The Importance of Transparency in the Governmental Regulation of the Nonprofit Sector: Room for Improvement?

The focus of this paper is not on the role of transparency in the self-regulation of the nonprofit sector (clearly that could consume an entire paper in itself). However, the widespread public availability of a charity’s financial and operational data in searchable form provides the important “electric light” or “policeman” described by Justice Louis Brandeis, that allows the IRS and state charity regulators to be a more efficient police force, aided by a militia of the “informed citizenry” Madison envisioned. Clearly, one important public policy reason why the IRS Form 990 itself is public is the scarce resources the IRS possesses to audit and examine these “information returns.” Most recently available data indicates that the IRS examines less than .04 percent of the returns filed by 858,865 reporting tax exempt charitable organizations. Thus, the public availability of IRS Form 990 data allows donors, members of the public, the media, and other stakeholders to be the “eyes and ears” of the IRS in detecting malfeasance, and incomplete or inaccurate Form 990s. Moreover, charitable organizations that take the extra step to promote transparency by publishing the data on the Internet often short circuit what could be potentially costly and embarrassing investigations by governmental regulators by allowing experienced charity regulators to fend off unwarranted complaints almost immediately. The core purpose of this paper is to examine the extent to which “transparency” plays in the government regulation of the nonprofit sector, with a particular emphasis on the extent to which a charity’s financial and operational data is electronically available on a widespread basis by government regulators, the extent to which government regulators make available on a widespread basis the results of investigations and enforcement actions, and to present and discuss the results of a survey of state charity regulator offices on the extent to which registration and other data is searchable and publicly available on the Internet. This paper will also examine how more liberalized information sharing between the IRS and state charity regulators can promote transparency, and thereby accountability, by our Nation’s tax exempt charitable organizations