Fragmented Oversight of Nonprofits in the United States: Does it Work? Can it Work?

Previously Brendan Wilson and I concluded that oversight of nonprofit governance would be most effective if it remained the responsibility of the states, although it would benefit from both a federal funding mechanism and enhanced coordination with the Internal Revenue Service.\u27 More recently I concluded that oversight of federal tax exemption would be better served if Congress shifted the locus of that oversight to a national, self-regulatory organization working in close cooperation with the IRS given the perennial financial and other limitations faced by the IRS.2 What neither of these earlier articles addressed, however, was whether the current split of nonprofit oversight between the states and the federal government is itself problematic. This essay seeks to fill that gap, which is particularly appropriate for this symposium because some of the other countries represented here have or are moving towards more centralized structures for providing such oversight.3 Part I briefly describes the current United States system for legal oversight of nonprofits, which divides responsibility between the state governments and the federal government. Part II then discusses the advantages and disadvantages of such fragmented oversight, drawing on the recent academic literature exploring fragmentation in a variety of contexts and then applying the lessons from that literature specifically to oversight of nonprofits. Part III makes several recommendations for enhancing the advantages and minimizing the disadvantages of fragmentation in the nonprofit context, which if fully implemented likely would render such fragmented oversight at least as effective as oversight centralized in a single, national actor. These recommendations include continuing to consolidate information gathering at the IRS, addressing the perennial lack of resources in this area through a national funding mechanism, improving coordination while maintaining fragmented authority over duty of loyalty and charitable solicitation issues, and either halting or rolling back the federal government\u27s encroachment on duty of care issues