The IRS Pushes For Nonprofit "Efficiency and Effectivenes."

As reported in the Chronicle of Philanthropy and elsewhere, Steven Miller, the commissioner of the IRS’s tax-exempt and government-entities division, has announced that the IRS intends to be “more aggressive” in monitoring the “efficiency and effectiveness” of tax-exempt organizations.  Fund-raising efficiency, compensation, and percentage of expenditures spent on programs are areas he has mentioned that need more oversight.

Good luck, Mr. Miller.  Your heart’s in the right place, but I fear you have set yourself a thankless task and probably an impossible one.  This is why:  Absent the most egregious cases of abuse of public trust, there is no consensus in the voluntary sector – or among the general public for that matter – as to what constitutes “efficiency and effectiveness” for charities.  Or how to measure it.  Or how to quantify it.  Or how to report it.  How can the IRS enforce policy when no one agrees what the policy should be?

Yes, I know it’s currently fashionable among nonprofit policy wonks to talk about “outcome-based measurement” and the like, but don’t be fooled by the jargon jockeys.  There is still no consensus, and for good reason.  “Efficient” and “effective” are adjectives inherently antithetical to the spirit of American philanthropy, as I’ll explain below.

Last year the IRS proposed that charities state up front on the Form 990 returns their fund-raising expenses as a percentage of total contributions, their compensation of top officials as a percentage of contributions, and the percentage of gifts received after paying their professional fundraisers.  The nonprofit community made such a fuss the Service had to drop the proposals. 

Why don’t charities want to publish these numbers?  It’s not because they are trying to hide inefficiencies or malfeasance.  It’s because they know that these numbers are just as likely to give a false impression of a charity’s “efficiency” as a true one.  And they fear that prospective contributors will misinterpret the numbers and forego giving as a result. 

Is that a well-founded fear?  Well, yes and no.  In our experience with at work employee charity fund drives, when prospective donors are told what the charities’ fund raising and administrative overhead percentages are, based on the 990 returns, that information does affect giving decisions.  Donors tend to choose the charities with the lowest overhead rates, even though this number has little or nothing to do with the “effectiveness” of a charity’s program.  Charities with just a few points higher rate are penalized, even though they may have superior operations.

But in those workplace drives where this information is not presented automatically, but is available to donors if they ask for it, the data is irrelevant to the selection pattern of charities by the donors.  Why?  Because the donors never ask for the information.

In my entire career I have never once been asked by a donor to provide a 990.  My federation clients go well beyond IRS-required disclosures in their 990 filings, and they post the returns publicly on their web sites.  In their annual reports, also posted, they go so far as to reveal the specific amount they raised for each member charity and how much each charity received after expenses, data their competitors never release. 

Total disclosure!  Good for them!  Except nobody visits those web pages.  All the traffic goes to the member charity human interest stories and the “click here to give” pages instead.   

That’s the irony here.  The IRS wants charities to report more and better information to the public in the interests of transparency.  The charities are concerned that if they do so the public will draw false assumptions from the data.  But the public doesn’t care about accessing the data.  All they can find in the statistics are reasons not to give.  Where’s the hopefulness and joy in that?

Voting with their feet, and their wallets, the public has shown they are willing to take the risk of making “inefficient” gifts rather than taking a “read carefully before you invest” approach to their philanthropy. 

And maybe that’s all for the good.  As I’ve said before on this blog, the most important contribution the voluntary sector makes to society is not program but experimentation.  The sector is vibrant not because is it well-organized and “efficient” but because it is adventurous and entrepreneurial.  Meaning it’s going to fail a lot, and post lousy numbers a lot, albeit with the best of intentions.

So I say, Go get ‘em, Mr. Miller.  Find the bad guys and take them down.  But in so doing, don’t make “effectiveness” and “efficiency” touchstones of public policy for the charity world.  For to do so risks getting…

“Organized charity, scrimped and
iced,
In the name of a cautious, statistical
Christ.”

--John Boyle O’Reilly