I don't know when the wheel was invented, but I'm pretty sure it was a long time ago. The wheel was a good idea at the time and still is, but we should stop trying to reinvent it.
As Congress considers proposals to clean up the mess in the non-profit sector, it seems fixated on one that looks a lot like a wheel. Specifically, both the Senate Finance Committee and the Joint Committee on Taxation have proposed to clean up non-profits by requiring charities to submit to IRS reviews of their exempt status every five years. A charity would have to demonstrate that it continues to deserve its tax exemption by filing information with the agency, such as its articles of incorporation; financial statements; bylaws; salaries of top-ranking executives; and a detailed narrative of prior, current and contemplated activities. The government would make this information available to the public and failure to file would allow the IRS to revoke the charity's tax-exempt status.
On the face of it, this five-year review idea seems perfectly reasonable. The information Congress is asking for is just the kind the IRS needs to properly assess a charity, and it's information to which the public deserves access. The proposal also zeroes in on a little-appreciated wrinkle in the process of getting a tax exemption: The IRS will recognize an organization as tax-exempt simply on the basis of what it says it intends to do in the future. Once the IRS grants the exemption, it rarely reviews that status (much less revokes it), no matter how much the organization departs from its original plans. So, it makes sense for the IRS to check up from time to time to ensure the organization is actually feeding the hungry, healing the sick, or whatever. A five-year interval seems fair too.
And it would be fair, except that most charities of any significant size already submit detailed information on their activities to the IRS on an annual basis. Tax-exempt organizations are familiar with Form 990 because every year they have to provide the IRS financial statements, salaries of top-ranking executives, payments to the highest-paid consultants, records of lobbying expenses, lists of major contributors, details of major transactions, a detailed narrative of their activities, and much more. And, all of this information is publicly available right now on the Internet. So why create another filing requirement every five years when we have a perfectly adequate one now? The answer is we shouldn't.
If Congress really wants to rein in charities gone wild, it can do so simply by beefing up the exempt organizations division of the IRS so it has enough staff to take a close look at the hundreds of thousands of Form 990s that come in every year. The IRS doesn't need more information about charities--it needs the manpower to make good use of the wealth of information it already has. It would take only a few audits of Form 990s, and even fewer revocations of tax exemptions based on such audits for the entire non-profit sector to sit up and take notice. Rather than reinvent this particular wheel, Congress would do much better to use the spare it already has in the trunk.
Still, a case can be made for a one-time five-year review for new charities. It would be reasonable, for example, to recognize a startup organization as tax-exempt on a provisional basis with the requirement that five years later it show the IRS it's still operating as a charity. This "training wheels" rule for new organizations would keep them focused and would be a reasonable means of IRS oversight.
Beyond that, however, a repeating five-year review for all charities--including well-established hospitals, universities and museums--amounts to regulatory overkill that rewards lawyers and accountants while stealing scarce program dollars from charitable purposes to accomplish a dubious public benefit. Congress should not be reinventing wheels. And the IRS shouldn't be forced into spinning them.