Nonprofit organizations that are tax exempt under the Internal Revenue Code enjoy a privileged position within the federal tax system. Contributions to such organizations are deductible for federal income tax purposes within certain limits. The income earned by such organizations is exempt from taxes, except to the extent they conduct unrelated businesses. It is no surprise that the number of tax-exempt organizations is large and growing.
It is also not surprising that supervision and oversight of tax-exempt organizations is difficult, because of their large number and the wide range of activities in which they participate. Organizations that have receipts beyond a certain minimal level are required to file an annual return with the Internal Revenue Service, the Form 990 Series. This return provides to the IRS the only information it receives, in most cases, on tax-exempt organizations. (While the IRS can, and often does, audit tax-exempt organizations, it is not possible to do so for more than a small percentage of them. And, while there is oversight of nonprofit organizations by the attorney general of Pennsylvania and by the Orphans’ Court Division of the Court of Common Pleas, those resources are also limited.) Consequently, the information provided on the Form 990 Series returns gives the IRS most of the insight it may practically obtain on what tax-exempt organizations are doing.
