Pleasant Valley Horse Farm

Gauging the size of the nonprofit sector is a seemingly impossible task. The Internal Revenue Service, the government agency in charge of monitoring and following-up on all businesses filing for nonprofit or tax-exempt status, is plagued by chronic under staffing and under-funding. Vague rules and regulations regarding which nonprofits must file which paperwork has caused a severe distortion and lack of information regarding the current size and state of activity of the third sector. The largest component of the nonprofit world, religious institutions, are automatically granted tax-exempt status and are not required to file anything with the IRS. The IRS guidelines stipulate that nonprofits with annual gross receipts less than $5000 or averaging in the previous three years less than $25,000 are not required to register with the IRS either. According to O’Neill (2002), two-thirds of nonprofits under the classification 501(c)(3) had less than $25,000 in revenue in 1997 and would not have been required to register. Organizations with affiliates or state chapters are not required to register each individual subdivision, yet some do. Therefore, the IRS has information on businesses that no longer exist and is not aware of many of the businesses that are currently active but never were required to file.

Keeping these limitations in mind, the nonprofit sector consisted of 1.5 million nonprofit entities, not including religious institutions, in the year 2000. It is also estimated that there are about 375,000 religious organizations, some filing with the IRS and some not. Nonprofit organizations in America have total annual revenue of $1 trillion generated from $2 trillion in assets. This accounts for nearly 10% of our country’s gross domestic product. The estimated 1.5 million nonprofit entities employ 12 million people, which is more than the civilian federal and state government workforce. More than 100 million adults provide the necessary volunteer work that nonprofits depend on. Also, $203 billion was donated to nonprofits from households, foundations and corporations in the year 2000 (O’Neill, 2002).

There are thirty-six different IRC classifications for nonprofit industry. The familiar 501(c) category has twenty-seven variations, ranging from 501(c)(3) for charitable organizations, to 501(c)(13) for cemetery companies. There are other 501 subdivisions, which include hospitals, religious organizations and child-care. Four additional codes provide for farmers co-ops, veteran and military organizations and unemployment programs. Sixteen of the thirty-six categories have less than one-hundred organizations each. However, 501(c)(3) alone has over 800,000 organizations. See Table 1.1 below for a list of the IRC breakdown for tax-exempt organizations.

Table 1.1 -Internal Revenue Code

Source: http://www.bizfilings.com/learning/nonprofitfaq.htm

This type of organizational breakdown allows us to begin to understand the size and scope of the third sector, yet does not allow for detailed study of any particular group. To supplement a subdivision breakdown such as this, the North American Industry Classification System (NAICS), developed by the governments of North America in the 1990’s can be useful. The NAICS takes every known industry and breaks it into the smallest possible subset. Once a NAICS code is discerned, it is possible to unearth massive amounts of detailed information that is tied to that code. See Table 1.2 for a listing of a small section of the NAICS.

Table 1.2 -North American Industry Classification System

Source: http://www.census.gov/epcd/naics02/naicod02.htm

Although the IRS is limited in their knowledge of its size, the IRS is aware of the recent growth of nonprofit industry. Before the 1960’s, the IRS approved approximately 5000 applications for nonprofit status each year. Beginning in the 1970’s, the nonprofit sector has grown four times as fast of the rest of the economy (Gaul and Borowski, 1993). Between the 1970’s and 1990’s, the number of applications had risen to 35,000-45,000 each year. Current trends suggest the IRS approves over 60,000 applications each year (O’Neill, 2002). It is probable that these numbers truly reflect the growth of the third sector in terms of employment, gross revenue, and contribution to GDP in the United States in the last fifty years. However, it is also likely that there are other factors, such as abuse of tax-exemption privileges that distorts the true nature of the nonprofit economy.

The application for tax-exempt privileges, Form 1023 (Appendix A) asks basic questions such as the names and addresses of all involved parties and requests information about the future activities of the organization. As long as the applicant fills in the questions and pays the $375 filing fee, there is little chance of being rejected. In 1990, an applicant had a one-in-sixty chance of being rejected. When asked why applicants are not screened for criminal activity or history, the IRS responded that “such questions were not needed, because not many criminals apply” (Gaul and Borowski, 1993, 19). The insufficient funding and staffing problems with the IRS, in addition to the over-simplified application process opens the door for criminal activity and abuse of the sector that exists to help those in need.

Although the possibility of fraudulent ventures exists, there are several reasons why the United States should expect legitimate growth in the nonprofit sector. The United States’ population, although historically diverse, is currently experiencing demographic changes. The aging Baby Boomer generation, for example, is creating demand for more nonprofit healthcare services. Nonprofits are more able to deal with the increasing awareness of ethnic diversity. The government and private sector focus on satisfying the needs of the majority; adaptable nonprofits fill in the minority gaps. The government, in efforts to cut expenses and distribute resources more efficiently, has begun to privatize and devolution (turn-over federal programs to the state level) many federal programs. The entrepreneurs of the third sector recognize this opportunity and have filled the market niche for nonprofit contract work. The relative lack of labor costs and tax obligations has provided the third sector with a competitive advantage from the rest of the market which allows for faster, more adaptive growth.