How H.R. 9495 could spur Nonprofit Governance Overhaul

Ironically, as we celebrated National Philanthropy Day last week, a time dedicated to recognizing the invaluable contributions of nonprofits to our society, Congress was grappling with H.R. 9495, a bill that sought to address when these organizations might deviate from their noble purposes.

Nonprofits are foundational to societal well-being, tasked with missions ranging from education to health services, free from the profit motive. They operate under tax exemptions designed to encourage public benefit, yet the question remains—how do we ensure they remain true to their altruistic paths?

H.R. 9495 - Stop Terror-Financing and Tax Penalties on American Hostages Act

H.R. 9495, which hasn’t passed Congress yet, with another vote scheduled this week, is intended to tackle the issue of nonprofits potentially supporting terrorism by granting the Treasury Secretary the power to swiftly revoke their tax-exempt status. The ACLU and others raised alarms over the potential for abuse, fearing it could lead to the silencing of legitimate advocacy under the guise of security concerns:

“While the sponsors of this legislation have stated that it is needed to avoid what they refer to as a “time-consuming bureaucratic process” under current law, what the bill sponsors are actually seeking to avoid is fundamental due process. If this bill were to become law, the Secretary of Treasury could strip a US nonprofit of its tax-exempt status without providing the nonprofit a meaningful opportunity to defend itself before a neutral decisionmaker. The legislation further does not require disclosure of all the reasons for such a decision or the evidence relied upon to support it. Nor would the government be required to provide any evidence in its possession that might undermine its decision, leaving an accused nonprofit entirely in the dark about what conduct the government believes qualifies as material support.”

The concern is that if the Trump administration or any thereafter doesn’t like a nonprofit they could, perhaps use the quick revocation process to simply revoke the authority of the nonprofit. A weaponized use of executive power. But.

What exactly is the “time-consuming bureaucratic process” that the ACLU references? Does it include a swift mechanism for revoking status of a nonprofit that has lost its way when injury to the public, whether through terrorism or another abuse is at play?

The Current “Process” . . . a big problem

The nonprofit sector in the United States is expansive, with over 1.5 million tax-exempt organizations (Source: National Center for Charitable Statistics). This vast number reflects a system where obtaining tax-exempt status is relatively straightforward, facilitated by the IRS with forms like 1023 and the streamlined 1023-EZ for smaller organizations. This ease of entry suggests that gaining tax-exempt status can almost seem automatic, provided the application meets basic criteria.

The “process” for revoking a nonprofit's tax-exempt status when misconduct occurs is murky: each state has its own regulations, and oversight by state attorneys general leads to patchwork enforcement. There isn't one clear authority; in addition to the state attorney generals, the IRS, FTC, and FEC all have roles, but their powers are not neatly separated. Nonprofits usually retain their tax-exempt status unless they fail to file Form 990 for three consecutive years. Without a whistleblower, an audit, or prompt action from the state attorney general, such revocations are rare.

This predominantly reactive governmental structure is too lax, resulting in numerous instances where a nonprofit's misdeeds are uncovered (if at all) only after significant time has passed, during which many individuals are misled or harmed. Consider the example of the Women’s Cancer Fund, which collected over $18 million between 2017 and 2022 under the guise of aiding cancer patients, but allocated just 1% to that cause. This case exemplifies a broader issue that is far from isolated.

Nonprofits enjoy a privilege underwritten by the public through tax subsidies, designed to foster societal good. However, this privilege must be matched with an equal measure of responsibility and accountability. The public's rightful expectation is for these tax benefits to be channeled towards genuine public benefit. When this trust is broken, it not only undermines the sector's integrity but also prompts a critical examination of whether such tax incentives should continue if they fail to deliver on their intended social contributions.

The Need for Overhaul

While H.R. 9495 aimed at terrorism prevention, for me it exposes a wider issue: the need for better governance in the nonprofit sector to ensure organizations adhere to their missions. Congress, potentially with the newly formed Department of Government Efficiency, should reassess how nonprofits are monitored. The goal should be to enhance accountability, ensure mission integrity, and rebuild public trust, making sure these organizations fulfill their societal roles effectively.