Unregulated Charity

The vast majority of charities in the United States operate in a regulatory blind spot: they are neither meaningfully evaluated when they apply for charitable status nor substantively monitored after they receive charitable status. Driven by severe budget constraints, the IRS decided to essentially ignore any charity that claims it will realize less than $50,000 in annual gross receipts. From a practical perspective, the IRS’s decision makes sense. To the extent smaller charities are less likely to cause harm, it is reasonable (perhaps even preferable) to subject them to less scrutiny.

This type of prioritization, known as risk-based regulation, has become increasingly popular as regulatory budgets have continued to shrink. But however intuitive, reasonable, or widespread risk-based regulation may seem, the fact remains that the IRS has effectively absolved itself of its duty to oversee the majority of charities. This Article explores, on both a micro- and macro-level, the negative consequences of the IRS’s decision to leave smaller charities unregulated. On the micro-level, the lack of regulation impacts virtually every person who interacts with the charitable sector, including donors, beneficiaries of charities, and private actors in the market.

On the macro-level, as an increasing number of charities operate without proper regulation, the public will lose faith in the charitable sector and the “halo effect” enjoyed by all charitable organizations will erode. This Article is the first to identify and discuss the harms associated with the IRS’s failure to apply either front-end or back-end scrutiny to smaller charities. To address this regulatory failure, this Article argues that the IRS should require a more robust retrospective regulatory tool for all charities, regardless of size. This solution represents a cost-effective means for the IRS to meet its regulatory burden in a manner that will help restore public faith in the charitable sector.