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Are nonprofit organizations held to higher federal standards than business corporations? Are they subject to more scrutiny from federal agencies?

I don’t think the IRS would admit to different standards for business corporations and nonprofits, although it may not be as aggressive in supervising nonprofits because they generally don’t owe taxes.  Publicly traded organizations are subject to scrutiny by the Securities and Exchange Commission and the investing public that looks at the filings.  But the SEC has had some highly visible failures lately.

The real difference, I think, arises in comparing the scrutiny of nonprofits and that of small or closely held businesses.  The Form 990 tax returns of nonprofits are public documents.  They can be—and are—scrutinized in great detail by donors, reporters, and state and local regulators.  There is essentially no public information available about the finances of small or closely held businesses.

We know what nonprofit executives get paid, for example.  We have no idea what small business executives get paid.  There is no such thing as an excess benefit transaction for business.  There is no reporting of related party transactions.  There is neither transparency nor accountability for such businesses. 

I have often said that if we really wanted to close the “tax gap”—the gap between what taxpayers legitimately owe and what they actually pay—we would make all business tax returns public.  Then there would be some real scrutiny.

April 28, 2009