News and analysis
April 03, 2011

IRS Figures Show Charity Creation May Be Slowing After Years of Fast Growth

The number of charities and foundations in the United States reached nearly 1.3 million in 2010, according to new data released by the IRS, more than double the number of organizations that were on the rolls just 15 years ago.

(The Chronicle built an interactive graphic of the changes to the tax-exempt sector over the past 20 years. Click here to explore the data.)

That number will probably drop sharply later this year when the IRS is expected to rescind the charity status of small organizations that failed to file an informational tax form. A preliminary list of groups that were in danger of losing their tax-exempt status as a result of missing the filing deadline totaled more than 320,000.

Even without this change, the latest IRS figures signal a possible slowing in the number of charities created in the United States. The tax agency said 59,945 groups applied for nonprofit status in 2010, down 30 percent since 2007. The reduction could be a response to the economy, but experts say it could also be the result of a new procedure the IRS uses to weigh requests for tax exemptions.

Regardless of the cause, the slower growth rate is seen by some nonprofit leaders as a good sign in an era when more and more groups are competing with each other to raise money and work on similar causes.

Katie Burnham Laverty, president of the Society for Nonprofit Organizations, in Livonia, Mich., said that when possible, she encourages groups to join with existing nonprofits rather than enter a crowded market.

“We have really been somewhat discouraging of people starting a nonprofit if they haven’t done the research to see if there are others that are providing that service or a similar service,” Ms. Burnham Laverty said. “It’s very hard to get a good board, find volunteers, and generate the money you need to run the organization.”

Such advice has become more common in light of the rapid growth rate in the number of nonprofits since the early 1990s, said Laura Otten, director of the Nonprofit Center at La Salle University, in Philadelphia. In the past 20 years alone, the number of groups that hold charity status has increased by nearly 150 percent. “I’ve been in the business for 40 years, and in the beginning, growth was at a much slower pace. I don’t think the need was any less, but there was a slower pace of growth,” Ms. Otten said. There comes a time when you say: Do you really need all these independent organizations?”

The bad economy has pushed some groups to do more research before filing for nonprofit status with the IRS, Ms. Otten and Ms. Burnham Laverty say, since many groups are already struggling to raise money.

“People do get discouraged when they see the economic reality,” Ms. Burnham Laverty says, “once they read about what fund raising is like out there and what donor development is like and they see that there is a lot of competition in their own community for dollars.”

Same Success Rate

Still, it is not clear whether the recent slowdown in applications is largely the result of the recession—or whether a recent change in IRS procedures has stemmed the rise in applicants.

Marc Owens, a Washington tax lawyer who formerly oversaw the IRS division that monitors tax-exempt groups, said that a change the IRS made in 2008 may be the cause of the decline, because it reduced a step in the application process and as a result a year-to-year comparison may not be accurate.

One thing that hasn’t changed is the success rate of those who apply for nonprofit status.

Of the groups that applied for charitable status in 2010, 82 percent, or 48,934, were approved and fewer than 1 percent of the applicants were rejected.

But while the IRS turns down only a small number of applicants, the low rate does not necessarily mean the tax agency has set a low bar for groups that are looking for tax-exempt status, Mr. Owens says. That’s because another 18 percent of groups never complete the process—in many cases based on advice from the IRS.

View 2009 application statistics and total figures of tax-exempt organizations registered with the IRS here.