Diary

About 275,000 nonprofit organizations lost their tax-exempt status nationwide last year, according to the IRS. Of those, more than 1,528 are Hawaii organizations, including the Adult Foster Homecare Association, the Association for Education and Rehabilitation of the Blind and the Big Brothers Big Sisters organizations on Kauai and Molokai.

They lost their tax-exempt status, says the IRS, because they had failed to file legally required annual reports for three consecutive years. Many, however, were preocuppied with heavy demands for their charity work, lacked adequate bookkeeping staff, didn’t have enough money to provide services or did not know they were on the non-exempt list. In some cases it was even due to a mistake by an IRS worker.

One way that states are balancing their budgets is by taking money away from nonprofit organizations at a time when the need for food, shelter, health care and other community services is rising–a serious threat explained in a new report issued recently by the National Council of Nonprofits (NCN).

A 2010 report entitled “State Budget Crises: Ripping the Safety Net Held by Nonprofits” examines the alarming condition of state budget deficits and identifies three trends that put nonprofits in jeopardy:

• State and local governments slashing funds for programs they expect nonprofits to administer.

• Government agencies withholding contract payments for services nonprofits have already delivered.

• Governments taking operating money from nonprofits through new fees and taxes.

Adding salt to the wounds of the non-tax exempted nonprofits, the IRS now asks these groups to report whatever remaining funds they have so the money can be “re-distributed” to other similarly focused nonprofits, which are still tax-exempt but financially weak.

It sounds similar to the situation with Hawai’i’s “special funds,” which mysteriously ended up in the state’s general fund (again) to help balance the state budget. The IRS, however, denies any plan to keep the money for its own budget.

As for those seeking a tax deduction for donations to nonprofits, the IRS gives this advice: “People who donate and don’t look at the list don’t discover [an organization] is not exempt,” said David L. Thompson, vice president of public policy for the NCN. “We don’t want the public to lose faith in nonprofits [or the IRS for that matter.]”