Improving Non-profits with Open Data

By Beth Noveck

Over 2000 delegates from around the world, including government officials, civil society organizations, and business leaders, arrived in Ottawa, Canada for the Third International Open Data Conference (IODC) on May 28th and 29. Although there is no single, universally accepted definition of open data, generally speaking, open data is publicly available data structured for usability and computability that can be universally and readily accessed, used, and redistributed free of charge. What potentially makes open data a powerful tool for governing better – and the reason why so many people are converging on Ottawa – is the ability of people inside and outside of institutions to use the same data to create useful policies, tools, visualizations, maps, and apps. Open data can provide the raw material to convene informed conversations about what’s broken and the empirical foundation for developing solutions.

One area where open data has the potential to make a real difference is state-level regulation of nonprofits. In May 2015, a multistate taskforce, comprising the Federal Trade Commission together with 58 agencies from all 50 states and the District of Columbia, filed a lawsuit against the Cancer Fund group of nonprofits and the individuals who run them. The complaint alleges that the groups are sham charities that have engaged in “a massive, nationwide fraud, telling generous Americans that their contributions will help people suffering from cancer, but instead, spending the overwhelming majority of donated funds supporting the Individual Defendants, their families and friends, and their fundraisers.” State officials spotted telltale signs of abuse and fraud by studying information the organizations had submitted in their federal nonprofit tax returns and state-by-state registration forms.

Nonprofit tax returns and registration forms are the public’s (and the government’s) primary window into the workings of America’s enormous and economically impactful nonprofit sector, which all together pays $670 billion annually in wages and benefits. Every year in the United States, approximately 1.5 million registered tax-exempt organizations file a version of the federal “Form 990” with the IRS and state tax authorities. These forms — whose questions vary a bit depending on the type of organization — collect details on the financial, governance, and organizational structure of America’s universities, hospitals, foundations, and charities, to the end of ensuring that they are deserving of their tax exempt status. All but ten states also require that nonprofits operating in their states file state-specific registration forms. The information these filings contain about executive compensation, fundraising expenses, and donation activities, for example, can help regulators spot potential bad actors and alert each other to targets for further investigation.

Yet despite the richness and utility of the information contained in these filings, major barriers prevent state regulators from efficiently sharing and analyzing the data. Although every Form 990 is required by law to be open and available for public inspection, the IRS makes it a practice to print out the returns and scan them back in so that the resulting file is an image file, rather than in machine-readable electronic format (MeF). The IRS has followed this antiquated practice even for the large percentage of returns already filed digitally. State regulators, moreover, can in theory share and compare their registration data. But practically, the widespread use of hard-copy paper filings — along with differences in the formats used by states with electronic filing systems — makes pooling registration data extremely challenging. Where they exist, paper and analog systems also impose serious, needless delays on investigations.

What results from these barriers is a regulatory system unable to harness the full power of computable open data. In the current cancer charities case, good old-fashioned sleuthing and teamwork allowed state regulators to make do with the data they have. Between 2008 and 2012, it is asserted that the Cancer Fund group of nonprofits raised more than $187 million from donors throughout the U.S., but spent a pittance on actual aid to recipients, instead channeling the monies to themselves. But what if fully open, machine-readable 990 data had revealed suspicious patterns earlier? How many bad actors could be stopped if state regulators could more easily pool and analyze their registration data?

Thankfully, major efforts are underway to make nonprofit filing data more open. In January 2015, the Federal District Court for the Northern District of California ruled that the IRS must turn over the original, machine-readable versions of nine tax returns filed with the IRS to Plaintiff PublicResource.org. (Disclosure: I filed affidavits in the case on behalf of PublicResource and its demand to make these returns available). With the IRS now ordered to put the processes in place to release these returns electronically, the hope is that the marginal cost for releasing all electronically filed returns will have dropped to close to zero. Furthermore, several states are working together to create a single portal where nonprofits can register in all 40 states at once. Along with its obvious convenience, such a portal would give regulators access to an unprecedented body of interoperable, multi-state data. The Cancer Fund litigation demonstrates the key role that the State Attorneys General can and must play in cracking down on fraudulent charitable solicitations, an activity regulated at the state level.  One of the best ways to ensure state-level regulators have the information they need to more quickly and efficiently stop these bad actors in the future is to do what the law intends and open up the data.