The Internal Revenue Service, the primary federal regulator of charities, has initiated a corporate governance initiative. The intervention by the Internal Revenue Service into an area traditionally the preserve of state nonprofit corporate law has little relationship to issues of tax compliance. This corporate governance initiative has been accomplished in the face of IRS acknowledgement that it has no statutory authority relating to these issues. Yet, the power of the Service to recognize tax exempt status and the method it has used to ensure it vision of correct corporate governance practices through a series of questions when an organization applies for recognition of tax exempt status and on the annual information return, the latter available on the Internet for public scrutiny, has resulted in substantial compliance.
This article casts a skeptical eye on the IRS’s corporate governance initiative from the perspective of federalism. Its thesis is that the Service’s regulation of nonprofit corporate governance is a kind of stealth preemption, which undermines the principles of our federal system. The issues of preemption described herein relating to the IRS’s corporate governance initiative are at least one degree separated from traditional constitutional analysis. There is no question of an agency regulation, pursuant to direct or indirect Congressional authorization to supersede state legislation. Essentially, the Service has interpreted the scope of its own jurisdiction, expanding its authority at the expense of the states.
The article argues the corporate governance initiative is inefficient from a cost/benefit basis, and diverts nonprofit organizations from their charitable mission. At a time when many charities are struggling to survive and maintain their level of activity, when there are pressures to reduce administrative expenses, the corporate governance initiative is an unwelcome, unnecessary distraction. It increases administrative costs, diverts boards and staff from the focus on the charity’s mission, and has no empirically verified relationship to tax compliance.
James J. Fishman, Stealth Preemption: The IRS's Nonprofit Corporate Governance Initiative, 29 Va. Tax Rev. 545 (2010).