Misreporting Nonprofit Lobbying Engagement and Expenses: Charitable Regulation and Managerial Discretion

Public charities “are almost always founded for some purpose other than advocacy in the policymaking process” (Berry and Arons 2005, 25). And yet, nonprofits are trusted and experienced agents, uniquely positioned to advocate for policies that will benefit the people they serve and engage the community in public dialogue around important issues (Avner 2016, 397). As a consequence, many stakeholders encourage charities to get involved in the policymaking process, to: represent and magnify the voice of the disenfranchised, protect and endorse individual and group values, propose and pursue policies that address root causes of the problems they confront in direct service, or promote some social, political, or economic change (Avner 2016; Berry and Arons 2005).

Paradoxically, however, previous scholarship shows that nonprofit managers face normative and legal boundaries that discourage and constrain lobbying engagement (Bass et al. 2007; 2005; 2007). For section 501(c)(3) organizations in particular the legal repercussions associated with performing substantial lobbying are severe, such as possible taxation and loss of tax-exempt status. Several rationales exist for limiting charities from engaging in substantial lobbying activities. For some observers, lobbying is inconsistent with the historical concept of charity, raising concerns that excessive lobbying could produce divisiveness and polarization that would lead to a decline in the independence, legitimacy, and strength of the charitable sector (Simon, Dale, and Chisolm 2006). Other critics point to government subsidies granted charities through the tax code and contend that the U.S. Treasury and other governmental bodies responsible for overseeing charitable activity should remain neutral stakeholders in policy matters (Berry and Arons 2005). Finally, some commentators assert that permitting charities to influence the outcome of governmental decisions substantially is undemocratic and counter-majoritarian because it intensifies the disproportionate influence of their wealthy donors in the political process (Simon, Dale, and Chisolm 2006).^[1]

These countervailing forces produce a tension that nonprofit managers must navigate. On the one hand, nonprofits are expected to protect values, promote ideals, and effect change, and on the other hand, they are normatively and legally discouraged from engaging in advocacy and lobbying (Berry and Arons 2005). How, then, do nonprofit practitioners manage this tension? Although previous research suggests that normative boundaries and legal implications constrain lobbying among public charities, it is possible that for some entities these factors merely influence how they report their lobbying activities to authorities. Indeed, incentives to misreport lobbying engagement exist at the federal level where regulatory oversight is lax. The Internal Revenue Service's Exempt Organizations division is ill-equipped to audit the activities of the roughly 500,000 charities that file Form 990 each year (Lott and Fremont-Smith 2016). Further, recent efforts by the 113th and 114th United States Congresses to minimize federal oversight of some tax-exempt groups and substantially reduce the IRS's budget have arguably created an even weaker federal regulatory regime (Colinvaux 2016; Lott and Fremont-Smith 2016).

Although federal agencies other than the IRS “oversee, or are implicated in, certain activities of charitable organization,” including, among others, the Federal Bureau of Investigation, Federal Emergency Management Agency, Federal Trade Commission, and United States Postal Inspection Service (Fremont-Smith 2004, ), state authorities remain “the primary regulatory and enforcement players in the federalist scheme” (Lott et al. 2016, ). This uneven regulatory environment creates opportunities for nonprofit managers to act strategically, and may influence how charities account for and report on their lobbying engagement and expenses to federal authorities.

In this article I compare IRS Form 990 data obtained for a sample of charities (n = 143) to contemporaneous data regarding the lobbying engagement, payments, and expenditures of these organizations obtained from the North Carolina Secretary of State. To my knowledge this is the first attempt to empirically verify the accuracy of lobbying expense reporting. In the first part of the article I briefly examine nonprofit lobbying research, identify inconsistencies in previous findings, and propose that unreliable data are undermining scholarship development. In the following sections, I rely on statutes, regulations, and prominent legal interpretations to detail the legal limits of lobbying for charities, and review state and federal reporting requirements.

Next, I turn to the analysis of lobbying data obtained from state and federal sources. Findings from the comparison of state and federal data suggest that charities report lower levels of lobbying activity and expenditures to federal authorities. Whether misreporting is intentional – i. e., “creative accounting” is used to cast the organization in a positive light by showing low lobbying involvement – or unintentional – i. e. illiteracy regarding what constitutes lobbying, how to allocate expenses, and how to report lobbying activity – is subject to interpretation, but findings are indicative.

Nonprofit Lobbying Literature

Nonprofit research over the last two decades has sought to understand the factors that influence whether nonprofits will engage in lobbying (e. g., Child and Grønbjerg 2007; Mosley 2010; Nicholson-Crotty 2007, 2009; Suarez and Hwang 2008), which nonprofits are more likely to lobby (e. g., Child and Grønbjerg 2007), how much nonprofits will spend to influence legislation (e. g., Harris, Leece, and Neely 2017), how nonprofits will report their lobbying (e. g., Harris, Leece, and Neely 2017; Nicholson-Crotty 2007), and which lobbying strategies nonprofits will employ (e. g., Chaves, Stephens, and Galaskiewicz 2004; Mosley 2011; Nicholson-Crotty 2009). According to this literature, managerial professionalization (e. g., manager's tenure in position, work experience, level of education), organizational financial support (e. g., amount of individual donations and government grants), organizational capacity (e. g., nonprofit's age and size), and context (e. g., political and policy environment, level of competition in policy area) affect whether and to what extent nonprofits lobby.

Although our understanding of nonprofit lobbying has improved considerably, several unknowns remain. For example, despite concerted effort to uncover the influence of government funding on lobbying, studies report divergent findings. Numerous studies indicate government funding “crowds-in” or stimulates nonprofit advocacy (e. g., Harris, Leece, and Neely 2017; Mosley 2011; Moulton and Eckerd 2012; Salamon 2002), while others find that government funding “crowds-out” or constrains nonprofit advocacy (e. g., Child and Grønbjerg 2007; Guo and Saxton 2010; Suarez and Hwang 2008). The inconsistency in studies emanates, at least in part, from scholars’ variable operationalization of lobbying (Almog-Bar and Schmid 2014) and dependence on unreliable or localized data (Prentice 2018).

Although nonprofit scholars are increasingly addressing, and attempting to resolve, construct validity concerns related to the use of various definitions of advocacy and lobbying (see Neumayr, Schneider, and Meyer 2015; Prentice 2018), little attention is given to the validity and reliability of nonprofit lobbying data. This article addresses the gap in the literature by examining the primary data source upon which numerous lobbying studies are performed – Internal Revenue Service Form 990 – and comparing them to a new source of publicly available nonprofit lobbying information. An analysis of the legal boundaries and regulatory environment for charitable organizations engaging in lobbying is necessary before such a comparison can be made and understood. Thus, the following two sections examine the federal and state lobbying laws and reporting requirements that establish the foundation for this research.

Federal Lobbying Laws and Regulation

To obtain recognition of tax-exempt status under section 501(c)(3) of the Internal Revenue Code (IRC), nonprofits must pass “organizational” and “operational” tests aimed at evaluating the purpose, financing, and activities of the organization to ensure compliance with prescribed criteria (Fishman and Schwarz 2010). One criterion is the restriction against lobbying constituting a “substantial part” of the organization's activities. For example, if a nonprofit corporation seeking recognition of tax-exempt status under section 501(c)(3) states in its articles of organization that it will engage in lobbying, then it must also state that its lobbying efforts will be an insubstantial part of its overall activities or face being classified as an “action organization” and denied recognition as a public charity (Hopkins 2011).

In addition to the prohibition against engaging in substantial lobbying, charities are specifically barred from engaging in extensive grassroots lobbying. A charity subject to the expenditure test may only spend 25 % of its total allowable lobbying expenses on grassroots lobbying (see IRC §§501(h) and 4911(c)). To compel compliance with federal lobbying regulations, public charities that engage in substantial lobbying, or exceed lobbying expenditure limits, face excise taxes (IRC § 4911(a)) and possible loss of tax-exempt status (www.IRS.gov).

The restrictions on lobbying placed on private foundations, which are more narrowly funded (i. e., financed by fewer, typically private, donors) and more tightly governed (i. e., oftentimes directed by members of a single family or institution, and sometimes by a single trustee) than public charities, are even stricter. Private foundations are not permitted to engage in any lobbying. The prohibition on private foundations engaging in lobbying stems from proscriptions against private inurement and serves to ensure that the organization operates to further public rather than private interests. Private foundations that lobby face sizable excise taxes and possible loss of tax exemption (IRC § 4945(a)). Additionally, foundation managers who approve the lobbying expenditure face excise taxes (IRC § 4945(a)).

State Lobbying Laws and Regulation

By contrast to federal regulations, which prohibit public charities from engaging in substantial lobbying and impose strict legal limits for charities taking the 501(h) election, North Carolina statutes do not limit charities in their lobbying expenditures. All NC organizations are subject to state lobbying laws found in General Statutes Chapter 120C (N.C.G.S. § 120C), and no distinctions in the law are made for nonprofit organizations. The statutes contain general provisions defining lobbying, registration procedures and fees, prohibitions and restrictions, reporting requirements, enforcement powers, and punishments for violation. Descriptions of legislation, legislative action, and lobbying provided in the statutes, and through clarifications of the statutes offered by the Secretary of State and the State Ethics Commission are similar to IRS interpretations of federal law. However, some minor differences exist.

The most pronounced difference between NC and federal law relates to how organizations are directed to account for grassroots lobbying and report on such activity. In NC grassroots lobbying is referred to as the “solicitation of others” and is more narrowly construed than at the federal level. Both federal and state authorities provide categories of exempted communication, which allow organizations to engage in certain lobbying-like activities without those activities or associated costs officially counting toward organizational lobbying totals. However, NC exempts all forms of grassroots lobbying communications made by organizations to its “employees, board members, officers, members, subscribers, or other recipients who have affirmatively assented to receive … regular publications or notices” (N.C.G.S. § 120C-100). Additionally, NC requires only that organizations report grassroots lobbying expenses exceeding an aggregate cost of $3,000 during any 90-day reporting period. Hence, all else equal, these differences imply that organizations will report fewer grassroots lobbying expenditures to NC authorities than to the IRS.

Understanding Misreporting

The preceding sections elucidate the federal and state legal boundaries, regulatory environment, and reporting requirements for charitable organizations, and offer a foundation upon which a comparison of federal and state lobbying data may be performed and understood.

Previous research illustrates that nonprofit managers feel pressure from charity watchdog groups (e. g., Charity Navigator, BBB Wise Giving Alliance) and donors (e. g., individual contributors, granting foundations), who use Form 990 information to evaluate nonprofits, to report low overhead costs and high programmatic output (Eckerd 2014; Garven, Hofmann, and McSwain 2016; Parsons, Pryor, and Roberts 2017). Additionally, research demonstrates that nonprofits, perhaps as a result of these pressures, often misreport certain expenses on Form 990, including: program, fundraising, and administrative (Froelich and Knoepfle 1996; Hager 2003; Keating, Parsons, and Roberts 2008; Krishnan, Yetman, and Yetman 2006; Trussel 2003). However, the literature has not addressed whether nonprofits also misreport lobbying engagement and expenses to the IRS. Given the strict legal federal limits placed on charitable lobbying and the harsh implications for exceeding those limits, it is likely that nonprofit managers also feel pressure to show low lobbying involvement. This study addresses the gap in the literature and extends our understanding of nonprofit reporting to public authorities by comparing federal and state reports of charitable lobbying for a sample of nonprofits.

For the sample of charities examined in this study lobbying expenditures reported to the state should be equal to or lower than lobbying expenditures reported to the IRS. Three points support this assertion. First, NC excludes certain communications to members from lobbying calculations, but the IRS does not (i. e., filers report more categories of lobbying activities and expenditures to the IRS than to NC). Second, the IRS requires filers to account for and disclose all grassroots lobbying activities and expenditures, while NC only asks them to report grassroots expenditures if the total equals or exceeds $3,000 per reporting period. Third, NC lobbying data capture only lobbying performed within the state. Charities that also lobby in other states (e. g., South Carolina, Virginia, or Washington, D.C.) do not report those activities or expenses to NC, but would report them to the IRS. Given these structural differences, lobbying expenditures reported to NC authorities should be equal to or lower than totals reported to the IRS. The following section introduces the lobbying data and methodologies employed in this study.

Methodology

To assess the accuracy of IRS lobbying information this study compares Form 990 data for a sample of charities to contemporaneous lobbying data from the NC Secretary of State on the organizations and their registered lobbyists. The following paragraphs detail the process by which charitable lobbying data were collected from federal and state authorities and present the methodologies employed in the empirical analysis.

Findings

Results from the comparison of state and federal data suggest numerous charities underreport lobbying engagement and expenses to the IRS. Table 2 shows that of the 143 charitable organizations that filed registration paperwork with the state signaling their intent to lobby, only 100 of them indicated to the IRS that they engaged in lobbying activity on their Form 990 or were an h-elector. It is possible that some of the organizations in the sample intending to lobby registered with the state, but ultimately did not engage in the practice. However, the number of organizations that may have done so is few, since only 7 organizations reported zero lobbying expenses to the state and reported no lobbying engagement to the IRS. Indeed, the Secretary of State expense data show that the great majority of the organizations (n = 132; 92.3 %) did engage in lobbying, with charities reporting lobbying expenses ranging from $87 to $174,452 per organization for a total $3,449,100 for fiscal year 2011. Average spending on lobbying for the 132 charities was $26,130, with a median of $15,375.

State data also indicate that 80 charities (55.9 %) authorized a total of 133 outside professionals to lobby on their behalf, with 72 of the organizations (50.3 %) making payments to 127 of them. Notably, however, only 44 organizations (30.8 %) reported payments to professional lobbyists on their Form 990. Thus, 28 charities (19.6 %) reported payments to professional lobbyists totaling $968,235 to the State of NC, but did not report these payments to the IRS.

Nearly half of the sample (63 charities, 44.1 %) reported greater lobbying expenditures to the state than to the IRS. As a group, these 63 charities reported $1,368,618 more lobbying expenditures to NC than to the IRS (M = $21,724 and Mdn = $10,313). Further, 38 charities (26.6 %) from this group reported no lobbying to the IRS, but cumulatively reported $875,511 in lobbying expenditures to the state. Some examples of lobbying expenditures described in the principal expense reports to the state, include: event costs (parking, venue rental, award plaques, catering), printing and merchandise costs (brochures, postcard petitions, flyers, tote bags, fleece blankets), as well as various other costs (rental space for a legislator's law office, call center services, funded international travel for legislators).

Discussion

Previous studies analyzing Form 990 data concede that properly accounting for expenses and reporting on them via Form 990 is complex. According to Froelich, Knoepfle, and Pollak (2000, p. 234), several factors may contribute to Form 990 inaccuracies, including “unclear guidelines for entry calculations,” preparation of returns by “outside accountants with limited knowledge of the organization and its activities,” and “in-house preparation of returns by nonprofit employees with inadequate accounting” proficiency. Although these potential accounting-related issues suggest that human error may contribute to expense misreporting, they do not suggest a directional bias toward over- or underreporting expenses. However, structural differences in reporting between state and federal authorities imply that differences should exist between state and federal lobbying reports.

For the sample of charities under examination, state expenditures should be lower than federal expenditures for three primary reasons. First, lobbying communications encouraging organizational members and newsletter recipients to contact their legislators to voice support or opposition to legislation are exempted from grassroots lobbying expenditure calculations in state law, but not in federal law. Second, grassroots lobbying activities with aggregate costs less than $3,000 per reporting period (i. e., per quarter) are not subject to reporting requirements in NC but must be reported to the IRS. Finally, and most importantly, the state lobbying expenditures analyzed here only reflect the lobbying activities of organizations within NC. Charities can, and often do, engage in lobbying across state lines. Form 990 requires filers to report all lobbying activities, irrespective of jurisdiction. And yet, despite these factors, nearly half of the charities in this study reported lower levels of lobbying engagement or fewer lobbying expenditures to the IRS than to state authorities. Additionally, recall that for half the sample the results only show that no evidence of misreporting exists, which is different than saying that these charities reported accurately. Thus, the actual number of charities that misreport lobbying engagement and expenditures is likely higher than found here.

Results from the descriptive analysis show substantial differences in reported lobbying engagement, lobbying payments to non-employees, and total lobbying expenditures. Nonprofits in the sample failed to report over $1.35 million in lobbying expenditures, including nearly $1 million in payments to professional lobbyists, to the IRS. To demonstrate the scale of misreporting uncovered in this study, records for 2 charities that showed significant variances in reporting were reviewed for additional years. Charity A, for the period of 2007 to 2013, reported no lobbying engagement or expenses to the IRS on their tax returns. Yet, the charity reported lobbying payments and expenses to the NC Secretary of State totaling in excess of $300,000 for the same period. Charity B reported no lobbying engagement or expenses to the IRS from 2004 to 2014, but records from the NC Secretary of State for five of the years (2010 to 2014) show lobbying expenses totaling in excess of $550,000. Although larger and more professionalized organizations are generally less likely to misreport, these findings demonstrate that nonprofits of all sizes misreport lobbying engagement and expenses to the IRS.

Group differences analyzed via t-tests offer some interesting bivariate findings, including the apparent influence of capacity, professionalization, and certain revenue streams on reporting accuracy. The regression results offer the most notable findings, particularly the strong effects of contributions and the use of professional lobbyists on reporting accuracy. Charities were significantly less likely to misreport lobbying engagement and expenditures as contributions increased. It is possible for organizations in the sample that contributions were given to support lobbying efforts, thereby reducing incentives to misreport. Managers might be strategically choosing to report accurately their lobbying efforts on Form 990 as a means of demonstrating to their contributors and other stakeholders the organizational commitment to furthering advocacy-related goals. As long as charities steer clear of federal lobbying limits, accurate lobbying disclosure could be fulfilling promises to donors and driving future giving to the organization.

The use of outside professional lobbyists also seems to have consequences for reporting accuracy. Charities were more likely to underreport lobbying engagement and expenses to the IRS as the use of professional lobbyists increased. It is possible that employing professional lobbyists increases opportunities for the loss of information between consultant and organization (for instance, from a communication gap or breakdown), and inconsistencies in state and federal reporting emerge as a product of human error. However, it seems more plausible that organizations are strategically hiring professional lobbyists at a higher rate in an effort to distance themselves from lobbying activities and avoid the possible negative ramifications.

Among the possible reasons to explain the observed disjuncture in state and federal reporting is the uneven regulatory environment. Although definitions of legislation and lobbying enacted by NC mirror respective federal definitions, registration requirements, reporting procedures, and enforcement differ significantly between state and federal authorities. Whereas the IRS requires only that organizations report lobbying activities once annually on their Form 990, NC policies and practices ensure that organizations and lobbyists report lobbying activities to state authorities multiple times throughout the year. Additionally, by requiring both lobbyists and their principal organizations to file quarterly reports consistently, there is a greater likelihood that data are cross-validated and incentives to misreport to state authorities are reduced. Finally, whereas federal punishments target the public charity as a whole (and not the reporting manager), NC's punishments for misreporting are aimed at the individual. Penalties for violations in North Carolina are severe, and include possible fines ($5,000 per violation), criminal charges (class 1 misdemeanor), and a 2-year lobbying ban in the State (N.C.G.S. § 120C-602).

Conclusion

The federal prohibition against performing substantial lobbying and gaps in the regulatory environment (with less oversight of nonprofit lobbying by the IRS than in NC) create incentives for nonprofit managers to underreport lobbying engagement and expenses to federal authorities. Previous scholarship demonstrates that nonprofit managers misrepresent certain expenses (e. g., fundraising) on Form 990 to avoid public scrutiny and negative evaluations (Keating, Parsons, and Roberts 2008; Krishnan, Yetman, and Yetman 2006). Thus, it is possible that nonprofit managers also manage lobbying disclosures on Form 990, especially given the strict legal limits and serious consequences for engaging in substantial lobbying (taxation or loss of tax-exempt status).

In an effort to validate the accuracy of lobbying reports this study compared Form 990 data to information from the NC Secretary of State. Findings demonstrate that numerous charities misreport lobbying engagement and expenses on Form 990. Although the absence of legal and accounting sophistication among nonprofit managers and directors potentially plays a role in misreporting, the results show widespread underreporting to federal authorities where charities face lobbying limits and less oversight. This finding suggests lobbying expense misreporting may be less about accounting sophistication and more about managers intentionally manipulating disclosure.

Although this inquiry offers an important first step toward understanding how and why charities report, and misreport, their lobbying activities to state and federal authorities, the study has limitations. Data for this analysis emanate from a single state and at a single time; hence, I caution against drawing inferences too generally. The findings’ basis in population data increases confidence in external validity; however, findings may vary in states with differing regulatory conditions and reporting requirements. Future scholarship might conduct longitudinal analysis or consider a broader sample. Additionally, without a qualitative component it is not possible to ascertain the precise causal mechanism to explain the results unearthed in this study. The findings suggest organizational size, level of contributions, and the mix of in-house vs. hired lobbyists play a role. Future research could employ a mixed-methods research design and conduct interviews with nonprofit leaders to explore whether other unexplored factors influence reporting. Despite these limitations, this study offers a strong foundation for further exploration on nonprofit lobbying and charitable expense reporting. More broadly, the findings suggest scholars might consider looking beyond Form 990 data to state-level information where oversight and reporting are presumably more pronounced.