One area where open data has the potential to make a real difference -- and where some of its current limitations are all too apparent -- is in state-level regulation of nonprofits.
What makes open data a powerful tool for governing better is the ability of people inside and outside of institutions to use the same data to create effective policies and useful tools, visualizations, maps and apps. Open data also can provide the raw material to convene informed conversations about what's broken and the empirical foundation for developing solutions. But to realize its potential, the data needs to be truly open: not only universally and readily accessible but also structured for usability and computability.
One area where open data has the potential to make a real difference -- and where some of its current limitations are all too apparent -- is in state-level regulation of nonprofits. In May, a task force 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 spend "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 government's) primary window into the workings of America's enormous and economically impactful nonprofit sector. Every year in the United States, approximately 1.5 million registered tax-exempt organizations file a version of the federal Form 990, the tax return for tax-exempt organization, with the Internal Revenue Service and state tax authorities. These forms collect details on the organizations' financial, governance and organizational structure to the end of ensuring that they are deserving of their tax-exempt status. All but 10 states also require that nonprofits file state-specific registration forms. The information these filings contain about executive compensation, fundraising expenses and donation activities can help regulators spot possible 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 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 document is an image file rather than in machine-readable electronic format. State regulators, moreover, can in theory share and compare their registration data. But the widespread use of hard-copy paper filings, along with differences in the formats used by states with electronic filing systems, make pooling registration data extremely challenging and 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 cancer-charities case, good old-fashioned sleuthing and teamwork allowed state regulators to make do with the data they had. Between 2008 and 2012, it is asserted that the Cancer Fund group raised more than $187 million from donors throughout the United States but spent a pittance on actual aid to recipients. 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 under way to make nonprofit filing data more open. Ruling in a lawsuit filed against the IRS, a federal judge in California in January ordered the agency to turn over the original, machine-readable versions of nine tax-exempt organizations' returns to Public.Resource.org. (Disclosure: I filed affidavits in the case on behalf of Public.Resource.org.). 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 drop 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.
Clearly interest in the potential of open data is growing: Just last week, the Third International Open Data Conference drew more than 2,000 delegates from around the world to Ottawa. And the Cancer Fund litigation demonstrates the need for data that is readily accessible. One of the best ways to ensure that regulators at every level of government have the information they need to more quickly and efficiently stop bad actors in the future is to do what the law intends and open up the data.
This column was originally published by Governing.