The Cost of Requiring Charities to Report Financial Information

Taxes and regulations, such as labor laws and reporting requirements, often exempt small firms, creating incentives to stay small or delay growth. Firms' responses to such size thresholds provide an opportunity to empirically assess consequences of regulations and firms' willingness to pay to avoid them. This paper provides a theoretical model for evaluating welfare effects of moving such thresholds. It then analyzes an income notch at which IRS reporting requirements for charitable organizations become more onerous. Standard bunching estimates imply that the average charity will reduce reported income by $750 to $1000 to avoid filing the more onerous information return. Panel data methods show that an even larger share of charities fail to appear when first required to report more information. There is some evidence of retiming of income to delay growing above the notch, but a long-run reduction in the share that grow above the notch provides evidence of real responses as well. Relatively low-expense and low-asset charities are most likely to reduce reported income to stay below the notch, while charities with past receipts above the notch do not manipulate income, suggesting the report imposes an adjustment cost on new filers.