How Do Nonprofits Respond to Regulatory Thresholds: Evidence from New York’s Audit Requirements

Nonprofits in the United States must comply with various state and federal regulations to maintain their tax-exempt status. Despite persistent calls to increase accountability in the nonprofit sector, there is little research examining the burden imposed by existing regulatory requirements, especially at the state level. This paper uses a bunching design to estimate the avoidance behavior exhibited by tax-exempt charities in response to New York state’s audit requirements. There is clear evidence of bunching in response to the requirement that nonprofits above certain revenue thresholds file financial statements reviewed by or audited by an independent CPA. Measuring the extent of bunching around the revenue notches yields estimates of the average revenue that nonprofits either forego or fail to report in avoidance of the requirements. Results from dynamic estimation show that charities near the threshold for a review engagement report approximately $1,300 less revenues than otherwise predicted by a counterfactual; charities near the threshold for a full audit report approximately $1,400 less. The results have implications for the optimal design of state-level financial regulations. JEL Codes: G28, H39, H83