The Internal Revenue Service is working to help “protect the trust and confidence” in nonprofit organizations during the current economic crisis and will be watchful of possible abuse, says Lois G. Lerner, who oversees the IRS office that monitors charities and foundations.
“During hard times, there is often a rise in questionable or fraudulent activity, in overly aggressive or inappropriate fund raising, and in tax-avoidance accommodation schemes of less than sterling character,” Ms. Lerner told a conference on tax-exempt organizations in Washington held by the Georgetown University Law Center.
“We are trying to stay ahead of the curve to curtail predatory abuse of tax-exempt organizations,” she said.
For example, Ms. Lerner said, the IRS is seeing “a number of” applications for tax-exempt status from organizations that offer mortgage-foreclosure counseling and assistance. Ms. Lerner noted that the revenue service in the past has cracked down on many organizations that counsel people who amass big credit-card debts.
“Based on our experience with abusive credit-counseling organizations, we are concerned that some of these [mortgage counseling] applicants may be using the guise of an exempt organization to profit from individuals who have been harmed by financial upheaval,” said Ms. Lerner. “Consequently, we are looking very closely at applications from new organizations, and at activity being conducted by established organizations.”
The difficult economy could claim the lives of some organizations, whether newly formed or long established, Ms. Lerner said. “Those that are not able to benefit from economies of scale may have a more difficult time surviving,” she said. “For that reason, we are hearing more about tax-exempt organizations considering mergers and acquisitions involving other exempt organizations.”
Ms. Lerner said that “traditionally there has not been widespread merger and restructuring work” in the world of tax-exempt groups.
“It involves a number of legal issues, many of which fall under state laws, and a number of which can be thorny,” she said. “The involved organizations must consider whether a change in the use of the assets is consistent with donors’ intentions and charitable trust principles, for example.”
Lawyers for nonprofit organizations who are working on such transactions should tell the IRS “of the issues you are seeing and tell us how we can help,” Ms. Lerner said. “If you think we need to issue guidance, we would love to see a draft of how you would approach the issues; provide us with a draft that gives us a good starting point. This is just one area where we can work with you to provide needed outreach and education to the sector during this time of change.”
Ms. Lerner said that, as an alternative to merging, some nonprofit groups “are partnering with other exempt organizations, through cost-sharing arrangements and other contractual means, to take advantage of economies of scale.”
Other groups, she said, are “developing innovative fund-raising mechanisms — some of which might result in UBIT [unrelated-business income tax that organizations pay on revenue not directly tied to their missions] — which organizations may view as an acceptable cost of obtaining the additional funds.”
Added Ms. Lerner: “Necessity is the mother of invention, and as tax-exempt organizations develop new ideas, I expect there will be some not-so-successful efforts as well as some creative gems that really shine.”