Key Senators Plan to Propose Charity Legislation This Year

After hearing three hours of testimony on Tuesday describing a wide range of legal abuses in the nonprofit field,

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the leaders of the Senate Finance Committee vowed to introduce legislation -- perhaps as early as this year -- aimed at curbing charitable improprieties.

Seven members of the Senate Finance Committee, which oversees nonprofit organizations, peppered 13 witnesses, including government regulators and charity officials, about nonprofit groups that provide overly generous compensation to their top officials or make loans to them, taxpayers who receive improper tax deductions for donations of cars and other items, and boards of directors that fail to catch fraudulent activity in the groups they are supposed to oversee.

"This proliferation of sloppy, unethical, and criminal behavior is unacceptable," said Sen. Max S. Baucus, of Montana, the top-ranking Democrat on the Finance Committee. "It has led to a crisis in confidence. It has hurt fund raising by legitimate charities. And it overshadows the good work done by the majority of civic-minded groups."

The chairman of the Finance Committee, Sen. Charles R. Grassley, Republican of Iowa, told the overflow crowd of several hundred nonprofit executives that he expects to introduce legislative proposals as early as this fall -- "and even earlier for some revisions," he said --intended to curb problems that he and other members of Congress see in nonprofit organizations.

Mr. Grassley and Mr. Baucus both invited witnesses to discuss ideas for new legislation included in a discussion document drafted by staff members of the Senate Finance Committee and released last week. The discussion document proposed several dozen regulatory changes, among them a requirement that the Internal Revenue Service review charities every five years to ensure they deserve tax-exempt status and stiffened rules designed to prohibit charity officials from gaining undue financial benefits for themselves, their friends, and relatives through their nonprofit work.

Billions of Dollars Lost

Mark W. Everson, commissioner of the Internal Revenue Service, told Senators that the federal government has lost billions of dollars through illegal tax shelters.

He said some donors had used "supporting organizations" as tax shelters. Through supporting organizations, some donors have set up their own charities, stacked the board of directors with friends, relatives, and business associates, and borrowed back the assets of the organization for personal, noncharitable purposes. The Chronicle in February published an article that described at least 12 cases where donors to supporting organizations took out loans that accounted for 70 percent or more of the organization's assets.

Mr. Everson also said that of the 31 types of tax transactions the IRS has recently identified as potentially abusive, almost half involve tax-exempt organizations.

The growing number of questionable activities at nonprofit groups has led the IRS to consider tax-exempt organizations one of its four highest enforcement priorities, Mr. Everson said. He urged Senators to approve President Bush's budget, which would provide the IRS a 17-percent increase over last year in its budget for audits of tax-exempt groups. Mr. Everson said that the IRS currently has the resources to audit just one-half of 1 percent of the roughly 1 million charitable organizations in the country every year.

Credit-Counseling Groups

One type of nonprofit group that drew the ire of both the IRS and members of the Finance Committee was credit-counseling organizations. The IRS has embarked on what it calls an unprecedented auditing effort of such groups, Mr. Everson said. Organizations representing more than 50 percent of the revenue of nonprofit credit-counseling groups will be under active audit by the end of the summer, he said.

The IRS is also starting a broad review of foundations to include audits of 400 grant makers, Mr. Everson said, in the hopes of identifying excessive compensation paid to top officials and other problems. IRS officials said this month they they also planned to examine charities that pay their top officials too much.

In the discussion draft, Senate Finance Committee staff members suggested limiting compensation for top officials at private foundations to the amount federal government employees are paid for comparable work and prohibiting or severely limiting compensation to foundation trustees or directors.

Mr. Grassley said that credit-counseling groups would be his top priority as he drafts legislation. He also said he wants to place limits on donor-advised funds to ensure they are not misused to benefit the donor who created them. Donor-advised funds allow people to donate cash, stock, or other assets to special accounts, claim a charitable deduction on their federal income taxes, and then recommend how, when, and to which charities the money in the account should be distributed.

Concern About Fraud

Mr. Everson was not the only witness to outline legal abuses by nonprofit organizations. Several other witnesses laid out a series of scams in which charity officials, donors, financial planners, and others have used nonprofit groups for their own financial benefit.

J.J. MacNab, a life-insurance analyst in Bethesda, Md., testified about an array of approaches through which individuals used donor-advised funds to shelter their estates from taxes, generate retirement income, and even pay the costs of adopting children -- all with the help of cooperative charities.

Jay D. Adkisson, an investment adviser in Aliso Viejo, Calif. who counsels several large charities, described how shady contributions of worthless corporate stock to charities have been used to avoid millions in tax liabilities.

Two anonymous witnesses -- testifying behind partitions with their voices electronically disguised -- talked about their involvement with organizations that took advantage of their involvement with charities to make millions of dollars.

The first witness described how automobile auction houses, car "brokers," and other middlemen who handle car donations to charities pocket as much as 99 percent of the profits from the sales of donated automobiles.

The second witness accused the founders and former executives of a charity created to provide house down payments to needy people of stealing an estimated $20-million from the charity by setting up a for-profit company to market the program to real-estate agents, mortgage brokers, and home builders. (No representative of the charity appeared before the Senate committee to respond to the allegations, and the witness said the charity's management had changed since the alleged misappropriation of money took place.)

Concerns About Oversight

When Senator Grassley asked why such schemes are multiplying, Ms. MacNab blamed a lack of government oversight.

"Regulatory supervision is almost nonexistent," she said. "Whereas in the financial world you have state and federal agencies fighting a turf war over who gets to take care of the bad guys, when it comes to charities, it's a reverse turf war. Everybody assumes someone else will handle it. Audits are nonexistent. If you talk to charities, no one can remember the last time someone lost their tax-exempt status. If you're going to have a voluntary compliance system, there has to be some expectation that you can get caught if you do something wrong."

The downturn in the economy has made charities more susceptible to scams promoted by financial planners, she added.

"Fund raising is down, corporate donations are down, they've lost money on their own portfolios in the market, and they're looking for money any way they can get it," Ms. MacNab said.

Mr. Adkisson said that not only should government regulators be given the resources to more aggressively pursue abuse, but tougher laws should be enacted that hold board members and charity executives to standards similar to those put in place for corporate officials.

Congress passed a package of laws in 2002 (referred to as Sarbanes-Oxley after the legislation's sponsors, Maryland Senator Paul Sarbanes and Ohio Representative Michael G. Oxley) that holds corporate chief executives responsible for the accuracy of financial statements, prohibits loans to officers, protects whistleblowers, and requires companies to take other steps designed to prevent ethical and financial abuses.

"The directors should be held personally liable for their misconduct, and misconduct of the charity taken at their behest," Mr. Adkisson said. "The reforms of Sarbanes-Oxley should be applied to directors of charities and foundations."

Diana Aviv, president of Independent Sector, a coalition of charities and foundations, lauded several of the committee's suggestions, including requiring charities to more accurately report their financial status on their federal informational tax forms and adding new sections to the forms, making it easier for federal and state regulators to work together, increasing funds for the IRS and state regulators, and increasing penalties for fraud. But she also suggested that a major overhaul of federal government oversight, adding a wide range of regulations with which charities would have to comply, would create more problems.

Said Ms. Aviv: "The current challenges do not lend themselves to quick fixes."

A video of the hearings is available on the Senate Finance Committee's Web site at http://finance.senate.gov/sitepages/hearings.htm

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