IRS Is Exploring Whether Charities Use Overseas Companies to Avoid Taxes

July 24, 2008

IRS Is Exploring Whether Charities Use Overseas Companies to Avoid Taxes

The Internal Revenue Service is looking at whether charities are using offshore accounts and other tactics to avoid paying taxes on income earned in the United States.

Frank Ng, a top IRS official, told members of the Senate Finance Committee today that the agency is “evaluating the nature” of offshore investments by nonprofit groups that would otherwise be required to pay unrelated business income for their investment gains.

That acknowledgment, which came during a Finance Committee hearing on offshore investments, follows recent scrutiny of charities that are subject to unrelated business income tax.

The Chronicle found in a recent investigation that nearly half of the nation’s largest charities that receive unrelated business income pay nothing in tax on that income.

Sen. Charles Grassley, of Iowa, the senior Republican on the Finance Committee, has expressed concern that some of the institutions that are not paying unrelated business income tax are using overseas companies to help shield their income from the government.

Under current laws, institutions are able to use so-called blocker companies overseas to convert taxable profit from hedge funds into dividends, which are not taxed.

Committee aides have been looking at the structure of offshore hedge-fund investments by major universities. Many large foundations and nonprofit hospitals use similar tactics to protect their hedge-fund income from taxes.

Mr. Grassley, citing the Chronicle report, raised questions during today’s hearing about whether charities that are subject to unrelated business income tax are complying with the law and whether blocker companies are being used to help groups avoid the tax.

Aides said Mr. Grassley is also asking Mr. Ng for a detailed written response to these questions.

— Peter Panepento

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