July 24, 2007
Nonprofit Groups Failed to Pay $1-Billion in Employment and Other Taxes, Report Says
By Peter Panepento
Washington
Nonprofit groups are costing the federal government more than $1-billion through unpaid payroll and other taxes, according to a government watchdog unit, prompting questions from lawmakers who worry that regulators are unable to keep up with the rate of abuse.
The House Ways and Means Subcommittee on Oversight at a Congressional hearing today pressed officials at the Treasury Department and charity leaders on how to combat these abuses without placing unreasonable burdens on the vast majority of charities that are playing by the rules.
At least 55,000 tax-exempt groups have failed to pay taxes, said Gregory D. Kutz, managing director of forensic audits and special investigations at the General Accountability Office, Congress’s investigative arm. In some cases, those organizations under suspicion for not paying their federal taxes were paying their top executives hundreds of thousands of dollars in compensation, he said.
At the same time that they were failing to pay taxes, more than 1,200 of these groups had been receiving more than $14-billion in grants from federal agencies, Mr. Kutz noted.
The findings prompted some of lawmakers to question whether the Internal Revenue Service has enough resources to properly monitor the nonprofit world.
“Why aren’t you being more aggressive in taking action against these bad apples?” asked Rep. Jim Ramstad, a Minnesotan who is the senior Republican on the committee, which called the hearing to collect information about the activities of tax-exempt groups and how those activities relate to federal tax policy.
In response to Mr. Ramstad’s question, Steven T. Miller, commissioner of the IRS’s tax-exempt and government-entities division, said his office does not have enough resources to properly monitor all charities.
He said his office examined about 7,000 returns for tax-exempt organizations in its 2006 fiscal year[—]a small number compared with the total number of tax-exempt organizations that must file returns with the IRS.
He noted that President Bush has asked Congress to give his agency nearly 11 percent more, or $26.4-million, in the 2008 fiscal year, which starts October 1. Congress must still consider that request. “It would be hard for us to build up by more than that percentage in a given year,” Mr. Miller said.
With the increased money, Mr. Miller said the IRS will probably step up its efforts to curb some of the most common forms of abuse by tax-exempt organizations.
He said those abuses included inflated valuation of non-cash donations, charities that are established primarily to benefit a single donor, abusive donor-advised-fund arrangements, the blurring of the line between tax-exempt and commercial activities, excessive compensation, and improper political activities.
Despite these concerns, members of the House subcommittee — which oversees the Internal Revenue Service — took turns pointing out that abuses obscure the charitable work done by what they said is the vast majority of law-abiding nonprofit organizations.
“We ought to prosecute those who abuse the process,” said Rep. Stephanie Tubbs Jones, a Democrat from Ohio. “But when we do that, it has an impact on the others who do a great job.”
Lawmakers also heard testimony from nonprofit leaders, who said that existing measures to curb abuse, while effective, have restricted the ability of many organizations to solicit donors.
Diana Aviv, president of Independent Sector — a Washington coalition of charities and foundations — and Steve Gunderson, president of the Council on Foundations, an organization of grant makers, both talked to the committee about the Pension Protection Act of 2006, a measure that was designed to promote charitable giving while also closing some loopholes that have allowed abuse.
The law allows older donors to contribute money from their individual retirement accounts directly to charity without facing taxes on their investment gains, but it does not cover gifts made from IRAs to donor-advised funds or to supporting organizations.
That restriction, they said, is causing problems for many charities and foundations.
“Our members have reported to us the extreme frustration of their donors that the law did not permit IRA rollover distributions to their donor-advised funds,” Mr. Gunderson said. “Our members are also reporting that many donors are choosing a second-best option of creating funds for charities designated at the time of gift. Because these designations cannot be changed once they are made, the resulting fund will lack flexibility to address emerging community needs.”
He said new federal rules, along with a recent IRS proposal to revamp the Form 990 informational tax return, are important steps in making sure that all nonprofit organizations are clear in their reporting and open to public scrutiny. But the changes must be accompanied by resources that will help leaders at nonprofit groups, many of whom operate with small budgets, learn the new rules and comply with the proposed changes to the Form 990.
“[There is a] clear and pressing need for guidance from the Internal Revenue Service on interpreting the new requirements and for the IRS to mount and maintain an effective enforcement presence in the exempt organization area,” Mr. Gunderson said. “Otherwise, we will find ourselves in a kind of death spiral in which Congress legislates ever more restrictive rules that seriously impede the ability of philanthropic organizations to accomplish their work while the abuses go unchecked.”
One way to help that process, Ms. Aviv said, would be for Congress to create a Small Nonprofit Administration, an agency similar to the Small Business Administration that would train charity leaders on issues such as planning, finances, and management.
She also said that the IRS would be more effective in monitoring nonprofit organizations if it required all organizations to file their informational tax returns online. Now only groups with $10-million or more in assets face such a requirement, starting with their 2006 returns. Such a step would allow IRS officials to more easily identify organizations that have red flags in their financial filings.
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I might be mistaken here, but Ms. Aviv’s proposal for the Small Nonprofit Administration sounds a lot like the Nonprofit Capacity Building Initiative that the National Council of Nonprofit Associations has been working on for some time. Details at http://www.ncna.org/_uploads/documents/live/NCBI-6-1-05.doc
— Leonard Hall Jul 24, 03:53 PM #
If the following is the worst of the abuses “… those abuses included inflated valuation of non-cash donations, charities that are established primarily to benefit a single donor, abusive donor-advised-fund arrangements, the blurring of the line between tax-exempt and commercial activities, excessive compensation, and improper political activities…” they should not to be dismissed, but rarely affect small-to-midsize nonprofits and do not warrant the increase in regulations and scrutiny that been recently been heaped on all nonprofits. Rather than increasing overhead expenses for all – which donors hate to fund – the IRS should do a better job out ferreting the bad players.
— Ann Lehman, ann@zimmerman-lehman.com Jul 25, 12:02 AM #