April 23, 2008
IRS to Step Up Efforts to Ensure Charities Are Efficient and Effective
By Grant Williams
Washington
The Internal Revenue Service is stepping up efforts to ensure that the nation’s charities are not hoarding or wasting money, a top official of the agency said today.
Steven T. Miller, commissioner of the IRS’s tax-exempt and government-entities division, said the tax agency will be “more aggressive” in monitoring the “efficiency and effectiveness” of charitable organizations, even though such monitoring is not expressly within the agency’s jurisdiction.
One way to do that, he said, is for the IRS to use a test to “create and enforce a standard to ensure that organizations spend in line with their resources.”
“This is not to say that we should necessarily devise inflexible rules about spending by all exempt organizations,” said Mr. Miller at a conference on tax-exempt organizations held by the Georgetown University Law Center Continuing Legal Education Department.
“No one wants the service dictating how a charity should do its job,” he said. “But every charity should make responsible and appropriate use of its resources to achieve its charitable purposes. That is what the tax-exempt subsidy is for.”
During his remarks, Mr. Miller noted the Senate Finance Committee “has been a leader here” in exploring whether to require universities and other nonprofit organizations to distribute a minimum percentage of their endowments each year.
The IRS will take up the topic later this year as part of a study of colleges and universities, he said, and in the next 18 months will “develop a broader program initiative” for applying a so-called commensurate test, which Mr. Miller said would “re-energize a little-used line of legal precedent.”
‘An Issue We Cannot Ignore’
Mr. Miller said that monitoring efficiency and effectiveness “is an issue of fundamental importance, and one that increasingly is attracting attention,” including from the House of Representatives.
The House Oversight and Government Reform Committee this winter held hearings on veterans organizations at which lawmakers showed increased interest in finding ways to require charities to tell donors what percentage of their revenue they spend on programs related to their missions.
The hearings “were essentially about fund-raising efficiency and compensation,” Mr. Miller said. “It is an issue we cannot ignore if we are to faithfully administer” tax laws.
“The public and the Congress may and often do have an expectation that the service can act when we see organizations spending 98 cents of every dollar on fund raising or compensation and two cents on services,” he said.
Mr. Miller said such situations, if serious enough, are the type the IRS can punish under current law, such as when people associated with a charity make an undue financial gain.
“But for the most part,” he said, “what we can do about efficiency and effectiveness is what we have been doing lately: Pushing transparency so people can see for themselves just how efficient and effective an organization is, or is not” through the public informational tax returns, called Forms 990, that charities file.
“As the public seeks a good return on its contribution dollar, we push for enhanced and meaningful transparency in the the hope that market forces and the good sense of the public will bring about change,” said Mr. Miller.
The IRS’s Form 990 is getting a significant makeover for the 2008 tax year, Mr. Miller noted.
“One of our guiding principles was to create uniformity and transparency in reporting,” he said.
Mr. Miller said he was disappointed that the IRS eventually had to give up its effort, in a draft version of the Form 990, to ask charities to provide “efficiency indicators” on the front, summary page of the document that he said could could have helped the public make “apples-to-apples” comparisons.
The IRS originally was going to ask charities for their fund-raising expenses as a percentage of total contributions; their compensation of top officials as a percentage of total contributions; their total expenses as a percentage of net assets; and the percentage of gross receipts that charities received after professional fund raisers were paid.
The IRS dropped such questions from the final redesigned form, Mr. Miller said, “in the face of strong criticism from the [nonprofit] community.”
Comments the government received about the proposed questions for charities “convinced us that we had not yet found a universal indicator of efficiency or effectiveness,” he said. “I have to tell you that I was and remain disappointed by the service’s and the (nonprofit) sector’s current inability to devise one or more shorthand indicators. But I have not given up.”
Public Perceptions
When it comes to enforcing current laws, Mr. Miller said that the tax code’s privacy restrictions on the IRS prevent the agency from discussing many actions it takes about charities. This, he said, “can create imbalances in the public’s picture of our enforcement efforts” even though Mr. Miller said the law stems from “good policy reasons” and he is not suggesting any change to it.
“Problems with respect to a charity or other nonprofit can become exceptionally public,” he said. “Yet we cannot make our response public, unless the taxpayer consents. In most cases, our enforcement actions and even the final disposition of a case are shielded from public view.”
Mr. Miller added: “This leads to all kinds of misperceptions about what the service is or is not doing. Our statutorily required reticence can lead the public to think that we are failing to act in a case that cries out for action, or that we are harassing some poor taxpayer, or treating an organization unfairly, or that we are just incompetent. It also leads to a lot of ‘no comments’ to reporters’ questions. None of this aids us in our relations with stakeholders.”
Governance Policies
In remarks made Wednesday at the Georgetown conference, Mr. Miller talked about the IRS’s decision to place new questions on the revised Form 990 that ask charities about their management and governance policies even though the federal tax code does not set out specific governance requirements for the IRS to enforce.
“Despite the absence of explicit statutory provisions setting forth clear governance standards — what I am calling jurisdictional gaps — we are not interlopers trying to regulate an area that is beyond our sphere,” Mr. Miller said.
“Rather,” he said, “the effects of good or bad nonprofit governance cut across virtually everything we see and do in our work. It impacts whether the organization is operated to further exempt purposes and public, rather than private, interests. It dictates whether the organization’s executives are compensated fairly or excessively. It influences whether the organization makes informed and fair decisions regarding its investments or its fund raising practices, or allows others to take unfair advantage.”
Mr. Miller added: “The question is no longer whether the IRS has a role to play in this area, but rather what that role will be.”
Comments
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I can’t say often enough how facile “efficiency” indicators, such as overhead ratios, are. Kudos to the IRS for striving to create transparency on the 990, and encouraging people to use that information to judge the performance of a nonprofit. But, please, can we leave off the idea that the ENTIRE nonprofit sector can be compared “apples-to-apples” by some simple percentage rules? Why is it that the nonprofit sector is presumed inefficient until proven otherwise?
— Chris Casquilho Apr 26, 06:38 AM #
The IRS has always exercised little to no oversight over non-profits,thus, allowing many non-profits to pay their administrators increasing high salary and benefit packages and justifying them by trying to compare compensation to private enterprise.Fund raising expenses are nothing more than an invitation to justify any expense including gifts to donors.Even with the quid pro quo rule being ignored,these non profits provide expensive gifts,gourmet dinners,travel memberships to other non-profits,such as the opera,symphony,etc.. The redesigned 990 will never be able to capture the data they need because many of the non profits will simply lie on the forms.Has the IRS ever audited a 990? What percentage of the non-profits mis-use donor funds by wrongfully placing expenses in the “fund raising” expense category?
— Steve Apr 26, 09:00 AM #
There needs to be clearer and more consistent definitions and enforcement on what are actual fund raising costs vs public awareness campaigns vs program expenses before efficiency indicators have any real value. Presuming that most non-profit organizations are created with the intent of “for the greater good”, there is a need to be held to a “higher standard”. Unlike for profit ventures where there is recourse, supporters provide resources because of a sense of social responsibility and a reliance on the intent, frequently without having any ability to validate programmatic spending vs accomplishments (as compared to the for-profit world where one can evaluate product value or ROI).
— Samantha Apr 27, 03:52 PM #
every charity that accepts tax deductable funds should be required to report all the % that irs was asking for
— myles a frank Apr 27, 06:06 PM #
It strikes me, as a conflict of interest to have the tax collecting agency attempt to establish governance rules that if violated would expose them to potential taxation and loss of tax-status. Considering that one of the I.R.S. current mandates is to disclose and then find solutions to the ‘tax-gap’ allowing them to be judge, jury and executioner seems extreme.
Do issues raised by the Commissioner need addressing, yes. Is the I.R.S. engaged in an aggressive educational outreach to so, I think not. More importantly if resources are not committed to the effort, all one might ultimately accomplish is to increase disregard for the guideline or requirements. If, however the resources are committed to an organization that has as it primary purpose the collection of tax revenue, the interest of the sector and the nation may not be best served.
Either the Commissioner should advocate for an independent agency outside of the I.R.S. to accomplish his objectives or he should establish a section within his agency whose sole function is to reach out to the nonprofit sector, to work directly with them, to educate them on issues of regulatory compliance, good governance and accountability. Short of that, I see an agency working at cross-purposes despite all Mr. Miller’s denials.
John C. McGee
Woodstock, GA
— John C McGee Apr 28, 08:59 AM #