Abuses by nonprofit groups and donors are costing the federal government about $15-billion a year in lost revenue, Internal Revenue Service commissioner Mark W. Everson told a Senate committee today.
Mr. Everson's remarks came at a Senate Finance Committee hearing on nonprofit abuses that is expected to serve as a prelude to an ambitious legislative package key lawmakers say they plan to introduce later this year.
At the hearing, senators took aim at charities and foundations that pay excessive salaries to their executives, donors who write off bogus amounts for noncash gifts, and wealthy people who they say bilk the tax system by using nonprofit organizations as a front to help pay for their personal expenses.
Few nonprofit areas were left unscathed, as members of Congress questioned practices at tax-exempt hospitals, colleges and universities, arts groups, social-service organizations, private foundations, and many other nonprofit organizations during the three-hour hearing.
Charles R. Grassley, Republican of Iowa and chairman of the Finance Committee, called the hearing -- the second one in 10 months that the Finance Committee has organized to deal with alleged nonprofit abuses -- to discuss ways to strengthen charitable governance and close tax gaps that he and other lawmakers say cost the federal treasury money.
Mr. Everson provided some of the most damning evidence against charities and foundations, calling abuses in the tax-exempt area "increasingly present" and saying that if Congress does not act to end the abuses soon, public support for charities will "wither."
Mr. Everson estimated that American taxpayers write off between $15-billion and $18-billion a year more than they should be allowed to set aside tax-free because of laws that he said allow taxpayers to inflate the values of land, art, and other noncash items they donate.
George K. Yin, chief of staff of the Joint Taxation Committee, told the senators that the federal treasury could bring in more than $2.5-billion over the next nine years if donors limited their deduction from property to the portion they own outright, rather than the fair market value, as they can do now.
The idea that lawmakers might consider imposing new rules to prevent inflated tax write-offs for noncash items drew heated debate at the hearing.
At least four senators, including Orrin G. Hatch, Republican of Utah; James M. Jeffords, Democrat of Vermont; Rick Santorum, Republican of Pennsylvania; and Charles E. Schumer, Democrat of New York, voiced concerns that any changes could discourage legitimate charitable giving.
"I do not accept the concerns about noncash donations," Mr. Jeffords said. He said farmers, for example, should be permitted to donate land and take a full tax deduction for the value of the land. "The government has no problem taxing that land at its fair market value. It can't have it both ways."
Senator Grassley said after the hearing that he believes many members of Congress will join him in making changes to end abuses where donors take excessive tax deductions for noncash items.
"We're talking about giving people a tax deduction based on an independent assessment of the value of property," the senator said. "Who's going to argue with that?"
Compensation Issues
Several senators at the hearing also raised an issue with how much money and perks nonprofit officials receive. Mr. Everson said the IRS is currently reviewing the compensation practices at more than 2,000 charities and foundations and that charity officials who take excessive salaries remain an area of deep concern.
Mr. Everson also told the senators that the IRS has discovered many legal abuses by donor-advised funds and supporting organizations -- two areas the Finance Committee has been investigating for the past year -- and said the IRS is examining the tax returns of more than 300 donors for possible violations of tax laws. He said the service expects to audit many more people in the next year to uncover potential problems with those types of giving approaches.
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. Members of Congress have criticized donors who take a deduction for gifts they make to donor-advised funds but delay or never make the contribution to charity.
At the hearing, Jane G. Gravelle, a researcher at the Congressional Research Service, said that she had conducted a survey of donor-advised funds at community foundations that found that last year one in five donors did not distribute any money to charity from their donor-advised fund accounts during the year -- and that about two-thirds of donors distributed less than 5 percent of the money in their funds to charities. Ms. Gravelle also said donor-advised funds offered by financial institutions often charge overly high fees to manage the funds.
Lawmakers have also expressed concerns about supporting organizations, which are designed to finance the work of specific charities. Many universities and other large nonprofit groups have supporting organizations that generate revenue by investing in stocks or by operating businesses. More than 45,000 supporting organizations with cumulative assets of approximately $76-billion are now operating, according to Ms. Gravelle. Some lawmakers are concerned that many people who have set up supporting organizations have made loans to themselves and improperly benefited from the groups they set up.
Self-Regulation
Many charity officials are working hard to persuade lawmakers to allow the nonprofit world to come up with ways to govern itself more effectively and avoid what they consider unnecessary legislation.
Leon E. Panetta, a former chief of staff in the Clinton Administration, suggested that a "National Council on Nonprofit Accreditation" be created to help nonprofit organizations prevent abuses and raise the standards of accountability in the nonprofit world.
"It would relieve the burden put on the IRS to oversee charities and preserve the independence of the sector," said Mr. Panetta, who is now co-director of the Panetta Institute, a center for the study of public policy at California State University-Monterey Bay, in Seaside.
But Mike Hatch, the attorney general of Minnesota, testified that self-regulation would not do enough to prevent the widespread abuses he has seen in the nonprofit world. In his state, which has more than 25,000 charitable groups, he said he has caught many organizations spending lavishly on luxury items unrelated to their charitable purpose. One health maintenance organization, he said, spent $35,000 on a phony trade mission to Brazil; another group purchased season tickets to sports events.
"These activities aren't criminal, but they are just awfully stupid," said Mr. Hatch. "We need to do better oversight."
The Senate Finance Committee has made a broadcast of the hearing available via the Internet. To see it, go to http://finance.senate.gov.