Reflections of a Top Regulator

As Marc Owens leaves IRS, he mulls changing nature of non-profit world

Marc Owens, director of the Internal Revenue Service’s Exempt Organizations Division since 1990, retired from the tax agency this month after nearly 25 years with the organization.

His departure comes as the revenue service consolidates its sprawling bureaucracy into just four units, one of which, the Tax Exempt and Government Entities Division, will focus on charity regulation and other matters.

Non-profit officials and their lawyers have long praised Mr. Owens for his candor and clarity in explaining complicated tax issues, and for his skill in managing an office that tries to keep an eye on more than 775,000 charities. Many observers had hoped that he would remain with the agency as it revamped itself.

Mr. Owens, however, says that the reorganization of the revenue service gave him the chance, under civil-service rules, to retire early from government service with good benefits that will help him and his wife put their three children through college. He says that his decision to leave the tax agency was “purely personal.”

This week, Mr. Owens joins the Washington law firm of Caplin & Drysdale, where he will represent non-profit groups and keep track of events important to charities from the other side of the fence.

In conversations with Chronicle senior editors Jennifer Moore and Grant Williams, Mr. Owens reflected on his quarter century at the I.R.S. But he also looked ahead, warning charities to watch out for scoundrels who will try to swindle them and their donors. And he expressed concern that federal charity regulators could have trouble securing enough budget dollars and staff members to do a good job in the rebuilt agency.

Following are excerpts from those discussions:

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Q What’s the most important development in federal charity regulation that you’ve seen in your nearly 25 years at the I.R.S.?

A The intermediate-sanctions law [passed by Congress in 1996, which allows the revenue service to fine charity officials for getting excessive compensation] could very well turn out to be very significant. I say that because we just started to implement it. It was important, and it will take some time to decide if it’s really a sea change or not.

But the changes in the disclosure rules of the Form 990 [informational tax returns filed by charities] could have the biggest impact on tax-exempt groups. The signals are for greater disclosure in the future, and that will be a tremendous development.

The prospect of scandal

Q Scandals are inevitable in the world of charities and elsewhere. What do you fear the future will bring?

A There will always be fast-talking music men coming into town and selling whatever the latest get-rich scheme is, whether it’s donors getting rich using charities or charities getting rich using some heretofore unknown investment technique that turns out to be the South Sea Bubble in disguise. You will always have that sort of background noise. That is human nature. People who run tax-exempt organizations should always be watchful for it, because they are fiduciaries, and that means they’ve got to stay on guard. They’ve got to constantly ask if something is too good to be true.

But stepping back from that background noise, there’s a big change taking place in the way charities are viewed, and how they relate to the business community. There are a lot of organizations that are starting to fall in between those two, that don’t fall neatly in either one.

You have a little cottage industry springing up to help benefit the common good, but not exclusively benefiting charity, through more directed commercial activities. In other words, you’ll have something that’s unabashedly a business — it isn’t pretending to be a charity and trying to get a tax exemption — but its goal is to do business in a way that has a social good as well as a commercial return. You’ve got examples going back to Paul Newman and his salad dressing. But there are more of those starting, and they fall in between.

They are doing something that in essence is competitive with what traditional tax-exempt organizations are doing. You’ll start to see a sort of sharing of ideas and concepts and approaches between those two sectors. And the lines will start to blur even more. And while that may increase the revenues of the charitable sector, it’s going to look like a different sector. You’re going to have much more of a commercial flavor to the delivery of charitable goods and services than we’ve had before.

It may be difficult to distinguish between some traditional charities and these new non-profits in the gray area, and maybe even regular commercial businesses. And that area, from a long-term standpoint, is going to be difficult for the charitable community to deal with because their mission is going to start to get blurred in the eyes of the citizens who give.

Q What are the consequences of that?

A There’s a danger of charities starting to lose their special place and sense of purpose and becoming just part of the way business is done. Once that happens, you start to lose the energy that draws people to charitable activity. People want to do something that helps, but if doing that actually looks like you are just selling hamburgers more efficiently and giving some of the money to charity, that may not be enough of a motivator.

It could start the world down the path of where everything is the same, all the jobs are the same. If you are motivated to help the homeless, you are not going to do that unless you are paid as much as you are to work for America Online, because it’s really the same thing. The jobs are the same, and the work is the same. You are having to answer to the same sort of commercial demands on a daily basis, so you lose that charitable spark.

Similarly, as lines between charity and commercial enterprises blur, donors may become less willing to contribute. The reduced clarity of focus in the charitable sector could thus impact charity in terms of financial support as well as with workers and volunteers.

Q What would that change mean for regulators?

A For tax administration and for state attorneys general, discerning what is a charity, and what isn’t, is going to get harder. The current statutory and regulatory framework is inadequate to deal with the increasing commercial nature of some charitable activities.

And you’ll have the wheeler-dealers who will exploit that vagueness for their personal gain. And then you’ll have a series of scandals; there will be people indicted for wire fraud and mail fraud and all sorts of things like that. It could set the stage for a fundamental review of the standards for tax exemption and unrelated business activity.

Q Some people are worried that coming years could bring scandals in the way charities handle donor-advised funds, which used to be offered exclusively by community foundations but now are also being offered by other charities, including some started by for-profit financial institutions. [Such funds enable people to turn cash and appreciated assets over to a charity, claim a charitable deduction, and then recommend how, when, and to which organizations to distribute the money.]

A It’s been more than a quarter century since the implementation of the Tax Reform Act in 1969 and the rules for community trusts. All those rules have some gray hairs now and may not necessarily fit smoothly anymore with modern-day concepts of charity. And not with just how charity organizes itself but how donors get involved with charity. Maybe you can blame computers and the Internet, but people are beginning to increasingly feel that they can take a greater role in things that they used to give to others, whether it’s making hotel reservations or buying airplane tickets or finding the right outlet for their charitable desires — finding somebody to give money to.

One of the reasons donor-advised funds have been so successful is they speak to that sort of involvement in a way that’s fairly efficient: where the barrier to entry is sufficiently low that people who did not see themselves as wealthy can suddenly have their own little fund and they are receiving all the psychic benefits that John D. Rockefeller and others got when they set up their private foundations.

There’s a real return from those psychic benefits that’s changing the structure of charity. But it’s probably about time that somebody — Congress, the Treasury Department, the I.R.S. — stepped back and looked at the structure of tax administration to see if it still fits with those new thoughts and those new ideas about charity. It’s no longer a perfect fit.

Reorganization of the IRS

Q Will the reorganization of the I.R.S. help charity regulation?

A The reorganization, even though it was officially under way December 5, is really just beginning. The I.R.S. is really still in a sort of basic transition phase.

Things are hopeful. People still have the vision of a much more efficient, streamlined structure that is more responsive to both internal and external needs. Nobody’s lost hold of that yet. But it’s still too early given the way the budget process works to know if the dollars are going to be there for charity regulation next fall and the fall after that and the fall after that, because it’s really a very long-term process.

To expand into the new structure will take years and will take consistent funding over the years. It will be very hard to get some money right now and then suddenly have that dry up next year, and not be followed by an increase next year. Just to suddenly have things taper off would make it very difficult for the organization. It’s a big project and it’ll take time and it’ll take money and it’ll take people. But things are still looking good.

Q If the reorganization goes well, how will charities know? What will they see that is different? For example, if they are asking for a private ruling on some issue, will they get it faster?

A Hopefully, they will get quicker turnaround on things like ruling requests, things like their applications for tax-exempt status. They will start seeing easier ways to contact the agency about their specific problems and questions about filing: Where do I send my 990? What do I need to do to complete it accurately? What happens if it isn’t timely filed? It will be much clearer who you go to for answers and how you get there. There will be more use of toll-free numbers and links to live people and that sort of thing.

When you step back and look at the way it was 10 years ago — when we had exempt organizations’ tax returns being processed at all the service centers [rather than just at one location now, in Ogden, Utah], and we had an old, more dysfunctional organizational structure within the agency that had more regions and districts than we had even recently — given that, the changes to come will be dramatic.

Q Steve Miller, your successor as head of exempt-organizations regulation, will have more “line authority” in the reorganized agency. What does that mean? More direct authority over agents?

A That’s right. If you can envision an organizational chart for exempt organizations, Steve will be at the top of a pyramid. The bottom layer of the pyramid, or on a couple of layers, will be the revenue agents in the field. Under the old system, those field agents didn’t report directly to the National Office director. There were two different charts that didn’t come together at any point until you got to the Commissioner’s office. So they might as well have been separate subsidiaries of the same I.R.S. corporation, not part of one organization. They were that different.

It was a little like conducting a symphony, but no one could really see the conductor. There would be a piece out there, and a piece here, and a piece there, and you all had the same music but you couldn’t see the person waving the baton. Under the new structure, it will all be visible. Everyone will be able to see the conductor, Steve Miller.

Now if they can’t afford to buy a baton for the conductor, then things still aren’t going to sound quite right. But at least they’ve got it to where all the members of the orchestra can see the conductor. And, of course, the orchestra needs to be fully staffed in order to play a harmonious symphony.

Brain drain

Q As the reorganization continues, several veterans of the agency, including you, are leaving or have left. Are there many vacancies?

A Yes. The demographics of the agency, and in exempt organizations particularly, are such that people are leaving. This reorganization is the trigger for letting me leave early. But there were a fair number who left because it was a good opportunity to leave, and they had been eligible for some time to retire. Of course, technical staffing — lawyers and accountants — in the Exempt Organizations national office is down 50 percent or more from the early 1980’s.

Q The I.R.S. has been concerned about a brain drain for several years: too many people with experience leaving.

A It’s been a real concern. There are obviously people still here with a lot of experience; it’s not everybody who’s leaving. And the I.R.S. hopes to hire people who can get theoretical knowledge they need off the shelf: Get a book and read it and learn the law.

But what the agency is losing is that information, that knowledge, that wasn’t ever put down in a textbook, that was never written into a private-letter ruling that somebody new can research — people who were here during the first dozen years after the 1969 law that created private-foundation excise taxes and created the real meaning of public charities and private foundations. People who were here then and lived through that gained a lot of knowledge as to why the rules are the way they are. People who have dealt with an increasing level of complexity in exempt organizations. People who sort of had a feel for the weaknesses of the internal systems and our strengths, and how to make them work sufficiently to keep the processes of government going. Those people are leaving.

Tight finances

Q Debate has raged for years about whether I.R.S. charity regulators should continue to get their budget money from general I.R.S. funds or from special earmarked money from foundation tax revenue or another source — or even whether I.R.S. charity regulators should be taken out of the agency entirely and be set up as an independent organization.

A Those kinds of questions have been raised a number of times in the past, as far back as the Filer Commission [a private group created in 1973 that studied the relationships among government, philanthropy, and business] and even farther back. Congress in the 1950’s was debating how much money ought to be allocated to exempt-organization enforcement and was concerned that not enough would be allocated. The issues have always been there; it’s a part of the process of government.

You want to have the checks and balances of the political process when you are doing oversight and regulation. You want the executive branch to be able to manage government through control of the resources in ways that fit their policy agenda. The Treasury Department will have so much, the I.R.S. will have so much. And similarly for Congress. You have to have that in a democracy. You don’t want to create law-enforcement mechanisms that do not have to answer to the people who run the country, that are self-funded and independent of oversight and become ironclad as a result.

Q But maybe there is some other way to get enough money to regulate charities?

A It’s worth thinking long and hard about. The new Tax Exempt and Government Entities Division is now one of four divisions, so we’re a bigger piece than we were before. But we’re still a weak sister, if you will. There is still a stepchild quality to it because the mission is dramatically different from the other pieces of the agency [which, unlike charity regulators, focus on collecting tax revenue]. Whether the visibility of being one of only four parts will help overcome that, time will tell.

Regrets and frustrations

Q Looking back, are there things you wish you had done differently, perhaps if you had had more money and staff members?

A Who knows what we could have uncovered in the way of abuses but didn’t because of some financial constraint. You almost never know that, and you’ll always have financial constraints.

There are a lot of frustrations when it comes to the quality of the management-information systems that we use. Many of the computer systems that we in Exempt Organizations use were created out of a computer system that was designed for individual taxpayers, not for tax-exempt groups. That means they were designed to keep track of how many returns are audited, and it’s very difficult to get it to record anything else.

It would be very useful to know how many contacts the I.R.S. had with charities and be able to categorize those contacts. How many audits, how many non-audit interactions. How many letters did the service centers send out, how many telephone calls were made to a particular tax-exempt organization. But we don’t know.

It would be useful to know how prevalent used-car-donation programs are among charities. But we don’t know. The Form 990 doesn’t specifically ask if charities have one. But if we changed the form to ask, we’d have to have a computer system that could extract that information, and we don’t. If you change the form, but you can’t get the information extracted, the information almost doesn’t exist. Right now, only about 20 percent of the information on the 990 is transcribed and thus “exists” in a way that can be electronically analyzed.

To really know what’s going on, what you are really doing, you need a management-information system that can capture the data. To do that would require a design of a completely different information-gathering system, a unique system. And that’s expensive, darned expensive. But if you had it, you’d have a lot better data on which to measure the performance of the agency. You’d feel pretty certain you’d make better decisions, and have a better ability to grasp questions and whether they were significant or not. You could analyze a better database to see whether a given issue was an extraordinary tax problem or a visible small problem or whatever. How you dealt with it would be dramatically different.

Personal ties to charities

Q Has working for the I.R.S. meant that you couldn’t get involved with charities personally?

A Yes. In terms of contributions, I’ve utilized things like the Combined Federal Campaign, but I felt constrained being essentially the charities regulator for the federal government. I haven’t taken an active role in the management of any tax-exempt organization, whether it was pressure to be on the board of the neighborhood swimming pool or any other group. My wife, a musician, teaches music at a music school, but I’ve tended to push away questions from people who are on that particular board. And I haven’t inserted myself into the discussion when questions would come up from my wife at the dinner table. It hasn’t been my role to do that.

I just had to be careful for 25 years how I interrelated with charities. That will change. Tax-exempt organizations are part of everyone’s lives.