Easing of IRS Policy Lets Relief Groups Disburse Funds Regardless of Need

Charities that collected disaster-relief funds following the September terrorist attacks say they will now be able to distribute money far more quickly because the Internal Revenue Service has reversed its longstanding policy requiring nonprofit groups to support only people who are financially needy.

But some charity representatives and financial advisers say the new policy, which only covers donations made to help victims of the September 11 attacks, could also carry problematic consequences.

The IRS recently announced that it will allow charities to make payments to victims of the terrorist attacks without first determining that they need the money. “Groups who act in a reasonable, good-faith manner to get help to victims will not endanger their tax-exempt status,” IRS Commissioner Charles O. Rossotti said in a statement. Mr. Rossotti said the IRS was responding to concerns raised by charities.

At issue is the disbursement of an unprecedented outpouring of aid in one of the largest disasters in U.S. history. More than $1.2-billion has been collected to date.

Some observers have complained that charities have been too slow to give out the funds. Yet when the Twin Towers Fund, set up by the New York City Mayor’s Office, recently sent 73 checks ranging from $50,000 to $325,000 to families of rescue workers killed in the attacks, legal experts warned that the distributions could violate tax rules against making charitable gifts to people who were not truly in financial need.

In response to the concerns, the IRS said that such payments would be acceptable as long as they were made “in good faith using objective standards” before December 31, 2002.

Congressional Debate

Traditionally, the IRS policy has been that families are not entitled to charity aid merely because they are victims of a disaster. Charities must first prove that a victim is in financial need before issuing a check. But because the policy can slow efforts to give out relief in a crisis, the revenue service has occasionally issued temporary exceptions, including after Hurricane Andrew struck Florida in 1992.

Congress is now taking up the issue by considering whether to make the policy change permanent. The Senate has approved tax-relief legislation that would no longer require relief groups to prove that the people they give money to actually need it.

Celia Roady, a Washington lawyer who represents charities, says that a review of the IRS disaster-relief policy is much needed. She says it has been so out of step with the real-life situations that charities face that organizations have trouble understanding what tax laws allow them to do. “We have an area of the law that is in need of clarification,” she says.

But Rochelle Korman, a New York lawyer who represents charities, believes the IRS announcement and the pending legislation are a mistake. The purpose of charitable relief, she argues, is not to make reparations to victims, a role she believes is best left to the government and others.

“Disaster relief historically has been tied to some kind of need,” she says. “This is not victims’ compensation.” While she says she believes that the IRS should broaden its definition of need to include services such as mental-health counseling, she says it would be a mistake to scrap the policy entirely. “What this is doing is changing longstanding public policy and legal analysis as to what constitutes charity,” she says. “Maybe we need to do that, but in the aftermath of a tragedy is not the time.”

Ms. Korman worries that the new IRS policy could permit charities to award aid based on the notion that those who have more get more. To say “the family that earns $300,000 a year should get 10 times as much as the family that earns $30,000 a year — that would be objective in the sense that if you earn a lot of money then your expenses are high and therefore you should get proportionately more help,” she says. “But it doesn’t take into account that at a higher income you can tap into other resources.”

Potential Trouble

Even with the new policy, charities must still be careful to give aid only to those who deserve it, says Peter Shiras, a senior vice president at Independent Sector, a coalition of charities and foundations. “It’s a positive step, when combined with the approach many agencies are taking to hire caseworkers and look at each family’s needs,” he says.

Marc Owens, a Washington lawyer who was formerly the IRS’s top charity regulator, says he worries that nonprofit groups now have little guidance for how to determine who deserves help. “Charities now have enough rope to hang themselves,” he warns. The IRS may accept a charity’s relief policy, but that policy could hurt a charity’s public image if it is popularly perceived as unfair, he says.