November 12, 2007 | Read Time: 4 minutes
Dana Point, Calif.
The Internal Revenue Service may need to take further steps to better help the public identify inefficient and ineffective nonprofit organizations, Steven T. Miller, the commissioner of the agency’s tax-exempt and government-entities division, told a group of foundation officials and donors here on Saturday.
“Efficiency and effectiveness have obvious implications when you consider the level of subsidy being provided here,” Mr. Miller said. “Should the public be able to rely on the Internal Revenue Service and the states to be sure when they make a contribution to an organization that the contribution is put to good use and not squandered?”
Mr. Miller’s remarks, made during a session on the IRS at the annual meeting of the Philanthropy Roundtable, an association of grant makers, led to sharp rebuttals from other speakers and members of the audience who said the IRS may be overstepping its basic charge of ensuring compliance with the tax code.
Marcus S. Owens, a Washington lawyer who is himself a former commissioner of the IRS’s tax-exempt division, urged the IRS to be cautious before stepping into new areas. He said state prosecutors have far greater powers to tackle issues related to governance and effectiveness than does the IRS.
“I would urge the IRS, as it begins to contemplate the concepts of efficiency and effectiveness, and of good governance, to keep in mind that some of those words are not found in the Internal Revenue Code,” he said.
The IRS is already planning to ask questions related to governance on the new version of the Form 990 informational tax return, the primary tax document that charities file each year. But Mr. Miller said that the IRS may need to take additional action to encourage efficiency and effectiveness, although he didn’t make clear exactly how the agency would do so.
Mr. Miller said the IRS was concerned that many organizations are not making effective use of their assets.
Wealthy colleges have come under increasing pressure in Congress to spend more of their assets. Similar concern about the “warehousing” of assets has led to scrutiny of donor-advised funds, which allow people to donate assets to special accounts, claim a tax deduction, and then recommend how, when, and to which charities money in the accounts should be distributed.
“Is providing a peppercorn of public benefit enough for a tax exemption?” Mr. Miller asked. “How much savings is too much savings? Should we insist on behalf of the public that the charity provide a public benefit that is commensurate with the charity’s financial resources and with the tax subsidy it receives?”
Mr. Miller said the IRS may want to consider a payout requirement for charities that is similar to the annual requirement for private foundations, which must distribute 5 percent of their assets each year. He said the agency may also use its enforcement tools to crack down on charities that are hoarding assets without providing much benefit to the public.
“We should review existing tools and explore whether we can hold organizations to a standard of commensurate use of assets, at least in the most offensive or egregious cases,” Mr. Miller said.
He said the IRS may review how foundations are complying with the requirement to spend at least 5 percent of their assets each year. Critics have suggested that some foundations include too much administrative overhead in meeting the 5-percent threshold.
“It may be time for us to review what is being spent and counted,” Mr. Miller said.
Mr. Miller also said the IRS has noted the “blurring lines” between the nonprofit and for-profit worlds, a point that has become a hot topic in Congress. Sen. Charles E. Grassley, of Iowa, the senior Republican on the Senate Finance Committee, has questioned whether nonprofit hospitals are providing enough free care and other services to justify the tax breaks they receive.
“To what degree has the sector drifted toward the commercial end of the spectrum and should they be taxed to the extent they’ve drifted in that direction?” Mr. Miller said.
Near the end of his speech, Mr. Miller praised nonprofit organizations for the work they are doing to figure out how they can be more accountable, but he concluded with a warning: “I would ask you not to let those efforts falter, or you may end up with the service or the Congress stepping in.”
