Overhauling Oversight of Charities and Foundations: Key Ideas Offered by Senate Aides

CONFLICTS OF INTEREST:

Ideas raised by Senate aides: Laws designed to prevent conflicts of interest and “self-dealing” among foundations would also apply to charities. Penalty fees for those found guilty of legal abuses would be increased.

Current law: Although charities are covered by provisions to prevent sweetheart and other such transactions, they are not as specific as the foundation restrictions.

GRANT MAKERS:

Ideas raised by Senate aides: Board members would be prohibited from receiving any compensation or might be limited in the amount they receive for their work at the foundation.

Current law: No specific limits on trustee compensation exist.

Ideas raised by Senate aides:

Board and staff members who provide services to foundations would not be allowed to receive more than people who perform similar services for the federal government. Foundations would have to explain to the IRS, in publicly available documents, why they paid $200,000 or more a year to employees and others.

Current law: No restrictions specifically limit compensation of foundation officials.

Ideas raised by Senate aides:

Foundations that devote more than 10 percent of their total expenses to administrative fees would be required to explain to the IRS why such spending was necessary and whether it could be counted toward the required 5-percent minimum payout rate. Foundations could not count any administrative expenses exceeding 35 percent of total expenses toward their payout figure.

Current law: Grant makers must meet general requirements to distribute at least 5 percent of their assets to charities, but don’t have to justify any spending that exceeds specific amounts.

Ideas raised by Senate aides:

Foundations that distribute more than 12 percent of their assets in a year would not have to pay any excise taxes on net investment income that year as an incentive to encourage increased giving.

Current law: Foundations must give away at least 5 percent of assets to charitable causes; they don’t receive special treatment if they give more.

Ideas raised by Senate aides:

Companies that are publicly traded would have to file a list each year showing which causes they supported and that list would have to be made available to the public. Companies that gave less than $10,000 annually to charities would be exempt.

Current law: Companies are not required to disclose how much they give or which charities they support; their foundations, however, must disclose detailed information about their grants.

CHARITY SPENDING:

Ideas raised by Senate aides: Charities could pay no more than the federal government (or a special nonprofit rate that might be determined by the Internal Revenue Service) for meals, travel, and accommodations. Board members, however, could authorize increased spending; the charity would have to disclose such expenses on its informational tax return.

Current law: No standard rate for meals, travel, and lodging exists, and there are no specific limits on such spending by charities.

SEEKING FOR-PROFIT STATUS:

Ideas raised by Senate aides: State and federal authorities would use new standards to determine whether a charity converting to a for-profit institution would serve the public interest and the interests of the intended beneficiaries of the organization’s assets. Such conversion plans would have to be reported to the IRS.

Current law: State laws have largely governed such conversions; states have widely differing laws on the oversight and regulation of such conversions.

Ideas raised by Senate aides:

Officials of organizations converting to for-profit groups could not receive excessive compensation.

Current law: No specific restrictions on compensation from a conversion process exist, though general restrictions on excessive compensation could apply.

DISCLOSING INFORMATION

Ideas raised by Senate aides: Chief executive officers of charities would be required to sign informational tax returns before they are submitted to the IRS.

Current law: An officer of the organization must sign the return, but not necessarily the chief executive.

Ideas raised by Senate aides:

Stiffened penalties and requirements would be imposed on charities that fail to file complete, accurate, and timely tax forms.

Current law: Charities face mild penalties and restrictions for failure to file complete, accurate, and timely returns.

Ideas raised by Senate aides:

IRS would be required to issue standards on how to fill out informational tax returns to ensure that organizations provided comparable information.

Current law: No specific standards exist, although the IRS does provide instructions.

Ideas raised by Senate aides:

Independent audits of informational tax returns would have to be undertaken by all groups that had $250,000 or more a year in gross receipts. Every five years the charities would be required to switch auditors.

Current law: Charities are not required to undergo independent audits or to switch auditors.

Ideas raised by Senate aides:

Charities would be required to detail ties with for-profit subsidiaries and other related organizations.

Current law: Charities are required to provide minimal information about their subsidiaries.

Ideas raised by Senate aides:

Charities would be required to make their financial statements available to the public.

Current law: Nonprofit groups are not required to make financial statements public.

Ideas raised by Senate aides:

Charities would have to make available to the public the tax form on which they state how much they paid annually in taxes on business activities unrelated to their charitable missions.

Current law: The IRS does not disclose tax forms on which charities state how much they owe in taxes on earnings from unrelated business activities; charities can choose to make them public.

CHARITY BOARDS:

Ideas raised by Senate aides: Charity boards would have to be made up of at least three members and no more than 15. A board’s chairman and treasurer would not be allowed to receive compensation. At least one-fifth of the board would have to be free of any relationships with the nonprofit group that could cause a conflict of interest. People who were convicted of criminal charges of fraud or similar offenses could not serve on any charity board for five years following the conviction.

Current law: Federal law does not set standards for the size or composition of a charity’s board.

CHARITY PERFORMANCE:

Ideas raised by Senate aides: Every five years, a charity must give the IRS updated information about its operations so that the government could, if it chose, review the group to make sure that it still qualified for tax-exempt status.

Current law: The IRS audits some charities, but does not make organizations regularly submit information designed to prove they deserve to keep their tax-exempt status.

Ideas raised by Senate aides:

Groups with more than $250,000 in gross receipts would have to give the IRS a detailed description of their annual performance goals and how they measure them as well as an explanation of their goals for the coming year. This information would also have to be made available to the public.

Current law: Charities are required to give the IRS a concise statement of their “program service accomplishments” for the year.

Ideas raised by Senate aides:

The IRS would receive $10-million to support a charity-accreditation system.

Current law: No government agency provides national accreditation to charities.

NONPROFIT INVESTMENTS:

Ideas raised by Senate aides: Charities would be required to follow “prudent investor” rules when they are investing money.

Current law: Many states expect charities to follow this standard in making investments.

Ideas raised by Senate aides:

Charities would be required to disclose where their assets are invested. Small charities would be exempt from this rule.

Current law: Foundations must make this information available, but charities are not required to do so.

ENFORCING NONPROFIT LAWS:

Ideas raised by Senate aides: With IRS approval, states could prosecute charities and foundations that violate certain federal tax laws.

Current law: States cannot pursue organizations that break federal tax statutes.

Ideas raised by Senate aides:

The IRS would be allowed to require tax-exempt groups to remove board members who have violated certain laws and rules, and to require that such board members not serve at other organizations for a set time.

Current law: The IRS does not have the power to require organizations to remove board members or prevent their future board service.

Ideas raised by Senate aides:

Trustees would be allowed to sue nonprofit groups in U.S. Tax Court if they felt their organizations were not following the law.

Current law: Trustees do not have the specific legal authority to take a nonprofit group to tax court.

TAX SHELTERS:

Ideas raised by Senate aides: Charities that are involved in illegal tax shelters could be prohibited from offering charitable tax deductions to any donor for at least a year. Charities would also have to pay penalties for their involvement in illegal tax-shelter deals.

Current law: The IRS cannot limit deductions to donors not directly involved in an illegal tax-shelter arrangement.

DONOR-ADVISED FUNDS:

Ideas raised by Senate aides: Donor-advised funds would be required to distribute at least 5 percent of their assets each year.

Current law: No distribution requirement exists.

Ideas raised by Senate aides:

Grants to overseas charities would have to be on the IRS’s published list of approved organizations that operate outside the United States.

Current law: No restrictions on international grants exist.

Ideas raised by Senate aides:

Funds would have to disclose their existence and their grants on an informational tax return.

Current law: No special disclosure rules apply to donor-advised funds.

Ideas raised by Senate aides:

Grants made from funds couldn’t be used for anything other than direct charitable causes.

Current law: No prohibitions on using funds for personal purposes exist.