Stamping Out Charity Abuses

Charity and foundation leaders sidestep thorniest issues in a report to Senate, critics say

Be bold. Those were the words that Diana Aviv, president of Independent Sector, says she kept in mind over the past few months as she oversaw the work of a national

committee of 175 nonprofit leaders put together to come up with ideas to respond to Congressional concerns about nonprofit abuses.

But the report her group issued this month contained little that many people in or out of the nonprofit world considered bold. The group pledged to members of the U.S. Senate that charities and foundations would take steps to tighten their financial operations and recommended changes in federal and state law they believed could prevent future abuses.

Among the key recommendations in the report submitted to the Senate:

• Nonprofit groups should adopt conflict-of-interest policies.
• The federal government should require groups with $2-million or more in annual revenue to get an outside audit of their financial operations.
• The Internal Revenue Service should be given more money to enforce nonprofit laws.

However, the report steered clear of some of the most divisive issues in the nonprofit world, including whether nonprofit groups should be limited in how much they can pay their top executives; whether tax breaks for land, art, and other noncash gifts should be restricted; and whether new rules are needed to crack down on fraudulent fund-raising solicitations. And at a time when many Americans feel that charities do not spend their money wisely, the panel’s report included few new ideas for improving financial accountability in nonprofit organizations, several nonprofit observers said.

“If this is the nonprofit sector’s version of boldness, I’d hate to see when they’re being cautious,” said Trent Stamp, executive director of Charity Navigator, a charity watchdog group in Mahwah, N.J. He said the report fails to suggest ways to fix many of the problems donors have with charitable organizations. He said donors are fed up with charities that sell their names to groups they do not want to support, and they have grown tired of organizations that do not provide prompt and easy access to their financial information.

‘Serious Reforms’

The breadth of the nonprofit panel’s work drew praise from Sen. Charles R. Grassley, Republican of Iowa and the chairman of the Senate Finance Committee, but he said that the panel’s proposals must be accompanied by “serious reforms” at charities and foundations.

Senator Grassley said he intends to hold a hearing on nonprofit abuses in the spring, and then introduce broad legislation that would set new rules to clean up problems in the nonprofit world and expand tax breaks available to charity donors.

While many nonprofit leaders welcome the senator’s interest in pushing incentives to stimulate giving, some say it is unlikely Congress will pass such measures because they would be costly to the federal treasury. They note that Congress has considered a major charity-giving bill in each of the past four years and has failed to pass it each time.

At the same time, lawmakers seeking to offset a federal deficit of more than $400-billion are drafting legislation that would try to cut down on charity abuses that rob the federal government of tax revenue, according to Senate aides. If those measures gain any momentum, the Independent Sector panel’s approach of waiting to deal with the most controversial issues could backfire, because lawmakers could simply move forward without waiting to hear what charity leaders think.

Officials at Independent Sector — who were asked by the Senate Finance Committee in October to organize a committee to recommend ways to strengthen governance, ethical conduct, and effective practices at nonprofit organizations, and to submit an initial report by February — said they purposely did not focus on excessive compensation for nonprofit leaders and improper fund-raising practices, two key areas where lawmakers believe abuse exists.

Trying to resolve those thorny issues would have proven too difficult to do in the four months the panel had to complete its first set of recommendations, Ms. Aviv said. The Finance Committee has asked the nonprofit panel to submit a final report by June, and the panel intends to more closely examine compensation issues and solicitation guidelines in that report.

Ms. Aviv is not concerned that nonprofit organizations will get shut out of conversations on Capitol Hill, should lawmakers take action before June. And because the legislative process can take many months, she said, that will give charity officials a chance to be heard on whatever measures lawmakers introduce.

“We never expected we could hold Congress hostage to our timetable; we could only go as fast as we could go,” she said. “I’m absolutely confident that members of Congress will be very interested in what we have to say in our final report and that there will be plenty of opportunities to add ideas to the legislative process.”

Noncash Gifts

Perhaps one of the most important areas where the panel put off making any major recommendations concerns problems lawmakers have raised about donations of land, products, services, and other noncash items.

After Congress last fall passed new rules limiting how much donors can write off for gifts of cars and intellectual property, the Joint Committee on Taxation last month issued a report urging lawmakers to sharply reduce the size of the deduction people can claim on their tax returns when they donate land and other noncash items.

Such a change would help the federal government raise about $2.5-billion over the next nine years, the Joint Committee on Taxation report said. The proposal would require donors to limit their deductions on the land and other items they donate to the portion they own outright. Now donors are allowed to write off the fair market value of their donation.

The Independent Sector panel has “deep reservations” about such a change, according to one of the most sharply worded sections of its report.

“The effect of this proposal could be to eliminate a significant source of contributions for charities,” the report said. The panel intends to further study the issue of noncash contributions over the next few months.

Some estate-planning experts suggest that the panel’s failure to do more than mention a few cautionary words against potential changes in noncash donations could prove to be a mistake.

“To take away fair-market-value deductions for donors would ruin planned giving because people give assets, not income, when they’re making planned gifts,” said Vaughn Henry, a planned-giving consultant in Springfield, Ill. “Based on the little attention they gave to this, I don’t think the panelists understand the ramifications of this kind of rule change and how profoundly it would affect charitable giving.”

Five-Year Reviews

Also absent from the nonprofit panel’s report was a discussion of a five-year review of tax-exempt groups.

In a discussion document it released last summer, the Senate Finance Committee suggested that every five years charities should be required to submit financial statements and other written documents to the Internal Revenue Service to show that they deserve to maintain their tax-exempt status. The Joint Committee on Taxation, whose recommendations often are included in Congressional legislation, also advocated the five-year review in its report last month.

Many nonprofit groups oppose the idea, saying the requirement would be too onerous. The nonprofit panel says it plans to further study ideas for periodically reviewing charities, including weighing the financial costs charities would take on in complying with the proposals against the benefits of putting the proposals in place.

Financial management remains one of the main themes of the nonprofit panel’s work, as 8 of the 24 sections in the report deal directly with financial issues, while many other sections also deal with financial matters.

Problems with donor-advised funds — which aides to the Senate Finance Committee have repeatedly said need fixing — get more attention than any other problem in the nonprofit panel’s report.

Four full pages of the 72-page report were devoted to donor-advised funds, which allow people to donate money to special accounts, claim a charitable deduction on their federal income taxes, and then recommend how the money in the account should be distributed.

The panel suggested six ways to help prevent financial impropriety with donor-advised funds, including recommending that donor-advised funds be prohibited from making grants to some types of private foundations.

The panel also said that organizations holding donor-advised funds that have long been inactive should be required to distribute money in the accounts.

But the panel’s suggestions for cleaning up problems with donor-advised funds did not go as far as some of those that have been proposed by Senate Finance Committee aides. Last year, Finance Committee aides said lawmakers might impose a distribution requirement on donor-advised funds, requiring donors to give away an average of 5 percent of the net assets in their funds every year. The panel opposed a minimum payout.

Governance Changes

The nonprofit panel’s report included more than three dozen ideas for strengthening the governance and accountability of nonprofit organizations — but many of those ideas have been raised previously.

One section of the report suggested what charitable organizations need to do themselves to correct problems. It offers suggestions designed to prevent people from gaining improper financial benefits through their charitable work, ideas for improving the oversight of fiscal practices at nonprofit groups, and ways to help organizations be more open with donors and the general public.

Another section of the report proposed new government rules that are needed to prevent further abuses. It suggested ways to prevent charities from participating in illegal tax shelters and proposed that the federal government crack down on accountants and others who omit information or misrepresent facts or figures when they prepare nonprofit tax returns. And the federal government should work more closely with states to pursue donors and organizations who are violating the law, the report said.

The panel also suggested that the government use revenue from the excise tax that private foundations pay on their investment earnings to help step up its oversight of nonprofit groups. And in coming months, the panel plans to look into whether the federal government should create a database of financial information about charities and foundations to help donors see more clearly how their money is being used.

Ms. Aviv said that more than 1,000 nonprofit organizations have participated in helping to produce the report. That broad participation has shown Ms. Aviv how important it is for charities and foundations to have a voice during an important time in the nonprofit world.

“The general process has confirmed for me that the charitable sector is willing to come together and set aside their differences to improve their own practices and not wait for legislation to happen,” Ms. Aviv said. “They are a proactive community and they know they have a responsibility to help shape whatever happens in the sector.”

To view the report, go to http://www.nonprofitpanel.org.

ENCOURAGING ACCOUNTABILITY: KEY RECOMMENDATIONS FROM NONPROFIT COALITION

DISCLOSURE

Nonprofit groups should be required to:

• Ensure that their informational tax returns are signed by their chief executive officer or another top official
• Get a financial audit if they have $2-million or more in total annual revenue
• Hire an independent public accountant to review their finances if they have $500,000 to $2-million in annual revenue

The Internal Revenue Service should:

• Require all charities to disclose on their information returns whether they have a conflict-of- interest policy
• Suspend the tax-exempt status of organizations that fail to follow federal requirements for disclosing information to the IRS for two or more consecutive years
• Fully enforce penalties on organizations that do not file complete or accurate returns

GOVERNANCE

Nonprofit groups should:

• Adopt and enforce a conflict-of-interest policy
• Include on their boards people who demonstrate financial literacy and consider establishing a separate board committee to oversee audits of the organization
• Establish policies and procedures to encourage whistleblowers to come forward if they know about violations of the the law or an organization’s policies

PREVENTING LEGAL ABUSES

Congress or the Internal Revenue Service should:

• Impose fines on accountants and others who prepare nonprofit returns if they omit information or misrepresent facts or figures
• Increase the penalty fees that must be paid by foundation managers and other “insiders” who participate in self-dealing transactions
• Modify the standards for imposing penalties on nonprofit managers who abuse the law to make it more likely the IRS will punish wrongdoers
• Pass laws and penalties to punish charities that participate in illegal tax shelters
• Increase the amount of money the federal government spends to enforce charity rules
• Encourage states to adopt the same standards the federal government uses to monitor and penalize charities
• Allow state officials to gain access to IRS information on charitable organizations

DONOR-ADVISED FUNDS

• Require organizations that hold donor-advised funds that have long been inactive to distribute money in the accounts
• Prohibit donor-advised funds from paying for travel and consulting expenses of donors, advisers, and others who help choose charities that will receive money from the fund
• Make it impossible for donors to use money in donor-advised funds to meet federal requirements for annual foundation payouts, or to cover the costs of tuition, tickets to charity events, or other similar expenses