Bush Forces Should Fight Disclosure Overkill

By BRUCE R. HOPKINS

With all its talk of support for the nonprofit world through new deductions for charitable giving and faith-based programs, the Bush administration would be wise to denounce a rear-guard action, begun during the Clinton administration, that threatens to stifle the nation’s 750,000 charitable organizations.

The threat comes from the staff of the Joint Committee on Taxation, a Congressional committee that makes tax-law recommendations. Last year the committee issued a massive set of proposals that would expand substantially the disclosure requirements for tax-exempt organizations. The litany of recommendations is overkill, way beyond anything that can be considered reasonable. Just because an organization is tax-exempt does not mean that it should automatically be subject to burdensome government regulations, almost in the nature of punishment, that far exceed what its tax-paying counterparts must endure.

Nonprofit groups have privacy rights, and they also have constitutional rights — including the right to solicit contributions. The government should balance those rights with the public’s right to know.

Some disclosure is good, of course. In 1999 and 2000 the Internal Revenue Service issued disclosure regulations for two key documents filed by nonprofit groups: Form 990 — the informational tax returns that most nonprofit groups must file — and the application for recognition of tax exemption.

Many people thought that those rules would quell the government’s impulse for disclosure, at least for a while. But it appears that thinking was naïve.

A quick review of some of the joint committee’s recommendations underscores the chokehold that threatens the nonprofit world — a menace that the new administration should move aggressively to squelch:

• In matters involving Internal Revenue Service rulings on tax-exempt organizations and applications for tax-exempt status, all communications with the I.R.S. by third parties — in other words, by people or groups other than the applicants — would have to be disclosed.
• Applications by nonprofit groups for tax-exempt status, along with all supporting documents, would have to be disclosed when the applications are filed. All government actions taken on the applications also would have to be disclosed.
• All other written decisions by the I.R.S. on the tax-exempt status of nonprofit groups, including background-file documents, would have to be disclosed, generally without alterations.
• The I.R.S. would have to disclose the results of financial and legal audits of tax-exempt organizations, generally without alterations.
• Private foundations reporting capital gains and losses on their Forms 990-PF informational returns would be permitted to disclose a summary of those transactions — although a full listing would have to be filed with the I.R.S. and disclosed to the public upon request.
• Nonprofit groups would be required to disclose their unrelated-business income-tax returns.
• All I.R.S. agreements on the tax liability of institutions and people who have had dealings with tax-exempt groups would have to be disclosed.
• The existing penalty imposed on tax-return preparers would be expanded to apply to any omission or misrepresentation on a Form 990 that the preparer either knew about or reasonably should have known about.
• The Form 990 would be expanded to report more information on the transfer of funds among various tax-exempt organizations, so that the public and the I.R.S. could better assess whether contributions were being used to pay for political activities.
• Any tax returns filed by groups that are “affiliated” with tax-exempt organizations would have to be disclosed.
• Charities would be required to provide a general description of their lobbying activities, disclose expenditures for self-defense lobbying, and report expenditures for nonpartisan research and analysis that included grass-roots lobbying on legislation.

The list goes on, to a total of nearly two dozen proposed regulations.

Those recommendations are unbalanced, biased, and unfair, bred of a complete loss of perspective regarding this nation’s concept of tax-exempt groups. Nonprofit groups are not exempt from taxes just so the government can pummel them with regulatory requirements that imperil their ability to carry out their charitable and other exempt functions.

Yes, the public interest is served by disclosure of the activities of tax-exempt organizations. But there should be a limit.

The new disclosure rules issued in the past two years already shed considerable light on the finances and program activities of tax-exempt organizations. Before the government starts requiring disclosure of audit results, third-party communications, and the like, there should be some meaningful experience with the rules already on the books.

What is most disturbing about the joint committee’s approach is that it ignores the fact that nonprofit organizations exist as essential components of a free, pluralistic society — and as an alternative to government and the for-profit business world. The nonprofit world should not be governed in the same way that business is, but rather through a flexible approach that ensures public accountability but does not stifle the private, voluntary nature of charitable activity.

One can only conclude that the government wants to minimize the scope and meaningfulness of the services of nonprofit organizations. After all, we increasingly hear government officials complain that there are too many tax-exempt groups.

Heavy-handed regulations, as manifested by the joint committee’s proposals, are one sure way to reduce their number.

In other words, don’t close them down — just strangle them in paperwork.

Bruce R. Hopkins is a lawyer in Kansas City, Mo., who specializes in tax-exempt groups. This article is adapted from his book, Starting and Managing a Nonprofit Organization: A Legal Guide, Third Edition (John Wiley & Sons, 2001).