Increasing IRS Enforcement Remains a ‘Slippery Slope’

To the Editor:

In his opinion column “IRS Needs More Money to Monitor Rapidly Expanding Nonprofit World” (February 21), Pablo Eisenberg raises some good points that deserve further exploration.

There is no disagreement that IRS resources dedicated to oversight of charities haven’t kept up with the expansion of the sector or the creative people who find new ways to exploit tax-exempt laws for personal gain.

However, just because Congress hasn’t specifically appropriated money for charitable oversight in recent years doesn’t mean Congress or the IRS has forgotten about charities. The IRS, at my urging, and under the leadership of then-Commissioner Mark Everson and continuing under the leadership of Commissioner Douglas Shulman, has increased resources for exempt-organization oversight, sometimes even when Congress reduced the overall IRS budget.

Yet increasing IRS enforcement—whether for tax-exempt or taxable entities—is always a slippery slope. Our system relies on voluntary compliance. The IRS can’t be everywhere all the time, and it would be unfair to the majority of law-abiding taxpayers if it were. The focus shouldn’t be on increased oversight but rather increased compliance.

And increasing audits isn’t the most efficient way to boost compliance, especially when the majority of audits of tax-exempt entities result in no changes. In recent years, the IRS has been innovative in its approach to nonprofit oversight. The agency has instituted compliance-check questionnaires, such as the ones on compensation, hospitals, and universities.

It’s created new offices such as the Exempt Organizations Compliance Unit and the Fraud and Financial Transaction Unit. It’s implemented regulatory changes such as the change in the advanced ruling process for charities, which apparently reduced the workload of the Exempt Organizations Determinations office. The IRS has significantly expanded its education and outreach, covering everything from seminars and Internet training to plain-language publications and instructions.

Arguably, these initiatives improve compliance and free up both IRS and exempt-organization resources.

The best way I know to increase voluntary compliance is to inject transparency.

If a tax-exempt organization has to disclose its top salaries or its payout rates for public scrutiny, odds are it will curb any potential abuses. The vast majority of charities operate above board, without abuse, and should have nothing to fear from more transparency; filling out a form is a lot less burdensome than being subject to a random audit. Congress made the tax-exempt filings with the IRS open for public inspection specifically so that the public would take on an increased role in oversight of charities.

As a result, probably the most significant step the IRS has taken in recent years to increase compliance is revising the Form 990 for tax-exempt organizations. The new form provides more information than ever before. The IRS needs to think innovatively about how to use all of this information more efficiently and effectively to increase compliance, especially since much of this information is available electronically to the IRS.

The new form also provides significant opportunities for the IRS to educate tax-exempt organizations. For example, questions regarding governance and management practices ideally will spur discussions on internal controls and best practices. Such discussions can often be more effective than legislation such as the so-called Sarbanes-Oxley law that tightens financial controls on corporations.

The public’s role in oversight is important. Just look at the example Mr. Eisenberg cites as a scandal that the IRS missed. According to The New York Times, it was a professor’s review of the Stevens Institute of Technology’s tax returns and other public documents, and his determination that there were big problems, that resulted in the New Jersey attorney general’s lawsuit against the school’s president and a subsequent IRS investigation.

Mr. Eisenberg is right that an independent unit to oversee charities—a Securities and Exchange Commission for charities, as some have suggested—would be a tough sell politically.

But the bigger question is what such an office would accomplish.

More than 150 years ago, the French scholar Alexis de Tocqueville marveled at how willingly neighbors helped neighbors in this country. U.S. philanthropy is the envy of the rest of the world. Private philanthropy in other countries is nowhere near the level we have here. Too much government involvement threatens to strangle the ingenuity and agility that, for example, allowed U.S. charities to turn on a dime to provide aid to Haitian earthquake victims.

Mr. Eisenberg reminds us that the revenue from the excise tax on private foundations enacted in 1969 has not been set aside for charitable oversight.

I agree that a replacement is needed. It’s a tax that hasn’t accomplished its purpose.

Mr. Eisenberg highlights a recent proposal to impose a uniform annual excise tax on private foundations of 1.33 percent of net investment assets and stipulate that the tax proceeds go to the IRS’s tax-exempt division. But he fails to mention that the main purpose of this proposal, which also would reduce one of the incentives for foundations to increase their payouts each year, is to reduce taxes for private foundations—not fund IRS charitable oversight.

Taxes are subject to the normal appropriations process, just as the current excise tax is. There is no guarantee that the taxes would be dedicated to charity oversight. A better solution is necessary.

I appreciate Mr. Eisenberg’s challenge to Congress to ensure better oversight of the tax-exempt sector. Donors need to have confidence that when they give to charity, their money is spent as intended.

Charities should be protected from exploitation by profiteers. Congress should update obsolete laws without imposing new mandates that stifle creativity. It should make sure the IRS has the resources to do its job. At the same time, the IRS should make full use of the materials it has to promote accountability and compliance from the tax-exempt sector. The public also needs to remain actively engaged in holding tax-exempt organizations accountable for doing what they say they are going to do.

Sen. Charles Grassley
Washington

Mr. Grassley, who represents Iowa, is the senior Republican on the Senate Finance Committee, which oversees the Internal Revenue Service.

To the Editor:

Both Lloyd Hitoshi Mayer and Brendan M. Wilson, authors of the February 25 opinion piece “State-Level Charity Watchdogs Need Support From Uncle Sam,” and Pablo Eisenberg, in his article about the IRS, make indisputably valid points. But none of them apparently remember, let alone explicitly credit, the June 2004 discussion paper issued by the staff of the Senate Finance Committee as it was examining how to fight abuses in the nonprofit world.

It expressly recommended the ideas the opinion authors are advocating (and in this respect, Mr. Eisenberg is unfair to Charles Grassley, the Iowa Republican who was then the committee’s chair). Independent Sector’s Panel on the Nonprofit Sector generally supported these recommendations.

Indeed, both the Senate Finance Committee and the Internal Revenue Service have had for almost five years an outline and a draft of the necessary statutory authority. What is lacking is not the ideas but executive- and legislative-branch will and funding.

William Josephson
Fried, Frank, Harris, Shriver & Jacobson
New York

Mr. Josephson was previously head of the New York State Charities Bureau.