Reorganizing the IRS: A Different View

To the Editor:

I enjoyed Grant Williams’s article, “Former IRS Nonprofit Watchdog Seeks to Retool Government Oversight of Charities,” (October 29) on Marc Owens’s proposed restructuring of the way the federal government oversees and makes policy for nonprofit groups.

While I agree that Mr. Owens is “a thoughtful critic,” and I believe that many of his recommendations have merit, I have many longstanding concerns with any new reorganization plan for “retooling government oversight of charities.”

To me, the biggest factor in success for an exempt organization’s regulatory function, no matter where it is located, is its ability to attract and retain talented people while being able to move out those who are unable to operate at a high level of competence and efficiency.

The $64,000 question is, how can the IRS get and retain more people like Marc Owens, who spent 25 years with the IRS?

So my first question is, what employment rules will apply in Mr. Owens’s new agency or new organizational setup? Will they be the same rules that apply now to the IRS and other federal agencies where, thanks to civil-service rules and a strong union, guaranteed lifetime employment is the norm?

I prefer up-or-out retention rules, similar to the armed forces, where officers either get promoted or are expected to leave. This type of system, while a bit harsh, helps an organization, such as a law firm, keep its best senior employees while constantly bringing in new blood at the lower levels. So an important question for any new system is, how will the best employees be retained and rewarded and can nonperformers be weeded out?

Tied in to the above is the need to change the IRS mind-set toward providing work space and support to employees. The current reliance on sticking professional employees in cubicles with little or no administrative support has to be discouraging. One high-level IRS employee (not in the exempt-organizations division) told me he left in disgust after having to do everything himself. On paper, he was entitled to an administrative assistant, but because of numerous agency constraints about hiring a replacement, the position went unfilled for over a year.

Another problem is the disparity between large tax-exempt organizations and the IRS. A wealthy organization under audit will often have a team of prominent attorneys and accountants squaring off against a [middle-level] revenue agent. The agent usually has little or no support from the IRS counsel’s office and is under time constraints to close the case. Technical advice, which often should be requested in major cases, is rarely sought in the new IRS. How does Mr. Owens propose to level the playing field so that the team that the IRS fields in a major case against a wealthy tax-exempt group equals the team of lawyers and accountants put together by the organization under audit?

Funding will not solve all the problems, but it is probably the number-one thing that could be done immediately to make the exempt-organization function at the IRS more effective in regulating charities.

Can Mr. Owens guarantee adequate funding for his new agency or entity and, if so, how much and what will it be tied to? The exempt-organization function could be greatly improved if only a separate, independent source of funding—most likely from tax-exempt organizations themselves—could be imposed on the IRS by Congress. We need direct appropriations, not what the IRS in its discretion wants to dole out to its exempt-organization function.

If an adequate source of direct funding could be found, then the question becomes how much. We need it to be tied to some standards—for example, the number of tax-exempt organizations, the number of audits, the number of guidance items, or a combination of these factors. In a perfect world, I would demand an across-the-board annual audit rate of 5 percent and then provide funding based on what it would cost to do this efficiently.

Most state regulation of tax-exempt organizations is pathetic. Should we give up on the states or should we seek some federal mandate—with funding—that states must do more, assuming this is constitutional?

Mr. Owens acknowledges that he is not a fan of the new Form 990. He is certainly entitled to his opinion. He notes that it “had to be rushed through because [the IRS] had a limited window of opportunity.”

I, on the other hand, thought the whole process was pretty deliberate—drafts, comments, then the final versions of the core form, schedules, instructions, and now FAQs.

I may be a minority of one, but I think the 990 is a brilliant accomplishment after many hours of dedicated effort by a motivated group of IRS employees with lots of input from interested parties. Is Mr. Owens suggesting that we start over, with new drafts and another call for comments, to be done without an “artificial time constraint”?

Over the years I’ve come to appreciate deadlines. Without them the perfect becomes the enemy of the possible. Time and resources are always limited. Efficient people know when enough has been done and it’s time to move on. The revised 990 may not be perfect, but I think any imperfections can be fixed without throwing it out and starting over.

Let’s not forget that the IRS’s Tax Exempt & Government Entities Division came into existence with a lot of false promises and at great cost in terms of morale and effort.

Much good was destroyed to create the new system. Are we better off? And if so, are we sufficiently better off to justify having made such a costly effort? The IRS is just now recovering from the upheaval of the 2000 reorganization, yet in the exempt-organization division we have the same stifling bureaucracy and the same resources.

Can Mr. Owens promise us that his new set-up, which will require another upheaval of people and resources, will put us in a better place? And how long will it take to get us there? Five years? Ten years?

So while I agree with many of Mr. Owens’s suggestions, I have many concerns, and hopefully he will address them as he continues to refine his restructuring ideas, because he is correct that the present system is not working well.

Paul Streckfus,

Editor

EO Tax Journal

Pasadena, Md.