Tax Report Shakes Up Charities

Leaders object to recommendations to increase access to IRS dealings

Many non-profit leaders are worried by a Congressional proposal to make most charity dealings with the Internal Revenue Service part of the public record —

including audits and other documents that would inform the world about a charity’s inner workings, misdeeds, and other problems.

Congress’s Joint Committee on Taxation, which scrutinizes tax proposals for the House and Senate, issued a report in January urging lawmakers to make sweeping changes in tax laws that would let the Internal Revenue Service make public information that had previously been kept confidential (The Chronicle, February 10). The report, written by the panel’s staff members, also said that non-profit groups should be required to provide additional information to the tax agency and to the public about their efforts to influence government officials.

Making public more data about non-profit activity would “improve the efficiency of the operations of the tax-exempt sector,” in part by stepping up the public’s role in the oversight of non-profit groups, the committee said.

Although the report’s suggestions are far from becoming law, charity officials, lawyers, and journalists speculate that some of the proposals could wind up in tax legislation this year. The House Ways and Means Committee is asking for public reaction to the committee’s report by next week, and expects a report soon from the Treasury Department on the same topic.

Congress had ordered both reports to find out whether the public interest would be served by increased disclosure of information about non-profit organizations.

Many charity leaders say the recommendations of the joint committee report would do little to help the public — and would be burdensome to many non-profit groups.

Peter B. Goldberg, chair of the board of Independent Sector, a national coalition of charities and grant makers, said he was puzzled by the joint committee’s recommendations and alarmed by the suggestions that charities step up their reporting on advocacy efforts.

“I would like to know what is the crisis that seems to be driving a quick-fix solution to a ‘problem’ that’s not clearly understood by non-profits but is apparently so bad that it requires an almost instantaneous kind of turnaround,” said Mr. Goldberg, who is also chief executive of the Alliance for Children and Families, in Milwaukee.

“Is there a crisis?” he asked. “Is the world falling apart here? Is the whole non-profit field engaged in some kinds of grievous practices that compel a rush to judgment?”

Peter L. Faber, a New York lawyer who represents non-profit organizations, said he was troubled “by the premise, articulated many times in the report, that the general public has an oversight function” over the I.R.S. and thus needs full access to so many documents.

“The premise is that it’s not enough that the I.R.S. is monitoring groups, making sure that they do the right thing, but that somehow there is an additional role for the people who read the newspaper and watch the news on TV.”

But others welcomed the joint committee’s recommendations.

Thomas F. Field, publisher of Tax Analysts, a news service that has frequently gone to court to try to force the tax agency to make public various kinds of information, said the committee’s report “provides hope that we will someday rationalize the hodgepodge of disclosure rules that now apply to I.R.S. documents.” Added Mr. Field, whose organization has charity status: “Its policy recommendations generally deserve support.”

One of the joint committee’s high-profile ideas is to allow the public to see, with as few deletions as possible, the results of government audits of charities. “Information regarding the outcome of an audit would assist the public in determining whether the organization is in compliance with the law, and how the organization is using funds,” the joint committee said.

What’s more, the committee urged full disclosure of the “closing agreements” that non-profit organizations make with the I.R.S. after audits — or after groups voluntarily turn themselves in after finding problems — which typically describe organizations’ previous conduct and promised changes.

Currently, the I.R.S. seldom makes closing agreements public.

As the committee anticipated, some observers reacted to the report by saying that full disclosure of closing agreements would deter some charities from voluntarily turning themselves in to the I.R.S. for possible or actual violations of the law. The joint committee said that those concerns did not “outweigh the public’s interest in disclosure.”

Other observers said that charities would refuse to enter into closing agreements with the government if they knew that the information would eventually be made public.

But Paul Streckfus, a former revenue-service lawyer who is editor of the EO Tax Journal, disputed that assertion. “Most of the time, if you are being subject to revocation of your tax-exempt status, a closing agreement is a life preserver being thrown to you by the I.R.S. to work out a deal,” he said. “If you want to walk away from that just because it’s required to be made public, fine, then you’ll get revoked. But how many organizations are going to do that?”

Mr. Faber, the New York lawyer, said the revenue service should know all the details about the operations of an organization, through audits and other ways. “But why,” he asked, “should the average guy on the street have to know that the I.R.S. looked at the salary of John Doe, who is the treasurer of a university, and concluded that he was overpaid by $8,000 and therefore owes a $2,000 excess-benefit tax?”

Mr. Faber added that making such information public would lead to abuse. “It’s so easy for the press to distort what happens in an audit. There’s a tremendous potential for misuse of information and embarrassment and difficulty.”

Also under scrutiny was the joint committee’s proposal that the I.R.S. be allowed to disclose rulings on tax issues, such as private-letter rulings and technical-advice memoranda, without blanking out words that identify the organizations involved, as the tax agency does under current law.

Many charities seek private-letter rulings from the I.R.S. in order to get official approval of something they have done or plan to do — and sometimes when they have come up with an innovative approach that is not clearly covered by current law.

James J. McGovern, a former top charity regulator at the I.R.S., said that such a change would prompt some charities to think twice about going to the revenue service for such a ruling, and rely instead on their own lawyers’ opinions, “because they wouldn’t want their transactions or proposed transactions to be disclosed to the world.” That would result in fewer published rulings, said Mr. McGovern, and thus less of the I.R.S.’s thinking on the public record for others to understand. Moreover, said Mr. McGovern, the I.R.S. would suffer if the number of requests for rulings declined because the agency relies on them to help keep in touch with charity trends. “Such a change could well leave the I.R.S. in a darker corner,” he said.

Said T.J. Sullivan, a Washington lawyer and a former special assistant for health care at the I.R.S.: “Saying that all private-letter rulings and technical-advice memoranda should be released with the identity of the taxpayer intact is going too far and is not something that serves a very strong public interest or interest of the exempt sector.”

Some observers praised the joint committee’s report for recommendations that would result in the release of many other I.R.S. rulings that are now kept secret.

Such disclosure is key to making sure that the revenue service is enforcing tax laws evenly to all non-profit organizations, said Mr. Streckfus of the EO Tax Journal.

“The big thing that we’d have a much better chance of getting is uniformity — equal treatment — which is one of the bedrocks of law,” he said. “Right now we don’t know that some hospital on the West Coast got a sweet deal from the I.R.S. and some hospital on the East Coast is suffering because it didn’t get the same deal and doesn’t know about the other one.”

Mr. Streckfus added: “The reality today is that the I.R.S. is inclined to prevent disclosure of a great deal of exempt-organization information that should be in the public domain under present law.”

Also stirring debate was a recommendation by the joint committee to shake up the way the I.R.S. handles applications for tax-exempt status. The tax agency currently makes public a charity’s application and supporting documents only after the government decides that the group qualifies for an exemption.

The committee said that the documents should be disclosed when the applications are made because they have “information of interest” to the public. Early disclosure would be particularly helpful in cases when the I.R.S. takes years to process a group’s case, the joint committee said. “While an application for tax-exempt status is pending, an organization may be in operation and the public may believe the organization is tax exempt and incorrectly assume that donations to the organization are tax deductible,” the committee said.

Some charity lawyers worried that that quick release of applications would lead to special-interest groups’ pressuring the I.R.S. to nix another organization’s application before the tax agency even had a chance to think it over.

“For any type of organization that is at all controversial, people on both sides may want to chime in,” said Michael A. Thrasher, a Washington lawyer and former I.R.S. official. “It could also induce letters from Congress and Congressional sources, which could lead to the politicalization of the process. You should give the I.R.S. the space, if you will, to make its own determination as best it can without outside influences.”

The joint committee also recommended that many non-profit organizations be required to provide new information on their federal informational tax returns, called Forms 990.

Such information would include a detailed description of the legislation they sought to influence by a lobbying campaign. The committee also wants organizations to provide the number of dollars they used for nonpartisan studies, analyses, and research that also identifies legislators who will be voting on issues organizations care about.

Under current tax law, such expenditures are not considered lobbying and are not reported on the Form 990. But the joint committee said that “disclosure of these expenditures would provide the public with additional information as to the usage of a tax-exempt organization’s resources and the relevance of such expenditures in accomplishing the purposes for which tax-exempt status is granted.”

The committee also wants charities to provide on the returns the amount of money they spent to influence legislation that could affect their own operations and rights. Such expenses are not considered lobbying under federal law because they fall under a provision that allows tax-exempt groups to work in “self defense” on issues important to them.

“The joint committee staff believes that the exception for self-defense lobbying permits organizations to expend a potentially unlimited amount on activities that, but for the exception, constitute direct lobbying, without being required to disclose the expenditures specifically allocable to those activities,” the report said. Disclosure is “appropriate to ensure that the public and the I.R.S. have a complete understanding” of such spending, the report continued.

In 1996, the House Ways and Means Committee provided a hint of Congressional concern on this issue when it examined Independent Sector’s self-defense spending to fight legislation that would have sharply limited the amount of money that recipients of federal grants could spend on lobbying. The committee never took any action after the examination of Independent Sector’s records.

The joint committee’s recommendations were branded as “burdensome new recordkeeping requirements” by the Let America Speak Coalition, a group led by OMB Watch, Independent Sector, and the Alliance for Justice, which aims to protect the advocacy rights of non-profit groups.

Mr. Goldberg of Independent Sector said that the proposals could be overly complicated and time-consuming to follow, and he said he feared that the joint tax proposals might reflect renewed hostility toward non-profit organizations by Congress just a few years after some House members tried to place some restrictions on charity lobbying.

“It is so ironic and paradoxical to me that at the same time that Congress can’t get its arms around campaign-finance reform — removing the terrible influence of big money — here they are coming after non-profits again,” said Mr. Goldberg.

“What they are really saying is they don’t want non-profits in the public-policy-making process,” said Mr. Goldberg, who called the concept “chilling” and unacceptable. “That’s line-in-the-sand stuff for us.”

Several of the joint committee’s proposals drew almost universal praise, however.

One recommendation, for example, would allow the revenue service to be able to share current audit and related information with state attorneys general and other regulators who have alerted the I.R.S. about charities with problems.

“The need for more cooperation between the I.R.S. and the state attorneys general is especially important, given the remarkable growth in the value of assets now held by charitable organizations and the unfortunate recurrence of abuses in the charitable area,” said Michael S. DeLucia, director of charitable trusts at the New Hampshire Attorney General’s Office and past president of the National Association of State Charity Officials.

The full text of the Joint Committee on Taxation’s report can be found on the committee’s Web site at http://www.house.gov/jct. The recommendations that apply to non-profit organizations can be found in Volume II of the report: “Study of Disclosure Provisions Relating to Tax-Exempt Organizations.”

For information on how to submit reactions to the joint committee’s recommendations, go to the Ways and Means Committee’s Web site, http://www.house.gov/ways_means/fullcomm/106cong/fc-18.htm. The deadline for submitting comments is March 15.