At a time when many nonprofits are seeing an increased demand for services amid government deficits at all levels, organizations are under increased congressional scrutiny of their tax-exempt status and their activities.
The Oversight Subcommittee of the House Ways and Means Committee held a hearing Wednesday morning that examined the operations and oversight of tax-exempt organizations. In explaining the importance of the hearing, which is the first in a planned series on the tax-exempt sector, subcommittee Chairman Charles Boustany, Jr. (R-La) said in his prepared remarks, “With so many Americans relying on, working for, and engaged in economic relationships with tax-exempt organizations, taxpayers should have confidence that tax-exempt organizations, especially charitable organizations, are operating efficiently and hopefully using good governance practices to maximize benefits provided to the community.”
Boustany opened the hearing with an inquiry into the recent Internal Revenue Service (IRS) audit of Cornell University, asking Joanne DeStefano, Cornell’s vice president for finance and chief financial officer, to explain what the IRS learned from its audit.
DeStefano replied that the IRS learned a tremendous amount in the two years it spent looking over “every single transaction” on the university’s regular Form 990 and Form 990-T, which reports unrelated business taxable income. DeStefano noted that much of the information that the IRS requests is redundant, especially information provided on Schedule I dealing with grants and other assistance. “Complying with that provision adds another 20 pages and 40 hours of work,” to the filing process, she said, which in turn increases the cost of providing education.
Catholic University law professor Roger Colinvaux, another invited speaker to the hearing, suggested that the form provides “too much information.” The complexity of the form does reflect the complexity of the sector, he added.
The tax-exempt sector plays an important role in the U.S. economy. As of 2008, 1.85 million organizations were exempt from federal income tax, and 1.19 million of these organizations also qualified as charitable organizations under section 501(c)3 of the tax code. Individual and corporate contributions to such organizations are tax deductible.
This provision is costly to the federal government. The nonpartisan Joint Committee on Taxation estimates that the federal government will give up $242.6 billion in revenue for fiscal years 2011 through 2015 from the tax deduction that individuals and corporations claim for their charitable contributions to religious, charitable and similar organizations.
U.S. Rep. John Lewis (D-Ga.) worried that if Congress followed the Republican lead and cut top income tax rates to 25 percent, Congress might turn to the charitable deduction as a source of revenue to pay for that tax cut. “We need to encourage charitable giving,” he said.
Diana Aviv, president and CEO of Independent Sector (IS), noted that charitable donations are significantly influenced by the incentives in the tax code. In her prepared testimony, Aviv cited the fact that “more than 22 percent of all annual online charitable donations in the U.S. are made on December 30 and 31” as proof of how sensitive these contributions are to the tax break. Aviv later said that Congress could help the sector meet its mission by renewing expired tax extenders, which include the IRA charitable rollover and deductions for food, books, and computer equipment.
As part of his federal budget proposals in recent years, President Barack Obama has proposed lowering the tax deduction on charitable contributions, among other things, for people earning more than $200,000 annually.
Rep. Ron Kind (D-Wisc.) wondered how responsive the IRS had been to comments during the process to revise Form 990. Michael Regier, senior vice president of legal and corporate affairs of VHA Inc., a national alliance of more than 1,400 not-for-profit hospitals and more than 23,000 non-acute care organizations, said the agency has been helpful in clarifying issues related to Form 990, but that “the biggest area where we need help is in finalizing the regulations.” Although tax code section 501(r), which imposes new requirements on hospitals, was enacted in 2010, the IRS hasn’t yet issued any regulations.
Rep. Xavier Becerra (D-Calif.), stressed that taxpayers “want to understand how their donations are being used.” He explained that the IRS audited about 7,900 tax-exempt organizations in 2008 – less than 1 percent of all such organizations. He wondered whether the IRS should impose an “outcomes” standard on tax-exempt organizations. Colinvaux, agreed, noting that, “Once an organization qualifies as tax-exempt, it largely stays that way.”
To be exempt from federal income tax under section 501(c)3, the IRS requires organizations to be organized and operated exclusively for exempt purposes. These organizations must refrain from attempting to influence legislation as a “substantial” part of their activities and they are “absolutely prohibited” from getting involved in a political campaign.
One future point of contention might center on the tax-exemption granted to “social welfare organizations” under section 501(c)4 of the tax code. Social welfare organizations can participate in political campaigns as long as that’s not their main purpose but contributions to these organizations are not tax-deductible and the recipient of the contributions may be required to pay gift tax on amounts received.
Rep. Kind asked whether the organizations should make public their list of contributors. Bruce Hopkins, a partner with Kansas City, Mo.-based Polsinelli Shughart, responded that if disclosure were mandatory, then contributions might be discouraged. “I have no problem with that,” he said, adding that in the spirit of fairness, other tax-exempt organizations might also have to follow the same rule.