Exempt Organizations Advisory - IRS Reports on Continuing Tax-Exempt Compliance Issues

By: Catherine W. Wilkinson (cwilkinson@steptoe.com)
Suzanne Ross McDowell (smcdowell@steptoe.com) 

IRS Reports on Continuing Tax-Exempt Compliance Issues
On July 24, the Senate Finance Committee released a letter from Kevin Brown, Acting Commissioner of the Internal Revenue Service regarding compliance issues in the tax-exempt sector.  This letter responded to the Committee’s request on March 2, 2007 that the IRS describe “the latest, worst compliance problems and abuses in the non-profit sector.”  Senator Max Baucus, Committee Chairman, and Senator Charles Grassley, ranking minority member, requested this “blueprint of the problems and questions” that face the tax-exempt sector to continue in their efforts to “increase transparency in the charitable sector, promote fairness in grant-making, and to protect organizations that do so much good from unscrupulous behavior and exploitation.”  

Brown commended the tax-exempt community for its growing trend towards high standards for compliance, professionalism, accountability and good governance but warmed that tax abuse persists within the sector.  Brown’s letter attributed the difficulties with compliance to a variety of environmental factors, including the continued increase in size and complexity of the tax-exempt sector (approaching 1.6 million exempt organizations with a value of more than $3 trillion).   

Issues raised in the IRS letter include abusive tax transactions and the use of tax-exempt organizations as accommodation parties; valuation issues involving charitable contributions; legal non-filers, under-reporting, and the absence of transparency; employee plans compliance issues; and exempt organizations compliance issues such as abusive donor-advised funds, credit counseling, executive compensation, and political activities.  A more detailed list can be found by clicking here.  

Brown suggests that there are a variety of ways to aid the public in complying with, and the IRS is administering, the law; namely, the IRS must have the proper tools to enforce compliance in a measured way, as well as the resources necessary to continue with enforcement efforts.

Oversight Hearing Indicates Continued Congressional Interest in Tax-Exempt Organizations
On July 24, the House Committee on Ways and Means Subcommittee on Oversight held the first in a series of hearings on tax-exempt charitable organizations.  Witnesses included Steven T. Miller, Commissioner, IRS Tax Exempt and Government Entities Division; Stanley J. Czerwinski, Director, Intergovernmental Relations, Strategic Issues, Government Accountability Office; Gregory D. Kutz, Managing Director, Forensic Audits and Special Investigations, Government Accountability Office;  Diana Aviv, President and CEO, Independent Sector; and Steve Gunderson, President and CEO, Council on Foundations.  Their testimony can be found by clicking here.  

The focus of the hearing was a broad overview of 501(c)(3) charitable organizations and the overall state of the sector, including activities and measures for ensuring public accountability and good governance.  Subcommittee Chairman John Lewis cited recent legislative and administrative developments related to 501(c)(3)s, including the enactment of the Pension Protection Act of 2006, the release of the redesigned draft Form 990, and the activities of the Exempt Organizations Office of the IRS’s Tax Exempt and Government Entities Division.  

In preparation for the hearing, the staff of the Joint Committee on Taxation prepared a Description of Present Law Relating to Section 501(c)(3) Organizations and Summary of Section 501(c)(3)-Related Provisions of the Pension Protection Act of 2006 and Proposed Legislative Proposals.  

Written comments regarding the tax-exempt provisions contained in the Pension Protection Act of 2006 may be submitted through August 7, 2007 for inclusion in the record on this hearing.  Details for submission of written comments can be found by clicking here.