IRS Identifies Nonprofit Compliance Problems

The Internal Revenue Service's list of the newest and worst compliance problems and abuses among nonprofits has come rolling in, pursuant to a March request by Senators Grassley and Baucus of the Senate Finance Committee.

In a letter sent June 28 by the acting commissioner of the IRS, Kevin Brown, the agency identified long-standing problems that include nonprofits that overvalue non-cash charitable donations, errantly wander into politics or commerce, or overpay their executives; emerging problems seen by the agency include the overpricing of derivatives in the tax-exempt municipal bond market. Mr. Grassley, an Iowan who is the ranking Republican on the committee, posted the letter Monday at http://www.finance.senate.gov/sitepages/grassley.htm. Mr. Baucus, a Democrat of Montana, is the committee's chairman.

In a statement, Mr. Grassley called the IRS letter "sober reading" that offered a blueprint for solving problems. He noted that one continuing IRS concern involves abusive donor-advised funds, which are maintained by a charity but used for a taxpayer's personal benefit.

"These issues are important to be addressed in order for the nonprofit sector to fulfill its social responsibilities," the assistant director of the Center on Philanthropy and Civil Society at the CUNY Graduate Center, Eugene Miller, said.

The IRS commissioner's letter cited the haziness of the line between the tax-exempt and commercial sectors and the increased size and complexity of the tax-exempt sector, as well as the rise of large tax-exempt organizations. "Several now have economic power that matches that of some nation-states," the commissioner wrote.

The consultant for government relations for the Nonprofit Coordinating Committee of New York, Jonathan Small, said the letter gave a thoughtful and impressive overview of various problems.

A long-standing concern of the Npccny has been an excessive focus on new legislation and an underemphasis and underfunding of enforcement and educational activities, Mr. Small said. "The IRS has been moving very constructively to address this imbalance," he said.

The university professor in philanthropy and the law at New York University, Harvey Dale, noted that the IRS report does not have the estimates the senators requested regarding the revenue loss resulting from the compliance issues they identified. Mr. Dale said the IRS was basically saying the role of the tax-exempt branch, unlike the income tax or excise tax areas, is not revenue raising.

At the end of the letter, the IRS asked Congress for an increase in its enforcement budget. The amount provided to the IRS for budget resources in its tax-exempt organization branch has been "inadequate for decades," Mr. Dale said, and added that less than 1% of charities are audited each year.