The US House of Representatives is conducting hearings on Tax Exempt Organizations.
Here is a link to some of the submissions:
Here is some background from the committee:
Tax-exempt organizations have long played an important role in the United States. Since the first income tax was imposed in 1913, certain organizations have been exempt from taxation, including those organized and operated for religious, charitable, scientific, or educational purposes. Such organizations remain the most common types of exempt organizations and are defined in section 501(c)(3) of the Internal Revenue Code (“IRC”). In addition to the longstanding exemption for such organizations under section 501(c)(3), there are 28 other types of organizations that may qualify for tax-exempt status.
As of 2008, 1.85 million organizations qualified for tax-exempt status, and 1.18 million qualified as charitable organizations under section 501(c)(3). In 2008, charitable organizations had $2.5 trillion in assets. It is estimated that tax-exempt organizations employ approximately 10% of the U.S. workforce (charitable organizations employ 7% of the U.S. workforce).
Tax-exempt organizations are subject to a variety of rules to ensure compliance with Federal tax law and limit abuses, including rules that prevent private inurement, limit certain activities, and subject business income related to for-profit activities to income tax.
On October 6, 2011, Chairman Boustany sent a letter to the Internal Revenue Service (IRS) seeking information related to the agency’s administration and oversight of tax-exempt organizations (including charitable organizations). The letter sought information on a variety of topics to help the Committee understand the current state of relations between the IRS and tax-exempt entities, and provide a foundation for further engagement in overseeing this important sector of the U.S. economy. The letter focused on a number of issues related to corporate governance and compliance, requested information related to new reporting requirements for tax-exempt hospitals, and asked for an update on the ongoing Colleges and University Compliance Project that was launched in 2008.
In announcing this hearing, Chairman Boustany said, “Oversight of the tax-exempt sector is an important priority for the Subcommittee, and it has been an area that both Republicans and Democrats agree needs greater attention. In my letter to the IRS last October, I asked the IRS about recent efforts to address certain concerns that have been raised regarding the operation of tax-exempt organizations, including corporate governance issues and mishandling of funds by officers. It is now time for the Subcommittee to hear from members of the tax-exempt community for a more complete picture of the current state of affairs. This review allows us to examine the state of the tax-exempt sector, as it currently exists today and consider this information as we continue the Committee’s efforts toward comprehensive tax reform. In both cases the goal is the same - to ensure that the tax-exempt sector is operating in an efficient manner and that the laws governing tax-exempt organizations are being applied fairly and evenly.”
FOCUS OF THE HEARING:
The hearing will focus on certain current issues related to tax-exempt organizations, including the current IRS compliance initiative related to Universities, recently enacted reporting requirements for tax-exempt hospitals, recent efforts by tax-exempt organizations to design and implement good governance standards, and taxpayer involvement in redesigning the Form 990. In addition, the hearing will discuss the history of recent legislative changes to the tax code dealing with tax-exempt organizations and what prompted those changes.”
Here is a very interesting submission of Professor Roger Colinvaux:
Professor Colinvaux suggests a number of changes to the US system to limit abuse and encourage more public good by charities.
Also here is some interesting pieces from the Testimony of Diana Aviv, President & Chief Executive Officer, of the Independent Sector
“Importance of the Nonprofit Sector
Every day, charitable nonprofit organizations provide educational and economic opportunities for families in need, work to alleviate poverty and suffering at home and abroad, assist victims of disaster, enhance the cultural and spiritual development of individuals and communities, and foster worldwide appreciation for the democratic values of justice and individual liberty that are part of the American character. Cities, suburbs and rural communities in every corner of the United States are enriched by the work of nonprofit, philanthropic, and religious organizations. ...
The charitable nonprofit and philanthropic sector is also a critical component of the nation’s economy. Nearly one in 10 workers in the U.S. is employed by a nonprofit organization, and with 13.5 million employees, we employ more people than the finance and real estate sectors combined. Further, we collectively pay nearly $670 billion annually in wages and benefits ???? salaries that support middle class families in communities across America ???? and in 2008, 501(c)(3) organizations paid $32.4 billion in payroll taxes.
In addition, charitable nonprofit organizations inspired 62.8 million American adults to contribute more than 8 billion hours of volunteer service in 2010, the equivalent of 4 million full-time jobs valued at approximately $173 billion.
The non-profit sector’s broad community impact and public support is evidenced by the breadth of its funding sources. Millions of Americans make donations each year, collectively providing nearly $300 billion to support the work of charitable nonprofit organizations. But charitable donations are only part of what is needed to ensure that the sectors programs and services can continue. More than 52 percent of revenue across the sector is derived from fees paid for services, ranging
from tuition and patient care charges to event admission fees. An additional one-third of nonprofit sector revenue is generated through partnering with all levels of government to deliver programs and services like after-school care, nutrition assistance, and health care services.”
[It is interesting to note that in the US 1/3 of charity revenue is from government - in Canada it is closer to 70%. Americans donated about 300 billion, Canadians about 13 billion. 52% of US revenue comes from earned income, in Canada it is closer 25%.]
here is another quote from Diana Aviv, President & Chief Executive Officer, of the Independent Sector
“Good Governance: Importance and Background
Charitable nonprofit organizations understand that continued support from Americans who give of their time and money depends upon the high level of public trust in our sector, and that erosion of that trust will ultimately harm those we serve. We are therefore deeply committed to ensuring that public charities and private foundations are governed effectively and transparently, maintain maximum accountability, demonstrate the highest levels of ethical conduct, and fully comply with the law.
We also see great value in encouraging the IRS to continue to review Form 990 requirements to determine whether particular items are necessary and add value, and look forward to similar initiatives with regard to the Form 990PF, which private foundations must file. As a publicly accessible document, the Form 990 has become an increasingly important tool for volunteers and donors to determine the accountability and transparency of charitable organizations they may wish to support. Indeed, the form is also used by organizations that assess and rank public charities based on their governance policies, stewardship of assets and ethical practices. It is therefore not surprising that we are keenly interested in not only ensuring that the form collects the most useful information possible, but also that the process for compliance by exempt organizations and subsequent use of collected data by the government and the American public is as effective and efficient as possible.
The charity sectors deep commitment to transparency, accountability and good governance stems from an understanding that doing so enhances our effectiveness and ultimately improves our ability to better serve individuals, families and communities. ...
The Current Environment: Government Oversight of Exempt Organization Governance
The IRS has already begun to use data from the revised Form 990 to develop risk models and guide the development of its annual work plans. One example that may be of particular interest to the Subcommittee is a recent effort to test the proposition that good governance leads to better tax law compliance. The IRS designed a “governance checksheet” that reflects the 26 governance questions on the Form 990. According to IRS officials, this check sheet has been completed by IRS
agents at the end of every 501(c)(3) public charity examination since October 2009 ???? more than 1,300 exams.
At the fifth annual Issues in Nonprofit Governance conference, held last month and cosponsored by Independent Sector, the IRS, and Georgetown University, IRS Exempt Organizations Division Director Lois Lerner reported that a preliminary analysis of the data shows a statistically significant positive correlation between a number of governance practices and tax compliance. Specifically, they reported finding that tax compliance is higher among organizations that:
???? Have a written mission statement;
???? Always use comparability data when making compensation decisions;
???? Have procedures in place for the proper use of charitable assets; and
???? Distribute their Form 990 for review by the entire board of directors prior to filing.
Conversely, the analysis showed that organizations in which control is concentrated in one individual or a small, select group of individuals are less likely to be compliant. The IRS also found no correlation between tax compliance and certain other governance practices, including the adoption of conflict of interest policies or whether voting board members have a family and/or outside business relationship with any other director, officer, trustee or key employee of the organization. (It is important to note that while these specific practices may not have been found to impact an organization’s tax compliance they are still vital governance tools that promote greater transparency, accountability and ethical conduct, and we continue to urge their adoption by charitable exempt organizations.)
Lois Lerner further reported that the IRS intends to verify these initial findings with a statistically representative sample of exempt organizations, which will provide a better understanding of the most useful governance questions to include on the Form 990, while also supporting continued compliance by exempt organizations.
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.