Congressional Oversight Hearings on Tax Exempt Organizations

On May 16, 2012, the Congressional House Ways & Means IRS Oversight Subcommittee held a hearing on tax-exempt organizations and IRS compliance efforts.  The focus of the hearing was to discuss issues affecting tax-exempt organizations, including new requirements for tax-exempt hospitals, good governance standards, and the Form 990.  The issues discussed at the hearing raised several key points about the state of tax-exempt organizations, including:

The 501(c)(3) category is broad. Tax-exempt organizations increasing, tax revenue decreasing: The Treasury loses money with 501(c)(3) organizations in three ways:  charitable contribution deductions, non-taxation of the income on tax exempt bonds and the exclusion from tax of income related to the tax exempt purpose of the organization. Because there are no bright-line tests to determine whether an organization can be deemed charitable, the category can be extremely broad. Instead of restricting section 501(c)(3), one individual who testified suggested restricting IRC Section 170, the section that allows charitable contributions to be made to 501(c)(3) organizations.
New requirements for tax-exempt hospitals: If the 501(c)(3) category was too broad to oversee organizations, the question was posed whether Congress was on the right track to impose additional positive requirements on organizations like tax-exempt hospitals with IRC 501(r) requirements. Even with the new positive requirements geared to distinguish tax-exempt hospitals from their for-profit counterparts, the consequence for non-compliance, i.e., revocation of exemption, still appears to make enforcement difficult.  The atomic bomb approach of revocation was the reason that Congress enacted Intermediate Sanctions (IRC 4958) as well as penalty taxes for organizations that are involved in tax shelters. The government has still not been able to issue regulations, even in proposed form.
Good governance standards: Recently, the IRS released the results of its audit checklist to show a correlation between an organization that has certain governance practices and whether the organization is tax compliant.  Interestingly, the results showed a statistical correlation between tax compliance and organizations that had written mission statements, those that always use comparability data when making compensation decisions, those with procedures in place for the proper use of charitable assets and those where the Form 990 was reviewed by the entire board of directors.
Form 990 concerns: Several of those testifying expressed concerns about the amount of information that was required on the Form 990 and the burden it imposes on exempt organizations with no apparent tax benefit to the government. Of note was a new requirement imposed by the IRS to report income, expenses and balance sheet items related to partnership investments based on Schedule K-1 information.  In response to an outcry from the nonprofit community regarding this requirement, the IRS made the requirement optional for the 2011 Form 990.

What’s Next?

The Ways & Means Subcommittee on Oversight hearing in May was the first in a series of hearings on the tax exempt sector.  It is likely that the next hearing will include the IRS to get their perspective. In addition to the hearing and the comments of those who testified, other stakeholders are sending in written comments that the staff will review. I will continue to follow these hearings and share information on the topics discussed.

In the meantime, does your organization foresee any issues as a result of these hearings?