Hearing on Tax Exempt Organizations
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Hearing on Tax Exempt Organizations _________________________________________
HEARING BEFORE THE COMMITTEE ON WAYS AND MEANS U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED TWELFTH CONGRESS SECOND SESSION |
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COMMITTEE ON WAYS AND MEANS |
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WALLY HERGER, California |
SANDER M. LEVIN, Michigan CHARLES B. RANGEL, New York FORTNEY PETE STARK, California JIM MCDERMOTT, Washington JOHN LEWIS, Georgia RICHARD E. NEAL, Massachusetts XAVIER BECERRA, California LLOYD DOGGETT, Texas MIKE THOMPSON, California JOHN B. LARSON, Connecticut EARL BLUMENAUER, Oregon RON KIND, Wisconsin BILL PASCRELL, JR., New Jersey SHELLEY BERKLEY, Nevada JOSEPH CROWLEY, New York |
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JENNIFER M. SAFAVIAN, Staff Director and General Counsel
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SUBCOMMITTEE ON OVERSIGHT |
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DIANE BLACK, Tennessee |
JOHN LEWIS, Georgia XAVIER BECERRA, California RON KIND, Wisconsin JIM MCDERMOTT, Washington |
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C O N T E N T S
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WITNESSES
Mr. Roger Colinvaux
Associate Professor, Columbus School of Law, The Catholic University of America
Testimony
Ms. Diana Aviv
President & Chief Executive Officer, Independent Sector
Testimony
Ms. Joanne M. DeStefano
Vice President for Finance and Chief Financial Officer, Cornell University, testifying on behalf of the National Association of College and University Business Officers
Testimony
Mr. Michael Regier
Senior Vice President of Legal and Corporate Affairs, VHA Inc.
Testimony
Mr. Bruce R. Hopkins
Senior Partner, Polsinelli Shughart
Testimony
Hearing on Tax Exempt Organizations
U.S. House of Representatives,
Committee on Ways and Means,
Washington, D.C.
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The subcommittee met, pursuant to call, at 10:05 a.m., in Room 1100, Longworth House Office Building, Hon. Charles Boustany [chairman of the subcommittee] presiding.
[The advisory of the hearing follows:]
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Chairman Boustany. The subcommittee hearing will come to order. Welcome to this morning’s hearing on tax‑exempt organizations. This hearing will be the first in a series of hearings exploring tax‑exempt issues and related IRS compliance efforts.
Tax‑exempt organizations, especially charitable organizations, serve an important role in our society. From the local Little League to nonprofit hospitals to major universities, tax‑exempt organizations are intertwined with our communities and economy.
Tax‑exempt organizations also control vast resources. It is estimated that in 2008 charitable organizations had $2.5 trillion in assets. In addition, tax‑exempt organizations employ 10 percent of the workforce. 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. To support these goals it is important that this committee review the substantive rules that apply to tax‑exempt organizations, IRS compliance efforts, and the operations and governance of tax‑exempt organizations.
In addition, Congress must ensure that the IRS has the information it needs to effectively interact with tax‑exempt organizations. The IRS is charged with ensuring tax‑exempt organizations are operating in furtherance of their tax‑exempt purpose and it is important that tax‑exempt organizations and the IRS effectively communicate with each other to meet this goal.
With this in mind, in October of last year I sent a letter to Commissioner Shulman to discuss a variety of current issues involving tax‑exempt organizations and IRS compliance efforts. Today we have invited witnesses who can provide information from the tax‑exempt sector’s perspective on the issues that were raised in my letter, such as good governance and compliance, the IRS college and universities compliance project, and new reporting requirements for nonprofit hospitals.
In addition, we have a witness who can provide historical background about recent changes in tax‑exempt rules and the general structure of the tax‑exempt sector. This is an opportunity to hear from the tax‑exempt community on these important issues and learn what the current landscape looks like for tax‑exempt organizations.
I want to thank all of our witnesses for joining us here this morning. With that I will now yield to my friend Mr. Lewis, the ranking member of the subcommittee.
Mr. Lewis. Thank you, Mr. Chairman. Thank you, Chairman Boustany, for holding this hearing today. Tax‑exempt organizations play an important role in our society. There are many types of tax‑exempt organizations and each type serves an important role. There are organizations that help our poor and feed our hungry. There are colleges and universities that educate our young people and hospitals that care for our sick. There are also organizations that touch every corner of our life: religion, labor and the arts, and advocate on our behalf. In total there are over 1.8 million tax‑exempt organizations that work to make our lives and our communities better.
Throughout the year I have been concerned about the IRS budget and the effect of the budget cuts on tax administration. The IRS currently has a budget of $100 million, and fewer than 900 employees to oversee nearly 2 million organizations that have more than $1 billion in revenue and $2.5 trillion in assets.
I continue to be concerned that, not if properly funded, the Agency harms taxpayers and in this context harms the public trust when bad actors are discovered. I look forward to learning more about the tools used to ensure compliance with the Federal tax laws.
In closing, I am mindful that tax reform is looming. If we adopt a Republican goal of a top individual tax rate of 25 percent, some tax preferences will need to be eliminated. However, I believe that tax‑exempt organizations play a major, valuable, and necessary role in our economy and in our country, and charitable giving should be encouraged. I look forward to hearing from the witnesses today and I want to thank each witness for your testimony and thank you for being here.
And with that, Mr. Chairman, I yield back.
Chairman Boustany. Thank you Ranking Member Lewis.
Chairman Boustany. Next it is my pleasure to welcome the excellent panel of witnesses seated before us today. Today’s witnesses have extensive experience studying or working with tax‑exempt organizations and their experience will be very helpful as we examine the current state of the tax‑exempt sector.
First I would like to welcome and introduce Mr. Roger Colinvaux. Professor Colinvaux is an associate professor of law at Catholic University and an expert on matters relating to nonprofit organizations. From 2001 through 2008, Professor Colinvaux served as legislation counsel with the Joint Committee on Taxation. Mr. Colinvaux, welcome.
Second, we will hear from Ms. Diana Aviv. Ms. Aviv is the president and CEO of Independent Sector, a national network of nonprofit organizations, foundations, and corporate giving programs. Before working at Independent Sector, Ms. Aviv worked as the associate executive vice chair for the Jewish Council of Public Affairs. Welcome, Ms. Aviv.
To introduce our third witness I am pleased to yield to my friend, the gentleman from New York, Mr. Reed.
Mr. Reed. Thank you very much Mr. Chairman for yielding. And it is my honor and privilege to introduce to the committee a witness, the third witness on our panel today, Joanne M. DeStefano, Cornell University’s vice president for finance and chief financial officer. She has custody and control of the university funds and has general responsibility for the maintenance of the financial records of the entire university. She oversees the comptroller’s office, the treasurer’s office. She holds an MBA from Cornell University. And before that, she worked for the private sector for Race Mark International, Inc. and Slumberge, Incorporated. She and I both live in the beautiful area of the Finger Lakes of New York. And it is my pleasure to introduce her in one of her first testimonies to the committee, and I know it will not be her last, having had the privilege of reading her testimony before it was given here today.
And with that, I yield back and welcome her for her testimony.
Chairman Boustany. Thank you Mr. Reed, and welcome, Ms. DeStefano.
Chairman Boustany. Fourth, we will hear from Mr. Michael Regier. Did I pronounce it correctly?
Mr. Regier. Yes.
Chairman Boustany. Senior vice president of Legal and Corporate Affairs for VHA, Incorporated. VHA is the Nation’s largest alliance of nonprofit hospitals serving members in 47 States. Welcome, sir.
And finally we welcome Mr. Bruce Hopkins, senior partner at Polsinelli Shughart in Kansas City, Missouri. Mr. Hopkins has published multiple treaties on nonprofit tax issues and is a former chair of the American Bar Association’s Committee on Tax Exempt Organizations.
I want to thank you all for being here today and spending time with us. The committee has received each of your written statements and we will make those part of the formal hearing record. Each of you will be recognized for 5 minutes for your oral remarks. And Mr. Colinvaux, we will begin with you. You are recognized for 5 minutes, sir. Thank you.
STATEMENT OF ROGER COLINVAUX, ASSOCIATE PROFESSOR, COLUMBUS SCHOOL OF LAW, THE CATHOLIC UNIVERSITY OF AMERICA, WASHINGTON, D.C.
Mr. Colinvaux. Thank you. Thank you, Mr. Chairman, Mr. Ranking Member, members of the committee. Thank you for inviting me to testify today and for holding this hearing. The (c)(3) sector is a vital and dynamic part of our civil society, but it is also a sector with its share of business interests, bad actors, and vested interests as well. In part for this reason, the law governing our tax‑exempt organizations is increasingly complex and also adrift.
I am here today to express my concern that the law is developing without a clear sense of the Federal role or a tax policy towards (c)(3) organizations. Now, we first granted exemption about 100 years ago and the law has changed a lot. For one thing (c)(3)s have to apply for their status and report annually. They didn’t when we started. (C)(3)s face restrictions on some of their activities like campaigning and substantial lobbying, but initially there were no activity restrictions. (C)(3)s must pay tax on some types of income, their unrelated business income, and private foundations pay tax on their investment income, so we don’t have a blanket exemption anymore. Some (c)(3)s also are preferred over others. Public charities face many more restrictions than private foundations, so not all charities are still treated equally.
So over time, Congress has placed limits on exemption. But what is interesting is that these limits are mostly negative in nature. That is, what we have said is, don’t do this or don’t do that or please file a form with the IRS as you go along. But we haven’t really required anything affirmative of (c)(3) organizations. That is, we don’t say that they must do anything to secure their status. Thus, we have kept the broad purposed‑based approach to exemption under which it is relatively easy to become a (c)(3) and remain one.
We have also kept the all‑or‑nothing approach to exempt status making the main tool IRS has for enforcement, revocation of status, which because it is so drastic is also a somewhat limited tool. The results I believe are legal standards that facilitate growth but little in the way of oversight capability, in large part because there is not much for the IRS to measure. This can lead to problems and it has. In recent years we have seen far too many (c)(3) organizations associated with scandals and we have had legislation as a result.
Now, I want to talk about this legislation for a few seconds because it highlights what I see as the current trends in the law. First, Congress has shown frustration with the breadth of the (c)(3) exemption standard.
First, in the case of credit counseling groups and then in the case of hospitals, Congress decided to impose more rigorous exemption requirements on these organizations than other (c)(3)s. This, in my view, is very significant because it treats some (c)(3)s worse than others based on the organization’s purposes. We haven’t done that before. What this means is that the sector can be broken down into its component parts, disaggregated, with legal standards tailored to each organization type.
Second, Congress has shown a willingness to blur the line between public charity, and private foundation, in several cases adopting the bright‑line anti‑abuse rules applicable to private foundations and applying them to stop abuses at public charities. This matters because it suggests that the old way for distinguishing (c)(3)s as public or private is less relevant today and that abuses can and do occur at public charities.
However, rather than selectively applying foundation rules to abuses of public charities, it might be better to reexamine this distinction entirely. We can look at each abuse, decide if it is still a concern, and, if so, for which type of (c)(3).
The final related trend to emerge is that Congress is showing a preference for brighter enforcement lines, more intermediate sanctions, and so frustration with the current facts and circumstances approach to enforcement. All these trends are important because they show the current direction of the law. We have a disaggregation of the sector based on purpose, a weakening of the public charity, private foundation distinction and a preference for bright, if harsh, enforcement lines.
Now, going forward, I think the question is whether to continue on this path, and here I see a fork in the road. Right now the path is focused on abuse. Policymakers respond to abuses with new rules, and stopping abuse and protecting the integrity of the sector are very important goals. And in my written testimony I highlight some ways we might consider to focus on that.
Another avenue for tax reform is to reconceive of the role the Federal Government has to (c)(3) organizations. Our current approach is somewhat monolithic. We tie all the tax benefits to (c)(3) exemption. Why not instead focus on areas where the Federal interest is the greatest: on support for charitable contributions; and decide whether eligibility to receive contributions should depend on the satisfaction of new criteria, perhaps based more on activities and outcomes rather than purposes?
I see I am out of time. I recognize the very important goal of oversight. And thank you for inviting me to testify today.
Chairman Boustany. Thank you Mr. Colinvaux.
[The statement Mr. Colinvaux follows:]
Chairman Boustany. Ms. Aviv, you may proceed.
STATEMENT OF DIANA AVIV, PRESIDENT AND CHIEF EXECUTIVE OFFICER, INDEPENDENT SECTOR, WASHINGTON, D.C.
Ms. Aviv. Thank you, Mr. Chairman, Representative Lewis, and members of the subcommittee for this opportunity to testify. I serve as the president and CEO of Independent Sector, which is a national coalition of nearly 600 public charities, foundations, and corporate giving programs and, that, with their affiliates, total tens of thousands of charitable organizations across the United States.
Every day charitable organizations work to provide help for families in need, assist victims of disaster, enhancing the cultural, physical, and spiritual life of communities, and foster the democratic values of justice and individual liberty.
These life‑changing programs, as well as the 13.5 million jobs and $670 billion in annual wages provided by the nonprofit sector, are made possible in part by the generosity of Americans who contribute millions of hours and billions of dollars to support the charitable causes they care about.
The difficult economy has affected both charitable giving and the need for services from charitable organizations. Annual giving dropped $30 billion between 2007 and 2009, and has not yet fully recovered to pre‑recession levels. At the same time, charitable organizations have struggled to meet payroll or hire additional workers as they work to keep pace with the dramatic increase in demand for services. According to a study by the NonProfit Research Collaborative, human service organizations, for instance, saw a 78 percent increase in demand in 2010.
Congress can help by immediately passing the expired tax extenders package which includes the IRA charitable rollover and enhanced deductions for donations of food.
As you look towards tax reform, we also ask you to keep in mind the positive impact of tax incentives for charitable giving on the people we serve, and explore ways to expand those incentives.
Because charitable giving depends in part on the high level of public trust in our sector, nonprofit organizations are deeply committed to ensuring effective and transparent governance, maximum accountability, and ethical conduct.
Independent Sector, with the encouragement of congressional leadership, convened the Panel on the Nonprofit Sector, which in 2005 issued a report that recommended improvements within the sector, more effective oversight and changes in the law.
The Pension Protection Act of 2006 included many of the provisions from our report, such as increased financial penalties for bad actors, safeguards against the use of charitable assets for personal gain, and improved information sharing between Federal and State oversight agencies.
The recently redesigned IRS form 990 also reflects many panel recommendations. As a publicly available document, the Form 990 has become an important accountability and transparency tool, and we are therefore keenly interested in IRS efforts to make further improvements. One issue of particular interest is removing barriers to electronic filing, which will improve the quality and accuracy of data, promote accountability and transparency, and save time and money for donors, nonprofits, and the government.
Using data from the redesigned Form 990, the IRS is evaluating whether good governance leads to better compliance. Their preliminary analysis of data from 1,300 returns shows a statistically significant positive correlation between a number of governance practices and tax compliance.
The nonprofit community also recognizes the importance of self‑regulation. To that end, the Panel issued The Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations, which outlined 33 recommendations designed to improve compliance, governance, financial oversight and fund‑raising practices. Almost 200,000 copies of the principles have been downloaded and used to develop governance policies, adjust board responsibilities, and offer guidance for those seeking to improve their practices.
Taken together, the actions outlined in my written statement ‑‑ legislative, regulatory and voluntary ‑‑ have strengthened governance and improved oversight of tax‑exempt organizations, and they reflect a deep mutual commitment on the part of Congress, the IRS, and charitable nonprofit organizations to accountability, transparency, and good governance. They have also allowed charitable organizations to maintain the public trust that is key to continued confidence in and support for our work.
Mr. Boustany, Mr. Lewis, and members of the subcommittee, thank you for the opportunity to share these perspectives with you.
Chairman Boustany. Thank you Ms. Aviv.
[The statement of Ms. Aviv follows:]
Chairman Boustany. Ms. DeStefano, you may proceed.
STATEMENT OF JOANNE M. DESTEFANO, VICE PRESIDENT FOR FINANCE AND CHIEF FINANCIAL OFFICER, CORNELL UNIVERSITY, TESTIFYING ON BEHALF OF THE NATIONAL ASSOCIATION OF COLLEGE AND UNIVERSITY BUSINESS OFFICERS, ITHACA, NY
Ms. DeStefano. Thank you, Mr. Chairman, Ranking Member Lewis, Congressman Reed, and members of the subcommittee, thank you for the opportunity to testify today. As already mentioned, my name is Joanne DeStefano, and I am the vice president for finance and chief financial officer at Cornell University.
Today I am testifying on behalf of the National Association of College and University Business Officers, known as NACUBO, which represents more than 2,100 public and private nonprofit colleges and universities.
NACUBO’s mission is to promote sound administrative and financial management at institutions of higher education. Cornell University is among the top research universities in the world with nearly $3 billion in annual revenue and expenses.
But today I am here to represent my colleagues at institutions across the country who are responsible for ensuring compliance with Federal Tax Code regulations and interpretations.
I want to stress to you three points today. First, many if not most institutions have long had institutional policies and practices in place reflecting a commitment to stewardship, accountability, and the highest standard of compliance with Federal and State laws and regulations.
Second, both public and private institutions had well established, sound, and effective governing structures prior to the IRS linking good governance to strong tax compliance.
Finally, although sometimes less visible to the public and to students and families, compliance with tax and other Federal rules, regulations, and requirements by institutions is a factor in our cost for education.
Cornell received the compliance survey and just completed a 2‑year audit. We closed the audit in March of 2012 and had no findings on our 990 return and just one immaterial adjustment to our net operating loss carry forward on our 990‑T.
I believe at Cornell we have two of the Nation’s best tax experts in house, and we have a growing tax compliance office. However, as the requirements for reporting and compliance are ever more complex, the university has engaged the services of an external auditor to review and sign both the Form 990 and the Form 990‑T, even though these forms are completed internally. The costs are in addition to managing our in‑house expertise.
Many large institutions like Cornell are organized similarly. The IRS is requiring not‑for‑profit organizations to report more and more information on the 990‑T. NACUBO has had a history of working with the IRS to ensure its efforts add value and increase understanding, rather than merely increasing administrative costs and creating confusion.
With that in mind, I would like to raise a new concern with Form 990 regarding the (k)(1). This is a new requirement to report income and expenses and balance‑sheet items related to partnership investments based on schedule (k)(1) information. Historically, partnership information on the Form 990 was reported consistent with all other financial data based on the organization’s books and records. This new requirement will create a number of inconsistencies and add substantially to administrative burden. The IRS has even recognized the concerns and actually took a step back for fiscal year 2011 and allowed the reporting to be voluntary. We strongly encourage the IRS to eliminate this proposed requirement that income on the 990 be reported based on (k)(1)s.
In conclusion, as stewards of Federal education, research, and student aid funding, as large employers, as significant operators of massive physical plant operations, and as home to our Nation’s college students, institutions of higher education take very seriously their approach to compliance with a host of Federal rules and regulations, including those by the IRS. We understand the privilege afforded by Congress for tax‑exempt entities. We understand and commend the objective of transparency to enhance information available to the public. We urge the Congress, the IRS, and all regulatory bodies to understand that all their respective and many times redundant requirements become a cost of delivery of services. In our case, it is the cost of education.
Ultimately we hope the IRS uses all of the information it has garnered as part of the compliance project to continue to explore smart, sensible, and valuable approaches to streamlining reporting and requirements. Thank you again for my first opportunity to be a voice for all of the colleges and universities at this hearing today.
Chairman Boustany. Thank you Ms. DeStefano.
[The statement of Ms. DeStefano follows:]
Chairman Boustany. Mr. Regier, you may proceed.
STATEMENT OF MICHAEL REGIER, SENIOR VICE PRESIDENT OF LEGAL AND CORPORATE AFFAIRS, VHA INC., WASHINGTON, D.C.
Mr. Regier. Good morning Chairman Boustany, Ranking Member Lewis, and members of the committee. I am Michael Regier and I am pleased to be here on behalf of VHA, a national network of more than 1,400 not‑for‑profit hospitals and more than 23,000 nonacute health‑care organizations. Based in Irving, Texas, we at VHA exist to assure the success of nonprofit health care, and we do this through 47 regional offices ‑‑ through 15 regional offices that cover 47 States and the District of Columbia.
This morning I wanted to speak to you primarily about two topics: the new requirements that are applicable to nonprofit hospitals under the Affordable Care Act, and then what we at VHA believe matters most to tax‑exempt hospitals in the context of more comprehensive tax reform.
As I am sure you know, the Affordable Care Act imposed new statutory requirements that have to be met by all hospitals that seek to obtain or maintain income tax exemption under section 501(c)(3). These requirements are in addition to and not in lieu of the existing requirements already applicable to those organizations.
We recognize the significant increase in the scope of responsibilities assigned to the IRS under the Affordable Care Act and we respect the good work the IRS has done to improve oversight of our Nation’s tax‑exempt organizations. However, during the more than 2 years since the Affordable Care Act was signed, the IRS has issued various forms of informal guidance and has revised the Form 990 annual information return filed by tax‑exempt organizations, but has not yet issued any proposed or final regulations to implement most of the new requirements that are already applicable to tax‑exempt hospitals and health systems.
Along with many other stakeholders VHA has worked with the IRS to provide feedback on the informal guidance that has been issued so far and to express our concerns about the potential compliance burdens associated with these new requirements, as well as how they will eventually be implemented and enforced.
And as an example just of the burdensome nature, I brought with me this morning the blank Form 990 with the schedules that must be completed and the instructions every year by tax‑exempt hospitals. This is the blank form and instructions. In particular, we have expressed some serious concerns about the way the revised Form 990 Schedule H was issued in February 2011, which we and many other organizations saw as supplanting the ordinary notice and comment rulemaking process.
We also expressed our reservations about the overly prescriptive nature of the more recent draft IRS guidance that relates to the community health needs assessment. We expect that hospitals will have a number of challenges complying with these new requirements, especially given the increasing financial challenges that they are facing. Now more than ever before, we at VHA believe that Congress should ensure that hospitals can direct their limited resources to actually meeting their community’s most significant health care needs rather than spending them to document the process that they used to identify those needs.
We support the goals of transparency and accountability, VHA supports the efforts to make the Tax Code fairer, simpler and more efficient, and particularly those provisions that apply to our Nation’s nonprofit health‑care organizations.
And as the Ways and Means Committee continues its effort toward comprehensive tax reform, we urge the committee to avoid any action that would jeopardize the followings three key benefits: first, the income tax exemption for charitable hospitals; second, tax‑exempt financing for hospital facilities; and third, the deductibility of charitable contributions and bequests for hospital donors.
Nonprofit hospitals and health systems need all three of these key benefits to assure that they can serve their communities well, whether that is through charity care or other financial assistance on behalf of the uninsured or underinsured, through subsidized health services, through community health improvement services, through community building services and activities, or through research and education.
Every day in communities throughout the United States, not‑for‑profit hospitals and health systems provide essential services compassionately and efficiently. Their work to further their charitable missions significantly contributes to the public good and lessens the burdens on government. In view of the expected cuts to Medicare funding under both the Affordable Care Act and the Budget Control Act and in light of the great financial demands that face the many State Medicaid programs, nonprofit community hospitals and health care organizations are going to be challenged to do more than they have ever had to do before to maintain access to quality health care for all Americans.
We have long encouraged our members to take their community benefit obligations seriously and will be working with our hospitals to facilitate their compliance. As we do so, however, we will continue working to assure that the implementation of the new requirements is not unduly burdensome or overly prescriptive and does not go beyond congressional intent. We look forward to working with the Oversight Subcommittee as well as with the IRS to meet these goals. Thank you.
Chairman Boustany. Thank you Mr. Regier.
[The statement of Mr. Regier follows:]
Chairman Boustany. Mr. Hopkins, you may proceed.
STATEMENT OF BRUCE R. HOPKINS, SENIOR PARTNER, POLSINELLI SHUGHART, KANSAS CITY, MO
Mr. Hopkins. Thank you. And good morning, Mr. Chairman, Ranking Member Lewis, and the other members of the subcommittee.
My task as a private practitioner in the exempt organizations area is to spend some time talking with you about the basics of the law in this area and then also identify what I believe to be the current developments in the field.
By my reckoning there are 67 different categories of tax‑exempt organizations. Obviously I lack the time to take you through all of those. But what I have done in my prepared remarks is focus first on 501(c)(3) entities, charities, religious organizations, educational organizations, scientific entities, to give you a feel for the detail and the criteria for exemption under each one of these categories.
For example, in the paper I note that under the concept of “charitable,” there are 15 different ways that an entity can qualify as a tax‑exempt charitable organization. Aside from a 501(c)(3) there are a number of other categories of exempt organizations, as I mentioned, and I highlighted in my paper the ones that I think should be and are a primary concern to you: 501(c)(4) and 501(c)(6). And so I have got some material in there about social welfare organizations, the whole concept of what it means to promote social welfare, what it means to serve a community, and, in the context of business leagues, discuss the rules about operating to promote a common business interest, a line of business, and the rules dealing with not performing particular services for individual persons.
There are plenty of other exempt organizations that could be talked about: political organizations, social clubs, fraternal organizations, labor groups, qualified health insurance issuers. But I wanted to put in the material at least a summary of the law dealing with what I consider to be the main categories.
And then on the last page of my prepared remarks, I have given a simple list of what I believe to be confirmed developments in this area. I don’t have time to go down the entire list. But as you can see, items like governance, which you have already heard about, and the Form 990 you have already heard about are at the top of the list. This isn’t necessarily a prioritized list, but certainly those two are on the top of any type of list like this. The whole IRS enforcement fees, compliance checks, the whole matter of political campaign activity, particularly the involvement of charitable entities and social welfare organizations in that; the pending regulation projects and other initiatives of the Internal Revenue Service of which there are a lot; and then, of course, the status of tax extenders legislation certainly impacts this field, and the whole matter of tax reform obviously interrelates with the law of tax‑exempt organizations as well.
So with that I think I will end my oral remarks and will be happy to take whatever questions the subcommittee might have.
Chairman Boustany. Thank you, Mr. Hopkins.
[The statement of Mr. Hopkins follows:]
Chairman Boustany. Clearly the tax‑exempt area is a growing and increasingly complex sector of our economy, and that is why we feel it is important to have this oversight hearing as a starting point to get a better understanding of the sector as we contemplate fundamental tax reform. And all of you have raised important questions and concerns.
I want to focus for a moment on the Form 990 specifically. This question is for the entire panel, but I would like to start with Ms. DeStefano and Mr. Regier to address this with regard to universities and hospitals in particular.
The IRS has just completed a revision of the Form 990. It took several years to complete and according to the IRS has been redesigned to enhance transparency, promote tax compliance and minimize the filing burdens. As part of this effort, the form was reorganized and filers were given more opportunities to explain their tax‑exempt activities, but were also required to provide more information regarding key issues such as executive compensation and other things.
How is this process working from your perspective? Ms. DeStefano, you can start.
Ms. DeStefano. Thank you for the question. We share our 990 before it is filed with our audit committee of our board of trustees. There are approximately 12 members of the audit committee. And I can say 3 or 4 years ago, we would have in‑depth conversations about the data and material within the 990. Today the form is so complicated that our committee of our board of trustees do not know where to begin. And I would say we have less than one or two questions on the 990 today than where we were 3 years ago.
Chairman Boustany. Okay. Do you think that the form meets the criteria set forth initially by the IRS?
Ms. DeStefano. I think there is too much information. And if you could streamline to the key points, and if executive compensation is an area that Congress feels is very important, keep that.
We have some schedules, if you don’t mind, if I could just highlight that we feel are redundant. Schedule F, which relates to foreign activity; Schedule I, which is subcontracts; and Schedule K, which is tax‑exempt bonds. They require a tremendous amount of information and we are not exactly sure of the value.
And I would like to point out, if I could zero in on Schedule I, which is the subcontracts. It requires information on grants and other assistance from organizations, governments, and individuals within the U.S. Cornell’s response is 20 pages long. And it consists almost entirely of subcontracts through the Federal Government as part of our research enterprise.
OMB already has a single audit act, with OMB A‑133 that audits States, local government and not‑for‑profit organizations. If we could eliminate all of the reporting that already goes through another phase of what is being audited, we estimate this one change would save 40 hours of work preparing our 990 plus 20 pages of reporting data.
Chairman Boustany. Thank you. Mr. Regier.
Mr. Regier. Mr. Chairman, to go back to the first question, I think our members would say the form does make much more information available. I don’t think that they would agree that it promotes efficiency or that it has lightened the filing burden. The form has expanded significantly. That is why we brought it this morning.
I think the experience in most tax‑exempt hospitals is very similar to what Ms. DeStefano outlined. This is not a form that, despite your best efforts and expertise inside of your organization, that you really can afford not to engage an outside advisor to help you with, whether that is your outside tax counsel, your outside auditors, or specialized tax consultants.
Chairman Boustany. I thank you. Any other members of the panel want to comment?
Mr. Hopkins. Mr. Chairman, I think one sentence might sum it up. The Form 990, the new Form 990 has greatly enhanced my law practice.
Chairman Boustany. Others?
Mr. Colinvaux. Well, I think one little bit of context, which is where we were before the new Form 990. Which was, the IRS was under a lot of pressure to revise the form because the form was seen as very outdated and not providing enough information. So it took years for them to come up with the new form.
I think the other thing that is important to keep in mind is the value of the Form 990 as an enforcement tool. One of the difficulties here is that there is not a lot for the IRS to enforce. And one of the things that ‑‑ one of the ways that we can keep oversight over organizations is through the disclosure of information which is made public on the 990.
I think one of the problems that is being highlighted here is the too‑much‑information problem. And I recognize that is a problem. But I also think that it is a problem that the IRS is trying to work out by continuing to revise the form in discussions with stakeholders to find out what the most relevant oversight information is.
And finally, I would say that the complexity of the form is absolutely correct. The instructions are, you could say, monstrous because they are so big. But what is going on here is that the complexity is reflecting the complexity of the sector. The sector is not a simple thing. And so the form is getting more complex as the IRS learns how complex the sector is. So there are a lot of issues at play here.
Ms. Aviv. Just a very quick comment. The Form 990 is the only vehicle through which the public, donors and volunteers, or people seeking jobs can actually find out what is going on in an organization, or quite a lot about it. Now, there may be some parts of it that are too detailed, but this revised form has provided the first opportunity to get a really good picture of the charitable sector. So as we go forward with this, let’s be mindful of the benefit of the public being able to see into these organizations as well.
Chairman Boustany. Thank you. Just a follow‑up question, Mr. Colinvaux. Obviously this is a very complex and growing sector. Should there be ‑‑ should we disaggregate to some extent or should the IRS disaggregate in terms of trying to get certain types of information from one sector of the tax‑exempt area versus another?
Mr. Colinvaux. Well, I think that is what is happening. I mean the IRS has been under a lot of pressure in recent years, in part because of the scandals that have happened at organizations. And so I think what the IRS is doing is they are educating themselves and they are saying there are two very big elephants in the room; it is namely the hospitals and big colleges and universities. They take up most of the assets and the revenues of the sector. And so there is disaggregation going on not only in terms of exemption standards passed by Congress but in terms of enforcement, so new compliance initiatives are launched, we look at the hospital sector, they look at the colleges and university sector. So disaggregation is happening and it is happening on the Form 990, as well as more tailored questions, depending on what you do, are surfacing in the 990. So you can show the whole form, but a lot of that form isn’t relevant to a lot of organizations.
So, yes, I think the disaggregation is happening. It is one of the facts on the ground, and it is something that policymakers are going to continue to wrestle with.
Chairman Boustany. Anybody else want to comment on that issue? No. Mr. Colinvaux, the Ways and Means Committee, as you know, is currently focused on comprehensive tax reform, and we are definitely reviewing all areas of the code, including provisions that apply to tax‑exempt organizations. You have recently looked at the tax‑exempt sector over the last 10 years and were on the Joint Committee on Taxation in 2006 when the Pension Protection Act was enacted, which contained many new provisions related to tax‑exempt organizations. Are there any lessons from the last few years we should keep in mind when considering tax reform proposals in this area?
Mr. Colinvaux. Well, one lesson based very much on my experience is to continue conducting hearings such as this, which is I think a really important form of oversight, because it calls the sector together and it reminds the sector that they need to do good and perform a public benefit. So I think this is a very important form of oversight that really does lead to better behavior. So that is one lesson.
Another lesson is ‑‑ what struck me about the Pension Protection Act was that it was very much focused on correcting abuses. And there are and always will be abuses in any sector. One of the challenges going forward, which was not addressed in 2006, really goes to the role the Federal Government has with respect to (c)(3) organizations. So we can take the anti‑abuse path, which is the path that we are on, continue to write rules that go to abuses, or we can start to ask harder questions such as which organization should get which benefits, do we expect certain public benefits to occur from our (c)(3)s? Those are questions that were not really asked in the lead‑up ‑‑ they were asked in the lead‑up to 2006 but weren’t really answered. So I think those are ‑‑ the lessons are we still have those questions, maybe.
Chairman Boustany. Thank you. I appreciate that. I am now pleased to yield to the ranking member, Mr. Lewis, for questions.
Mr. Lewis. Thank you very much Mr. Chairman. And again I would like to thank each member of the panel for being here and for your testimony.
Mr. Hopkins, you are a noted expert on tax‑exempt organizations and you have worked in this area for over 42 years. I don’t believe you worked there that long. Apparently someone violated the child labor law and some law firm hired you at an early age, but I don’t want to get into all of that.
Now, the IRS has fewer than 900 employees to monitor more than 1.8 million organizations. Can you tell the members of the committee how you feel the IRS is doing in the oversight of these organizations?
Mr. Hopkins. Well, Congressman Lewis, I think based on the resources the IRS has, I think the IRS overall is doing a very good job. I have never worked for the IRS so I am not familiar with the internal workings. But based on what I see and certainly based on my years of practice working with the IRS, both on the examination side and working with the IRS with organizations that are applying for recognition of exemption, the IRS I think is doing an excellent job in reviewing entities, screening entities.
I would note that almost every week there are a number of private letter rulings that are issued by the IRS. I review each one of those, and almost all of them are adverse to the nonprofit organizations that are applying. So the IRS is being very aggressive, very active in applying the law and determining which organizations comply and which ones don’t. So my impression overall is that the Agency is doing a good job, a very good job actually with the resources that it has.
Mr. Lewis. Now, I noticed someplace that you provide a monthly newsletter?
Mr. Hopkins. That is correct.
Mr. Lewis. Do you get feedback from the private sector?
Mr. Hopkins. I get a lot of email as a result of some of the things that are mentioned in the newsletter, yes.
Mr. Lewis. Are people pretty satisfied with what they get from the IRS?
Mr. Hopkins. Well, I think it depends on what kind of entities you are talking about. I mean, I hear a lot from organizations that are unhappy that they have been audited and/or been denied recognition of exemption. But I think on balance, probably the IRS position was correct. And then, of course, I hear from organizations that are very happy with the situation that they are in. So I think it just depends on how the nonprofit organizations have fared with the IRS. Some complain and some don’t.
Now, I am talking now about compliance with the criteria for exemption. This discussion about the Form 990 is a totally different matter. I hear in my practice daily complaints about the Form 990 overall, not just Schedule H but the parts of it as being ‑‑ and we have heard some of these words this morning ‑‑ burdensome, redundant, overreaching, and that kind of thing. So there are lots of complaints about the Form 990; but leaving the Form 990 aside, not a lot of complaining about the IRS.
Mr. Lewis. Thank you. Ms. Aviv, you noted that charitable organizations have struggled financially during the economic downturn. How has the demand for service increased and what do people need?
Ms. Aviv. Congressman Lewis, people need help. The economy hasn’t recovered. The demand for service has grown. And the ability of these organizations to get additional funding has been diminished. Individual donor giving is down, and public funding has certainly not increased, particularly State funding. And the ability of these organizations to charge greater fees means that the people who are at the bottom of the economic scale, who have nothing, wouldn’t pay more because many organizations charge fees on a sliding scale. Some of these organizations have coped by doing more with less, but there is only a limited amount of time that you can do that.
For the most part what we are being told is that these organizations are finding themselves turning people away. And with your permission, I just want to share with you a story that was shared with us by Catholic Charities. They said that in the fourth quarter of 2011, a snapshot survey of 44 local Catholic Charity organizations located in 29 different States that served about 3‑1/2 million clients annually, found that the 44 responding agencies each maintained a waiting list or turned away individuals for services during the fourth quarter, with the greatest areas of unmet needs being in emergency financial assistance and utilities assistance. Even the most basic needs are going unmet in some communities. Three agencies reported turning away at least 1,750 individuals that came to them seeking food.
So what we are seeing is that organizations are not able to keep up with the increased demand.
Mr. Lewis. What more can Congress do to assist these organizations, not just to do well in the entire private sector, but also to do good?
Ms. Aviv. I mentioned in my remarks, and in my written testimony, that immediately passing the tax extenders, particularly the IRA charitable rollover and the other provisions that affect the charitable community, would be a big help.
When Congress first passed the IRA charitable rollover, some of us had concerns that the only organizations that would benefit were those who were attached to high‑income individuals, and that that might be universities, it might be cultural institutions. But in fact what we have found is that many different kinds of organizations, including health and human services organizations, are the beneficiaries of those kind of funds. That provision was not extended at the end of last year and we are concerned that it still hasn’t been extended. It is an easy fix and it is certainly one of the ways to help these organizations.
Mr. Lewis. Thank you very much. Mr. Chairman, I yield back.
Chairman Boustany. I thank the ranking member. I now recognize Mrs. Black.
Mrs. Black. Thank you, Mr. Chairman. Let me go to you, Mr. Regier. In your testimony you noted that VHA has worked with the IRS in its design of the new Schedule H; yet you express concerns regarding the clarity on the form. And I know that the chairman talked about the 990. How receptive has the IRS been with working with you and your organization and your other members about your concerns?
Mr. Regier. I think in our experience the service has been very open to receiving input, and so they have in many ways requested input and solicited input in advance of issuing their formal guidance. And I must say the IRS did agree with the request that we made to make certain provisions of the Schedule H optional for certain filers for a year. Those are questions, however, that are information gathering items in the Schedule H which we believe makes the schedule confusing. We did ask the IRS to extend that and make that voluntary or to eliminate it. We did not get a favorable response there. I would say we have had some success in shaping the form to the better as we see it for our membership, but we would like to see more.
Mrs. Black. Well, other than the category you just spoke of to make it voluntary, what other specific concerns do you have on that schedule?
Mr. Regier. I think the new Schedule H compared to the former one has now expanded significantly in its length and detail, so there is now I think more than 60 subparts to the schedule. We saw the adoption of it as a pretty significant increase in the filing responsibility for the exempt organization.
Mrs. Black. Let me go to your testimony where you state that many of the documentation requirements related to the community health needs assessment are burdensome. And as you know, these requirements are designed to ascertain whether each tax‑exempt hospital is truly providing the requisite community benefit to qualify for tax exemption. So given this weighty task, do you propose an alternative method of demonstrating to the IRS that every tax‑exempt hospital is meeting those requirements?
Mr. Regier. I think the concern that we have is not about demonstrating that the requirements have been met, it is more about the way that one ‑‑ the process that is being prescribed for the needs assessment. The guidance that has been issued by the service so far for the community health needs assessment is very detailed in what you have to do to document what you have done. So for example, to list by name, by organization, the persons that you consulted with who you thought were public health experts; to list by name, and their indication of their community or status, the persons that you consulted with that represent low‑income or specific disease populations. Leaving aside the question of privacy concerns, that is a level of detail about and prescribed detail about what you must supply and report about your process of assessing community need that we think really misses the point; the point of which is, here are the needs that are present in the communities that we are serving.
The other concern I would say we have about the guidance so far really is the question of how this kind of assessment and planning is done in particular in multi‑hospital systems. So multi‑hospital systems that may extend through a State or across many regions typically plan on a systemwide basis and there are efficiencies to be obtained from that. The reporting scheme, however, that is set up, which is driven by the statute, is very siloed, so it is requiring reporting to be done on a hospital‑by‑hospital‑by‑hospital basis, along with an implementation plan that would be separate for the hospital‑by‑hospital‑by‑hospital basis. We would love to see something that would allow a system to have a greater degree of flexibility, to show within the report how the individual hospitals are meeting needs without having to do this kind of siloed hospital‑by‑hospital kind of approach, which is how we see the guidance shaping up so far.
Mrs. Black. And I think you make a very good point there. In certain hospital systems, you may have one hospital in an area that provides a great deal of community needs and maybe in another sector of that same system not so much so. But if there could be some coordination there, so the silo effect.
Is there anything else that you would like to offer in this testimony to say how you think this could be made better on that?
Mr. Regier. I guess the overall concern I have is that today we are asking health‑care organizations to become much more accountable in different ways to help manage and promote the wellness of the community. We want to keep people well, keep them healthy and be rewarded for that, or that is what government seems to be telling health‑care providers. The community health needs assessment could be a very powerful tool to inform that work. I am concerned and we are concerned that it won’t be if we ask our providers and multisystem providers to look on this siloed hospital‑by‑hospital basis. We don’t achieve population health and wellness in that way, we don’t achieve and meet the needs of communities and regions in that way. So that is the only thing I would say.
Mrs. Black. Thank you for your testimony. I yield back.
Mr. Boustany. Thank you. Ms. Jenkins, you are recognized.
Ms. Jenkins. Thank you, Mr. Chairman. Thank you for holding this hearing, and thank you all for joining us.
Mr. Colinvaux, in your testimony as well as in your recent article in the Florida Tax Review, you raised the issue of the distinction between public and private charities. You stated that the distinction is one of form rather than substance and that the distinction is beginning to collapse from its own weight. As an example, you mentioned the different standard that applies with respect to self‑dealing between a charity and the insiders. Can you just elaborate for us on the distinctions in law between a public charity and a private charity?
Mr. Colinvaux. Sure. Thank you for the question, Ms. Jenkins. By saying that the distinction is one more of form than substance, what I mean by that is that we take a public charity and a private foundation. Well, what makes a public charity public and what makes a private foundation private? Well, the private foundation is private not because of what it does but because it is funded really by one person or by a family, not because of its underlying charitable activity. And so Congress has looked at that shape, the form of the foundation, and said that shape is more likely to result in abuse because it doesn’t have a donor community making contributions to it, it also doesn’t have a service community so that there is no base to effectively oversee the foundation. So the form of the foundation is then disfavored relative to the public charity. So that is why it is a distinction of form and not substance.
Why I think it is starting to collapse is because when Congress made that distinction in the law in 1969, it was very much an anti‑abuse focus. That is, we said certain forms of charity are more subject to abuse, so they should be subject to the private foundation anti‑abuse regime. What we have now seen in recent years has been more abuses at public charities, and one of the congressional responses, then, is to look to the private foundation rules, say here we have a set of rules that regulate abuse, why don’t we apply those rules to public charities? And so the self‑dealing rules are an example of that.
The private foundation approach to self‑dealing is quite harsh. It says if there is a transaction; that is, if there is a loan between the charity and a disqualified person or a sale of property between the charity and the disqualified person, then it is self‑dealing.
The approach under the public charity rules is different. You have to decide whether there has been an excess benefit. So it is a very different analysis, and by saying it is collapsing, I am saying that the more we use the public ‑‑ the private foundation rules to regulate abuses, the less distinct these two types of charities become.
Ms. Jenkins. Okay. So did I just hear you say that you believe that the anti‑abuse rules that pertain to private charities should apply to public charities?
Mr. Colinvaux. Well, not across the board. What I think would make sense is to look at the types of abuses we have identified. So there are a number of abuses: Self‑dealing, excess business holdings, the expenditures for nonexempt purposes. We should look at those abuses, decide whether those abuses, first of all, still matter. Some people would argue that we don’t ‑‑ we are not worried about some abuses anymore. We should look at the abuses, decide if they still matter, and if they do, then maybe apply the private foundation rules not based on whether you are a public charity or a private foundation or not but just apply them because we want to regulate the abuse.
Ms. Jenkins. I see. You also mentioned in the Florida Tax Review article that a largely unexamined facet of the charitable sector is the ownership by public charities of for‑profit enterprises. Given that is an area that has remained largely unexamined, can you just elaborate on some of the reasons why a tax‑exempt organization would own a taxable, for‑profit enterprise and how prevalent this practice is?
Mr. Colinvaux. Well, I can’t really comment on how prevalent it is, but I know it is fairly common. There is no rule against it. So, first of all, there is a rule against it for private foundations. Private foundations cannot have excess business holdings. Public charities may, and because they may, they do. So why? Well, I think one of the reasons is because they want to do more than just the charitable work. They want to do other activities that may be related to the charitable work. So they set up a for‑profit business and separately incorporate it. There is no rule against it. It is not necessarily bad, but it is something that we haven’t thought about a lot as to whether we want to encourage it or not encourage it.
Ms. Jenkins. Okay, thank you so much. I yield back.
Mr. Boustany. Mr. Reed, you are recognized.
Mr. Reed. Thank you, Mr. Chairman. Ms. DeStefano, if I could ask you a question in regards to your testimony, and I do appreciate you being with us today, you had mentioned in your testimony and when I read your testimony the compliance that you had with the Form 990, and you had mentioned something in your verbal testimony today about the K‑1 and the side issues. I wonder if you could elaborate for me a little bit more in detail exactly what you are referring to in regards to that additional requirement.
Ms. DeStefano. Currently the 990 is an informational return, and it reconciles with our financial data and our balance sheet of our audited financial statements. K‑1 data typically will be used for institutions like Cornell that have large endowments where we are invested in partnerships, and we receive K‑1s. The K‑1 data is not part of our official university records. If we are required to now take a return full of data that reconciles with our financial statements and have financial statement data and other data commingled, the reconciliation issues and the amount of time to validate the accuracy of the reporting expands exponentially. So we are recommending that for the informational return that we stay with financial statement data that is already audited and can tie to something that someone else has already reviewed.
Mr. Reed. Well, that makes sense to me, and that is a really a good common sense suggestion. Is there any way, in your mind, that you could quantify the type of burden that you would have to comply with if we went down ‑‑
Ms. DeStefano. I don’t have the answer, but I can speak with my staff ‑‑
Mr. Reed. I would appreciate that.
Ms. DeStefano. ‑‑ and provide a response back.
Mr. Reed. And obviously any resources that you allocate to this compliance issue is taking away from your educational mission, correct?
Ms. DeStefano. Exactly, it is additive.
Mr. Reed. And from your experience with the compliance audit, could you offer any insights to us as to what worked, what didn’t work from your perspective in dealing with the IRS?
Ms. DeStefano. So we spent 2 years going through the compliance audit. We had approximately 15 staff members involved. The IRS looked at every single transaction for fiscal year 2008. We spent a significant amount of time educating the IRS on the higher ed industry. I think that the auditors after 2 years now understand our industry. The one thing, though, that we felt might be helpful is apparently the 990 and the 990‑T did not provide sufficient data to determine what should be audited, and as a result, the IRS created a questionnaire and at Cornell we felt that the way the questionnaire was, the questions were phrased, and that is what determined what is to be audited, the IRS should seriously take a look at what those questions were phrased, was sufficient to determine areas of audit if the return itself didn’t identify the areas that they should come in and take a look at the survey questions, perhaps they were more effective.
Mr. Reed. Very good. I appreciate that testimony, and I look forward to receiving your additional material and that estimate of impact on your K‑1 compliance requirement.
With that, Chairman, I would yield back.
Ms. DeStefano. Thank you.
Mr. Boustany. Thank you, Mr. Reed.
Mr. Kind, you are recognized.
Mr. Kind. Thank you, Mr. Chairman. I want to thank our panelists for your testimony here today. I appreciate this opportunity to have this hearing on tax‑exempt organizations. Mr. Colinvaux, I think you are right, I think we are going to have to maintain lines of communication and learn more before we are ready to dive into comprehensive tax reform and help us to do that. But listening to almost all of you here today, I am being left with the impression, especially with the 990 form, that the IRS has not been all that responsive in receiving feedback or suggestions on how we might be able to streamline or simplify the 990 form.
Is that the impression that you have or have they been responsive to feedback that various organizations have been giving them on how they can help simplify the 990 form? Mr. Regier, do you want to take that first?
Mr. Regier. Sure. And I don’t want to leave the impression that the IRS has been unresponsive. They have not been. Through our dialogue, we have clarified some pretty important issues related to the Form 990 and the Schedule H, so, for example, they have been helpful in clarifying just what kind of hospital facility is required to comply with the new requirements in helping to define what it means to widely publicize your financial assistance policy. So I can point to, you know, four or five areas in particular that we think have been very helpful clarifications that have come out of that dialogue.
That said, there is still at least that many or more where we believe there is some further help that is needed, and the biggest degree of help would be if we were able to get actual proposed or final regulations related to these new requirements, most of which have been in effect since the Affordable Care Act was signed in 2010.
Mr. Kind. Anyone else have an opinion on how responsive the IRS has been? Ms. Aviv?
Ms. Aviv. Mr. Kind, our experience is actually quite different from what the question might suggest. When the Pension Protection Act was passed, we worked closely with the IRS on the reform of the 990 the first time, and we found that they invited us in and many other organizations in to talk to them about what the concerns were, what the changes needed to be. When we offered our comments during the public comment period, they followed up with us. When they put in place the Pension Protection Act requirement that organizations that failed to file would lose their tax exempt status they went out of their way to provide notices across the board and on their web site to make sure that everybody knew when a number of organizations got caught in that that still existed. The idea was to clear out the inventory of those organizations that no longer existed so we have an accurate count of how many organizations there actually are. They worked assiduously to try and get those organizations reinstated. We found them responsive to our concerns, including questions, in a serious way. I think that is different than the question of the burdensomeness of the 990 form which many organizations feel is beyond their capacity and the expense capability and takes away from programs.
Mr. Kind. I am sympathetic, too. And obviously we get testimony from the IRS themselves. It seems as if as a body we are asking them to do more with less, and these things are becoming more complex every year, and yet we are asking them to render good, effective service and responsive service to all of you, too.
Mr. Hopkins, let me turn to you real quickly on a different line. Obviously, we have seen a real growth in (c)(4) activity off of the social welfare organizations, and we are also noticing stepped‑up political involvement with a lot of the (c)(4)s out there. Is that an area that the Congress should be paying a little bit more attention to or even the IRS paying attention to, in your mind?
Mr. Hopkins. Well, absolutely. Certainly the IRS is paying attention to it now. The IRS, as you probably know, has gotten a substantial number of applications from organizations that want to be 501(c)(4)s, and some of them have a substantial amount of political campaign activity planned, and the position of the IRS is that if that is the entity’s primary purpose, it can’t qualify under 501(c)(4). There has been, for example, a recent ruling, the first ruling of the current batch was adverse to an entity that wanted to be a 501(c)(4). The IRS decided that 80 percent of what it wanted to do consisted of political activity. So the IRS is right now processing a lot of applications in that area.
Mr. Kind. Well, what is your opinion on requiring disclosure of contributions to (c)(4)s?
Mr. Hopkins. Well, that of course is not the law at the present time.
Mr. Kind. Right.
Mr. Hopkins. And we do have the alternative, the 527 political entity, and that kind of an organization does have to make its donors public, and public charities have to disclose their donors but only to the IRS, and private foundations have ‑‑
Mr. Kind. It just seems that a lot of the (c)(4)s are being used in order to allow these anonymous contributions to be made for, in essence, political activities.
Mr. Hopkins. That is one of the principal reasons, frankly, that (c)(4)s are being utilized in this regard is so that the donors do not have to be disclosed. So if the question is ‑‑ and this is purely a matter of policy. Should donors or at least large donors have to be identified to 501(c)(4) entities? I mean, that is obviously well within the prerogative of Congress’ decision making, and certainly that rule could be enacted.
The question to me is, you know, what would be the consequence of that? Would it be to discourage contributions, political contributions to (c)(4)s? Probably to some degree. And maybe that is what is desired. But certainly as a matter of transparency I personally don’t have any problem with having that sort of a rule, although probably as a matter of fairness if that kind of rule were to be enacted, maybe some other categories of exempt organizations ought to have the same rule, (c)(5), (c)(6)s, for example, but as a matter of transparency on balance it is probably a good idea.
Mr. Kind. Right, right. Thank you. Thank you, Mr. Chairman.
Mr. Boustany. Thank you, Mr. Kind. We will go next to Mr. Paulsen.
Mr. Paulsen. Thank you, Mr. Chairman, also for holding the hearing today.
Mr. Colinvaux, let me just shift back to something I think you referenced in your testimony before about the enforcement problems that are faced by the IRS than being due to a lack of positive requirements for tax‑exempt status. Can you elaborate a little bit on that point, and do you agree or do you believe that this is not an enforcement problem that can be resolved simply by increasing the IRS budget to audit charities? Is there more to it?
Mr. Colinvaux. I do think there is more to it. I think a lot of what we are hearing about the 990 and the information burden, what is driving a lot of the information question to me really goes to what we mean when we say compliance, what do we mean by compliance. And partly what policymakers and others are concerned about is whether or not an organization is providing a public good. Well, there is no legal requirement, really, that the organization provide a public good. They just have to be organized for a good purpose. So we want all this information in order to assess a substantive question, which is, is the organization doing good. But there aren’t really legal requirements to back that up. Rather, the legal requirements are more you may not pay excess compensation, you may not engage in campaign activity, you may not engage in substantial lobbying.
So a lot of the enforcement efforts are tailored to that sort of compliance, and one quick note which I think is very significant, the governance initiative, we have talked a lot about governance. One of the reasons I think the IRS is looking at governance is because if the IRS can decide that good governance means better compliance, that means you will have a better run organization, fewer abuses, and maybe also more public good is being produced. So it is something the IRS can do. It is something they can look at. I think part of what they are doing with the 990 is gathering information to see what information works and what helps them oversee the burden.
Mr. Paulsen. You also noted that the new hospital requirements are a recent example of Congress imposing a positive requirement on organizations in order to support their tax‑exempt status. Do you think that this type of sort of anti‑abuse positive requirement structure would also be useful in other areas of the tax‑exempt sector?
Mr. Colinvaux. I think potentially yes, although with hospitals in a way the new rules fall short of a strict positive requirement, and that is where some context is useful there, too, because leading up to the new Section 501(r), the question was whether an affirmative duty of charity care should be imposed on hospitals, and Congress didn’t go that route. Instead they went the route of requiring more process‑based requirements; namely, more paperwork, more proof of the community benefit without actually defining what the community benefit is. So I think partly you are seeing more process being layered on community and charitable organizations as a substitute for requiring some affirmative duty.
Mr. Paulsen. Thank you, Mr. Chairman. I yield back.
Mr. Boustany. I thank the gentleman. Mr. Becerra, you are recognized.
Mr. Becerra. Mr. Chairman, thank you very much, and let me congratulate you on this hearing. This is something that we should be doing quite a bit more, I hope, and it is great to have the testimony of all the witnesses.
Ms. Aviv, a pleasure to see you again, always a pleasure.
Let me make sure about something, and Mr. Colinvaux, maybe this is a question I should direct at you. Close to two million tax‑exempt organizations, at least that was a 2008 number, and my understanding is that in 2008 there were some 7,900 audits by the IRS performed of these tax‑exempt organizations. So if my quick math is correct, less than 1 percent of organizations that qualify for tax‑exempt status are audited by the IRS. Is that about right?
Mr. Colinvaux. It sounds about right.
Mr. Becerra. I actually know something more than you do on this; okay, that is good. That is a good way to start. At least those are the numbers I have, which to me is perhaps one of the reasons why we do have these issues, that there isn’t enough oversight, and with these fuzzy rules on who qualifies and who doesn’t, it is not surprising that we have so many entities applying to become tax‑exempt organizations. Many of them do great work. We are finding, unfortunately, that some don’t. And the sector, because it probably doesn’t do as much as it can to police itself and because the IRS hasn’t focused on doing more enforcement and oversight can’t do it either or hasn’t done it either, it seems that there are a lot of entities operating here that perhaps would not qualify, and the result is that a lot of American taxpayers are watching their taxpayer dollars go for noncharitable, nonpublic good purposes.
Let me ask, Mr. Colinvaux, a question to you because you focused on this issue of enforcement, and having more effective enforcement would include having brighter lines, more positive requirements you have mentioned. Give me a sense, give me something tangible in terms of brighter lines. For example, what would you qualify, having, for example, a tax‑exempt organization have to provide some information on its outcomes and activities that it is engaged in to have that status?
Mr. Colinvaux. Well, it is very hard for me to judge, but in part yes. I think what I am trying to argue is that our current system is one that is based on purposes which, as you suggest, means a lot of organizations can qualify, and once they qualify they tend to remain exempt. So in terms of looking at more positive requirements or brighter lines, one of the things I think we ought to be thinking about is whether we should shift away from just purposes and also towards activities, which is to look at the activities of an organization, maybe require a certain threshold of an activity, maybe do more work in terms of defining what a charitable purpose is. I also think it is important to remember that we don’t have to view all of the tax benefits together. Right now we do. We put everything under 501(c)(3), and deductibility and tax‑exempt financing flow from that. We don’t have to do that. We could look at 170, the charitable deduction, and say are there certain eligibility requirements we want to impose on donations, on certain types of organizations that can receive donations? Do we want to prioritize certain types of charitable purposes over others? Those are the sorts of questions I think we should be asking.
Mr. Becerra. And that would help people understand where those tens of billions of dollars that ‑‑ well, actually even more money that is being contributed by Americans to these nonprofits, how it is being used and how it is that they are ‑‑ those entities are now getting to shield those resources from taxation. So you make a charitable contribution, you get to write off that on your taxes, the organization has tax‑exempt status, doesn’t have to pay taxes the way a for‑profit entity would have to pay. Therefore, it is in a better leveraged position than that for‑profit entity. So taxpayers should be entitled to some sense of what is being done with the money since at the end of the day it is taxpayers who are covering the cost of giving these entities this tax‑preferred status.
Mr. Colinvaux. Yes, I generally agree with that, and that is why I think looking at 170, the charitable deduction in particular, that is where the Federal interest is quite strong.
Mr. Becerra. I do have a concern with these 501(c)(4) organizations, these welfare organizations. We are finding more and more how they are going into the political side of things and, Mr. Hopkins, you testified to that. But I know my time is about to expire.
Mr. Chairman, I know you are planning to have more hearings on this issue. I hope we do. I hope we have the IRS here. I believe that the more we do to examine this sector, the better off those that are doing phenomenal work will be able to have contributions made by Americans because they will know, in fact, that their money is going to great purposes, and so I hope we get on this. Thank you, Mr. Chairman.
Mr. Boustany. Thank you, Mr. Becerra.
Mr. Marchant, you are recognized.
Mr. Marchant. Thank you, Mr. Chairman. This question is for Ms. Aviv. As part of its Good Government Initiative, the independent sector has identified 33 principles in its Principles for Good Government and Ethical Practice Guide to help tax‑exempt organizations with operations and transparency. Are any of the 33 principles reflected in the revised Form 990?
Ms. Aviv. Mr. Marchant, I would have to get back to you on that, and I will check and do in writing to make sure that they are there. Let me say that the general point of these principles was for them to be applied to ourselves by ourselves. This was a set of voluntary principles that we put forward. We said that in order for this not to be a government compliance area, we need to step up to the plate and support standards of good governance and ethical practice that we impose upon ourselves. So the purpose was not to encourage further government action in this regard, believing that there were whole areas of governance that organizations themselves have a responsibility to fulfill. That is why we are so pleased that so many organizations have stepped up, downloaded this document, and are using it in order to improve their practice. We believe the more we step up, the less need there is for government to step in.
Mr. Marchant. Are there some principles not incorporated in the form that you think should be?
Ms. Aviv. I will have to get back to you on that in writing. I would be happy to do that.
Mr. Marchant. Well, thank you. Thank you very much.
Welcome to Mr. ‑‑ how do you say it?
Mr. Regier. It is Regier.
Mr. Marchant. Regier. Welcome. Your offices are in my district on Las Colinas.
Mr. Regier. Yes, absolutely.
Mr. Marchant. It is good to see you here today.
I have a couple of questions for Mr. Hopkins. Can you briefly describe the distinction between a 501(c)(4) and a 527?
Mr. Hopkins. I can do it. Whether I can do it briefly or not is another matter.
Mr. Marchant. Well, in the amount of time that I have left.
Mr. Hopkins. Let me put it this way, they are both discrete categories of tax‑exempt organizations. The 527 entity has as its primary purpose political campaign activity. The flip side is a 501(c)(4) cannot have that as its primary purpose and must have as the promotion of social welfare its primary purpose. So the primary purpose test takes those two organizations in different directions.
We have talked about the donor disclosure rules. They apply to 527s. They do not currently apply to 501(c)(4)s. The 527 organizations are taxable on all of their revenue from nonexempt functions whereas a 501(c)(4) would be taxable only on its unrelated business income. And the only other item that I can ‑‑ or element that I can think of that would differentiate between the two is that the reporting for political organizations is far more complex and frequent than is the case for the 501(c)(4) organization.
Mr. Marchant. Well, there has been a lot of recent activity out in the country among some of our activist groups that are complaining that the IRS is putting an incredible paperwork burden on them to prove that they should have the status that they have, and I am assuming that these are 501(c)(4)s that are ‑‑ the accusation is that they are doing 527‑type activity; is that correct?
Mr. Hopkins. That is absolutely correct.
Mr. Marchant. And the IRS, I am getting a lot of complaints from my constituents that feel like that they are perfectly justified and are following all the rules under 501(c)(4) but that the IRS has singled them out for audit, for hundreds and hundreds of pages of forms, and has this always been the case or is this a recent phenomena?
Mr. Hopkins. This is a recent phenomenon in my judgment for two reasons. One, 501(c)(4)s, of course, do not have to file to begin with, and so the practice in many, many instances up till recent times has been for an organization to form as a 501(c)(4) and just go forward and not even go through the application process. Why there has been this upsurge in application activity is not entirely clear to me, but the impression I have gotten based on the limited amount of experience derived from my own practice is that for some reason the IRS does seem to be asking for a lot more detail in this context than they might otherwise.
Mr. Marchant. I would hope, Mr. Chairman, that at some date we will have the IRS here so that we can specifically ask the IRS, you know, why is there this sudden new focus on these groups. Thank you. Thank you, Mr. Hopkins.
Mr. Boustany. Thank the gentleman, and I share his concern.
This concludes all the questioning. I want to thank each of you for coming here today and being witnesses and for your testimony. I want to remind you all that members may have some additional written questions that they might submit to you, and your answers to those as well as the questions would be made part of the official record.
This has been a very helpful hearing. The information you provided to us has given us some good guidance as we look at this whole area of tax‑exempt organizations. This hearing is now adjourned.
[Whereupon, at 11:30 a.m., the subcommittee was adjourned.]
Questions For The Record
Ms. Diana Aviv
Public Submissions For The Record
American Association of Museums
American Bankers Association
American Hospital Association
Association for Healthcare Philanthropy
Catalogue for Philanthropy
Cause of Action
Charity Navigator
CharityWatch
Community Catalyst
Credit Union National Association
Jewish Federations of North America
National Association of Federal Credit Unions
National Council of Nonprofits
The Community Foundation for Greater Atlanta