Statement of Steven Miller, Director, Exempt Organizations,
Tax Exempt/Government Entities Division, Internal Revenue Service

Testimony Before the Subcommittee on Oversight
of the House Committee on Ways and Means

Hearing on Response by Charitable Organizations to the Recent Terrorist Attacks

November 8, 2001

Introduction

Thank you, Mr. Chairman, for this opportunity to testify on the IRS review of charitable organizations providing relief to the families of the victims of the September 11 attacks upon our nation.  Like all Americans, the Administration is committed to ensuring that that donations made to these charities reach those hurt by the attacks and that the charities follow the letter and spirit of the law.  The IRS is certainly available for consultation and we urge charities to request guidance as needed.  However, we will also investigate  and prosecute to the fullest extent violations of the tax laws in this area.  We encourage the public to report any suspected anomalies and tax fraud to the IRS at 1-800-829-0433.

Before and after the tragic events of September 11, the IRS’ Tax Exempt/ Government Entities (TE/GE) Operating Division worked to educate the public on the legal requirements organizations must meet to qualify for tax-exempt charitable status. 

On September 18, one week after the attack, the IRS placed a new, easy-to-understand publication on our web site that provided information to help the public to make use of charitable organizations.  We also announced that we would speed processing of requests for tax-exempt status from new charities formed to assist the victims.  Let me stress, Mr. Chairman, that although we expedited the process, we did not lower our standards for new organizations applying for the tax-exempt status.

The new IRS publication – “Disaster Relief: Providing Assistance Through Charitable Organizations” – explained how to make contributions through existing charitable organizations and how new organizations can apply for, and receive, tax-exempt status. An advance text of that publication is available on our web site at www.irs.gov.

 To further help the public make an educated choice, we also maintain a readily available list of charitable organizations that are qualified to receive tax-deductible contributions.  Publication 78 is available on our web site as is a special supplement announcing the new tax-exempt charitable organizations formed to help the victims of the September 11 attacks.   In addition, a potential contributor can call IRS Customer Service at 1-877-829-5500 to determine if an organization is qualified to accept tax deductible contributions.

Mr. Chairman, the IRS’ review of the operations of a tax-exempt charitable organization is generally only available after the organization files its annual information return (Form 990).  We do not receive any operational information, such as disbursements, from the charities prior to this time.

Nevertheless, we would take very seriously any information presented by the public or the law enforcement community, such as the state attorneys general, that a tax-exempt organization is engaged in fraud or is failing to meet the statutory requirements.  We would take appropriate action that could include revoking of the organization’s exemption and referral to IRS Criminal Investigation.   

Background

The IRS comes into contact with disaster relief organizations at two points.  The first is when the organizations apply for recognition of exemption; the second is when they file Form 990, the annual information return.  Ongoing guidance is provided through educational material, such as plain language publications that are available to the general public and our annual Continuing Professional Education (CPE) course book that we provide to our agents, but that is publicly available and well known to tax practitioners.

We also provide information through workshops for smaller organizations and through speeches and participation on panels at practitioner conferences.  We published a CPE article in 1999 that specifically addresses issues of importance to disaster relief charities.  The IRS also provides speakers for Federal Emergency Management Agency sponsored workshops for non-governmental organizations that provide disaster relief.

And, as I mentioned, we quickly placed on our web site after September 11 an advance text of  “Disaster Relief: Providing Assistance Through Charitable Organizations”, along with other disaster-related tax information.   Now, we are also beginning the process of corresponding with disaster relief charities to advise them of their responsibilities; offering to meet with them; and providing a single point of contact for assistance.

The Application Process

An organization initiates the application process by filing Form 1023, which is titled, “Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.”  The application is often filed in advance of actual operations and can be based on representations about what the organization will do in the future.

We review the application to determine whether what the organization proposes to do satisfies the statutory requirements.  In the case of the September 11 tragedy, and in light of national need, we created an expedited process for newly-established disaster relief charitable organizations to request IRS qualification.  This expedited process was publicized in an IRS News Release and was placed on our web site. 

 Since September 11, we approved approximately 120 new exemption applications for disaster relief organizations.  In addition, many existing charities established new disaster relief programs, which do not have to be separately approved by the IRS.  Let me stress, Mr. Chairman, we achieved this result by dedicating special resources to these disaster relief applications. We did not lower the bar for our processing standards.

For example, we did not approve an application where a for-profit company, which intended to solicit contributions through a web site in the name of the charitable applicant, had also established the organization and retained control over donations.

Mr. Chairman, the primary considerations during the application process are these.  We first ask, “Is the organization serving charitable purposes?”  Charitable purposes can be accomplished by providing relief to persons who are poor and/or distressed.  Charitable organizations may provide charitable disaster relief in a variety of ways.

Some organizations offer immediate relief by providing emergency food, shelter, clothing, and crisis counseling, or medical attention to victims and dependents of victims.  Other organizations offer longer-term relief for victims and dependents of victims, such as annuities, permanent housing, long-term counseling, or scholarships for children. 

Whether providing immediate or long-term relief, a charitable organization must serve persons who belong to a charitable class. Victims of a Presidential-declared disaster, such as those in the September 11 tragedy, generally represent a charitable class.

We then ask the second question.  “Does the organization control its charitable program?”  The charitable organization must be in charge of its charitable program.  Donors to the charity may not designate particular, pre-selected individuals as beneficiaries for their gifts. 

If members of the public want to help particular individuals, they can simply give the money directly to the victims or through an organization that is not a qualified charity.  Gifts given with disinterested generosity do not constitute taxable income to the recipients.

Finally, we must ask, “Is the charity providing assistance to persons who are poor or distressed?” Merely being present at the scene of a disaster does not establish a need for assistance.  A person must be distressed or needy to be an appropriate beneficiary of a charity’s assistance.   An affected individual generally is not entitled to charitable funds without a showing of need.

Therefore, the IRS reviews the organization’s application to determine whether it has adequate procedures, including specific criteria for the selection of recipients and the types of assistance to be awarded, to ensure that only persons who are appropriate objects of charity will be granted assistance.

Money collected even for a specific disaster must be distributed based on a determination by the charity that it is meeting the needs of disaster victims.  The charity’s funds cannot be distributed among the victims simply on a pro-rata basis because that method is not based on meeting individual victims’ needs. 

The IRS does ask that the organization obtain appropriate documentation when providing assistance to needy or distressed persons.  The purpose of this documentation is to demonstrate that the organization’s program cannot readily be used to serve private, as opposed to a public or charitable, interests.  Immediate assistance may only require minimal documentation.  Longer-term assistance typically requires more complete documentation, including evidence of a person’s financial resources and the specific needs the organization’s assistance is intended to address.

IRS Oversight

The filing of the annual information return, Form 990, requires the organization to document that in actual operations it adhered to the standards and procedures it said that it would use when its application was approved.  In contrast to the application process, the Form 990 is retrospective.   It is due approximately four and one-half months after the organization’s accounting period ends, and the organization may apply for a 6-month extension.  So, for example, the earliest information return reflecting any expense after September 11 would not be received at the IRS until the middle of February 2002.

The Form 990 can be used as the basis for an examination of the organization.  The examination is based on actual, completed operations as opposed to the proposed activities that may serve as the basis for exemption when we initially review an application.  The IRS does not usually involve itself in the day-to-day operations of a charitable organization, which are generally left to the charity’s governing members.

Indeed, the IRS is not in a position to assess the needs of individuals or the community, nor to determine the priority of competing needs.  This is the business of charity and the leaders of charity, i.e., members of the community.  The IRS has never undertaken a directive or supervisory role of this nature. 

What we are best at, and what we have done Since September 11, is to educate the public and recognize organizations that meet certain requirements.  These requirements focus generally on three points.  First, are the organization’s assets permanently dedicated to charitable purposes?  Second, has the organization described its intended activities in sufficient detail to demonstrate that the organization is likely to accomplish its stated purpose?  And third, does it appear that public and not private interests – which are impermissible – will be served?   After recognition, our involvement with the organization generally entails additional educational contacts, the review of filed returns, and an examination based upon completed operations.

However, if upon review, we determine an organization is not operating consistently with its tax-exempt purpose, the IRS will revoke its exemption.  Thereafter, the organization will be subject to federal income tax. 

I want to underscore that there is no tax law obligation that an organization be perfectly efficient.  The applicable tax law standard is whether the funds are ultimately used for charitable purposes.  The method and timing by which this use occurs is left to the wide discretion of the charity.  Inefficiency, without a corresponding finding of inurement, fraud or private benefit, is not a tax issue.

Role of the Public and the States in Oversight

Forms 990 are available to the public by request to the IRS, or the charity itself, or through independent web sites, such as www.guidestar.org.  The public, including the press, often plays a significant role in monitoring the activities of charities by inquiring into whether the charity is accomplishing the public purposes for which it was formed and for which it solicited contributions.

Mr. Chairman, when we receive inquiries from the public about whether a tax-exempt organization is operating consistently with its exemption, we evaluate the information and determine whether we should act to ensure continued compliance. 

Continuing oversight of charities is also the responsibility of the states, which monitor their operations through their attorneys general as well as through other taxing and regulatory agencies. For example, a significant role of the state attorneys general is to ensure that charitable assets are not wasted and that abusive fund raising solicitations are investigated.   The State of New York has one of the most active and competent state charity offices. 

I want to be very clear that we are partners with the states in ensuring that charitable assets remain dedicated to charitable purposes.  For example, if the IRS revokes the exemption of a charity, we are required to inform the appropriate state officials of this action so that they can protect the charitable assets. 

We recognize that valid concerns are being raised concerning appropriate coordination of the funds that have been contributed to the September 11 disaster relief funds.  Recent experience suggests that an effective approach exists for monitoring and coordinating the use of charitable relief funds.  Following the Oklahoma City bombing, the charities providing relief to victims joined in a voluntary effort to ensure that the victims needs were met efficiently and without duplication.    I believe that Mr. Spitzer, the Attorney General for the State of New York, is considering spearheading such an effort in this case, as well as creating a unified database to minimize duplication and enhance efficiencies.  We believe the Oklahoma City approach was effective and should be considered here.  In addition, while I do not have enough information to speak to the unified database, it too seems worthy of study. 

Mr. Spitzer’s position carries considerable authority.  As mentioned, state attorneys general have statutory jurisdiction over the charitable assets of these organizations; and responsibility for overseeing the fiduciary relationship between the board and the assets, and over the fundraising activities of charities and local needs.  These offices also have considerably closer relations with local charities.  We have contacted Mr. Spitzer’s office and offered any assistance or resources necessary.

Conclusion

Mr. Chairman, in conclusion, following the events of September 11, we at the IRS stepped up our education efforts on behalf of charitable organizations.  We provided guidance to those organizations seeking charitable tax-exempt status as well as information to taxpayers contemplating making a donation to the victims.   However, the IRS does not usually involve itself in the current, day-to-day operations of a charitable organization.  Historically, this is a role best carried out by the charity’s management and the state attorneys general.  Nevertheless, we are committed to working with the Subcommittee, charity officials, state law enforcement authorities, and other interested parties to address any of the problems raised at today’s hearing.  The victims of the September 11 attacks and the American people deserve no less.