Takeaways from Ways and Means Committee hearing on tax-exempt organizations

By Katy Snyder, JVA Consulting

A hearing led by Rep. Charles W. Boustany, Jr. (R-La.), Chairman of the Ways and Means Subcommittee on Oversight, was held yesterday to discuss issues related to IRS oversight of tax-exempt organizations. The hearing, which Boustany called for back in October of 2011, was the first in a series expected to take place on the topic of tax- exempt organizations. Experts from several types of nonprofits, including representation from Cornell University, the Catholic University of America, the VHA (an alliance of nonprofit hospitals), and the Independent Sector (a nonpartisan network of nonprofits, foundations and corporate giving programs) gave testimony. From the varied backgrounds and viewpoints of those assembled to testify, it seems that the Oversight Subcommittee is in information-gathering mode, collecting testimony from those who study and practice nonprofit law and those subjected to nonprofit law, such as nonprofit hospitals and universities. Read on to learn what the assembled nonprofit experts had to say.

Roger Colinvaux, Associate Professor at the Columbus School of Law at Catholic University of America, provided an overview of the nonprofit sector, noting its vastness in the type and size of organizations that are designated as tax-exempt. Much of Colinvaux’s testimony centered on the point that government requirements for nonprofits have moved from “positive” requirements (what they must do), to “negative” requirements (what they can’t do), which makes enforcement and measurement difficult. In Colinvaux’s estimation, “more should be required from the [nonprofit] sector than avoiding bad outcomes.” Furthermore, Colinvaux said, once a nonprofit is designated as such, it is hard for it to lose its tax-exempt status, both because few nonprofits are audited and because the IRS has few “hard laws” relating to nonprofits that it can enforce.

Striking a different tone, Diana Aviv, President and Chief Executive Officer of the Independent Sector, started her testimony by highlighting the importance of the nonprofit sector to the country, in terms of the economic boon it provides—13.5 million employees and $32.4 billion paid in payroll taxes—and in providing disaster relief, alleviating poverty and enriching communities. Despite the strength of the sector, the effects of the economic downturn have been harsh, according to Aviv. As many of us in the sector can attest, nonprofits are serving more clients with less money. In order to deal with the pinch that many nonprofits find themselves in, Aviv asked that Congress enact the expired tax extenders, which includes the “IRA  charitable rollover  as  well  as  enhanced  incentives  for  the  donations   of food,  books,  computer  equipment and  land  conservation  easements.” Aviv also discussed the importance of tax policy in encouraging giving, saying that over 22 percent of all donations are made on December 30 and 31 as taxpayers rush to make donations in time to claim charitable deductions. Further, Aviv stressed the importance of the regulations and oversight the Independent Sector has helped to put in place, including its 2004 Panel on the Nonprofit Sector, out of which the widely-used Principles for Good Governance and Ethical Practice, was created. She also stated that the vast majority of nonprofits are ethical and fiscally responsible, adhering to legislative, regulatory and voluntary practices.

Speaking more directly to the impact of IRS oversight on nonprofits, Joanne DeStefano, Vice President for Finance and Chief Financial Officer of Cornell University, who testified on behalf of the National Association of College and University Business Officers, testified about Cornell’s experience of undergoing an IRS audit of its forms 990 and 990 T from fall of 2010 to the spring of 2012, a process which she said consumed significant amounts of staff time and involved offices across the Cornell campus. DeStefano touched on the concerted efforts of universities and colleges to increase tax compliance over the last 20 years, using Cornell’s efforts such as hiring an external auditor and opening a dedicated tax compliance office, as examples of this compliance.  She also talked about IRS form 990 and the increasing amount of data that are being requested from nonprofit universities and colleges on these forms, specifically in the form of Schedule K-1, which requests information about partnership investments. Schedule K-1, according to DeStefano, will “add substantial administrative burden” to universities and colleges that have large numbers of partnerships investments. Fortunately, because of feedback from universities, the IRS has decided to scale back this requirement and make it optional. DeStefano concluded by expressing her desire that the IRS uses information gleaned from its audit of Cornell to continue to work toward streamlining reporting requirements.

Michael Regier, Senior Vice President of Legal and Corporate Affairs, VHA Inc., testified on the behalf on nonprofit hospitals. He spoke about how nonprofit status for hospitals is defined (they must be of “community benefit,” meaning that the emergency room is open to all, charity care is provided, etc.) and 2009 regulations that add a further burden on nonprofit hospitals to provide information on their activities that are for community benefit. Regier also discussed the further regulations that nonprofit hospitals are subject to under the Affordable Healthcare Act. Regier outlined difficulties that nonprofit hospitals may have with complying with some of these new regulations and implored the Committee not to take any action that would jeopardize the status of nonprofit hospitals.

Bruce R. Hopkins, a Senior Partner at the law firm of Polsinelli Shughart, testified about how nonprofits are defined. He began with a discussion of the myriad forms of charitable activities that can fall under the designation of tax exempt, from helping the poor, to religion to advancing the arts. Hopkins then went into more specific detail about some of the larger categories into which charitable activities fall—education, religion, social welfare and business leagues—and gave an inventory of recent development in nonprofit law.

While the testimony was varied, a common theme that emerged was that nonprofits are vital both because of the services they provide and the role they play in providing jobs and economic benefits. The majority of those who gave testimony also felt that nonprofits are increasingly becoming burdened by complicated IRS forms and requirements and that the IRS needs to continue to have an open dialogue with nonprofits on regulations and compliance.

Check back for more on upcoming hearings, and let us know who you think the Oversight Subcommittee should call for its next hearing by leaving a comment below.

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