House Republicans target tax-exempt groups with latest bills

The House Ways and Means Committee held a hearing Wednesday to advance GOP-sponsored legislation aimed at requiring more disclosures of foreign sources of funding for tax-exempt groups and the recipients of donations, while preventing religious faith-based organizations from losing their tax-exempt status based on their beliefs.

"The tax-exempt sector is about 15% of the economy, the same size as the state of California, and has grown to account for nearly $3.5 trillion in annual revenues," said House Ways and Means Committee chairman Jason Smith, R-Missouri, in his opening statement. "As more money flowed into this sector, it has become a prime target for misuse and abuse by foreign nationals and agents acting on behalf of foreign countries like China. Too much of the tax-exempt sector operates in darkness, deliberately hiding in the shadows to avoid scrutiny. This committee has uncovered incidents of organizations abusing their generous tax benefits while seeking to divide Americans, sow chaos in our communities, and manipulate American politics and public life." 

The committee marked up four pieces of legislation, three of which were originally introduced in May 2024. One bill, the American Donor Privacy and Foreign Funding Transparency Act, introduced by House Ways and Means Oversight Subcommittee chairman David Schweikert, R-Arizona, would require all tax-exempt organizations to publicly report information on foreign donations they receive, while maintaining privacy protections for Americans. The bill would require disclosure of whether the organization accepted any foreign donations in a calendar year; the total combined amount of donations from foreign sources; the country of citizenship or principal place of business of any foreign source that made a donation; and the total amount of donations sourced from each country. However, the bill would also protect American donors by preventing federal agencies from collecting or requiring the submission of information on the identification of any donor to a tax-exempt organization. The legislation highlights contributions from foreign nationals from so-called "countries of concern" such as China, North Korea, Russia and Iran.

Another bill, from Rep. Nicole Malliotakis, R-New York, takes aim at a Swiss billionaire who contributed heavily to organizations that sent money to super PACs that supported Democrats. 

The No Foreign Election Interference Act would amend the Internal Revenue Code to impose penalties for organizations who receive contributions from foreign nationals and then make contributions to political committees. It would prohibit tax-exempt entities from making any contribution to a political committee for eight years from the date a tax-exempt entity received a contribution or gift from a foreign national, in order to prevent foreign money from flowing into tax-exempt organizations and subsequently into political committees, including Super PACs. The first two disqualified contributions would be punished by a fine totaling 200% of the donation amount. A third contribution would result in the automatic revocation of tax-exempt status for the organization making the donation to a Super PAC.

Another bill from 2024, the Foreign Grant Reporting Act, from Rep. Lloyd Smucker, R-Pennsylvania, would require 501(c) organizations to include certain information regarding grants or other assistance provided to foreign entities in their annual Form 990 tax filing: the name and address of the foreign entity; the aggregate amount of the grants or other assistance during the year; and whether the foreign entity is a charity.

The fourth bill, the Fair Treatment of Religious Organizations Act, was introduced earlier this year by Rep. Blake Moore, R-Utah. It would amend Section 501 of the Internal Revenue Code to prohibit the IRS from considering a religious organization's beliefs or practices concerning marriage, sexuality or gender identity when making tax-related determinations. The protections would extend to tax-exempt status under 501(c); eligibility to receive tax-deductible charitable contributions; and any other federal benefit or privilege tied to tax-exempt charitable status. An organization's religious beliefs on these matters could not be used against it even if those beliefs are otherwise inconsistent with public policy. 

In addition, the bill would prohibit federal agencies from discriminating against religious employers in grants, contracts, subcontracts, purchase orders or cooperative agreements based on the organization's religiously motivated employment decisions. According to a description of the bill, religious corporations, associations, educational institutions and societies would not be disadvantaged for employment actions or practices consistent with exercising their right to employ people who share the organization's religious beliefs and to require employees to comply with religious standards of conduct.

"Faith-based organizations should be able to carry out their tremendous work in our communities, without the threat of removal of tax-exempt status," said Smith. "Moreover, the IRS should not be in the business of making determinations regarding an organization's tax-exempt status based on specific religious beliefs or practices such organizations might hold."

The top Democrat on the committee blasted the majority's priorities. "This is the third markup this committee has held in a month, and you still won't find a single bill that will bring relief to families struggling under the weight of higher health care bills, pain at the pump, or rising grocery costs," said Rep. Richard Neal, D-Massachusetts, in his opening statement. "Instead, the majority is using the limited time we have to recycle old bills attacking charities and unions. Every moment Republicans spend chasing manufactured problems and targeting the little guy is another moment they're not focused on families back home, who are still wondering when House Republicans will lift a finger to help them."

Neal and Senate Senate Finance Committee ranking member Ron Wyden, D-Oregon, introduced separate legislation Wednesday to prevent ultra-wealthy individuals from abusing tax-preferred retirement accounts such as IRAs and 401(k)s as tax shelters. The proposal would prevent the accumulation of massive fortunes inside mega-retirement accounts by requiring ultra-wealthy individuals to take distributions from accounts with balances over $10 million. The bill would make no changes to retirement accounts for middle-class savers. 

Last month, at an earlier markup hearing, the House Ways and Means Committee advanced eight other pieces of legislation related to tax administration that were mostly bipartisan, in many cases with unanimous votes.

(Read more: House committee advances tax administration bills.)

Among the tax-related bills under consideration in Congress are several bipartisan bills, including the Taxpayer Experience Improvement Act, the Taxpayer Assistance Service Act and the Taxpayer Notification Privacy Act. However, the two parties remain divided over contentious issues such as funding the war in Iran and President Trump's push for the Save America Act requiring voter identification and proof of citizenship. Republicans are using another budget reconciliation package like the one they used to push through the massive tax and spending package, the One Big Beautiful Bill Act, last year and in June continued funding for the Department of Homeland Security's Border Patrol and Immigration and Customs Enforcement. The latest push, dubbed Reconciliation 3.0, advanced on Wednesday after GOP lawmakers narrowly voted to approve an overall $95 billion budget framework.

"I think that those have such broad bipartisan support and industry backing," said Jessica Jeane, a director with Baker Tilly's national tax practice, during an interview in May. "It might not be in the form that we currently have with both the TAS Act in the Senate, and the more piecemeal approach with the House bills, but I do think that eventually these policies will be successful. I don't necessarily see them being added to a reconciliation bill, as partisan as those measures are. However, that's not to say that bipartisan proposals are often added to reconciliation measures, especially with tax legislation. It's not unheard of, but it really does just remain to be seen how they decide to move forward. Washington has effectively entered a two-lane tax environment, where we're seeing this bipartisan cooperation on IRS administration issues, and even taxation of digital assets, for example, alongside continued Republican exploration of another partisan reconciliation package."