House Republicans target tax-exempt groups

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. One bill, the 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 tax-exempt organizations to collect and report to the IRS the aggregate amount of donations received from foreign nationals.

Tax-exempt organizations would also be required to include in a separate line item to identify the aggregate amount of donations received specifically from those foreign nationals who come from a so-called "country of concern," including China, North Korea, Russia, and Iran. The bill would cover dual citizenship for purposes of identifying foreign nationals who are from a foreign country of concern to ensure accurate reporting. Tax-exempt organizations would collect data for each country in which the foreign national is a citizen. If a foreign national maintains citizenship in a foreign entity of concern and obtains citizenship in an unlisted country, both countries would be required to be listed with the donation. The committee passed the bill by a vote of 23 to 18.

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 Stopping Foreign Election Interference Act would levy a penalty against large tax-exempt organizations that receive contributions from foreign nationals and then donate to a political committee or a 501(c)(4). The penalty would be double the amount of the contribution given to the entity. It would also establish a secondary excise tax on tax-exempt organizations that contribute to a political committee or 501(c)(4) organization if they have received a contribution or gift from a foreign national within the last two years.

The excise tax on the first contribution by a tax-exempt organization that has received a contribution or gift from a foreign national would be equal to 100% of the contribution to the PAC. The excise tax on the second contribution to a PAC would be equal to 200% of the contribution to the PAC. If the tax-exempt organization makes a third contribution to a PAC, its tax-exempt status would be suspended for two years beginning on the date the contribution is made on top of an additional 200% excise tax. The bill passed by a vote of 23 to 16.

Another bill, the Fiscal Sponsorship Reporting Act, from Rep. Lloyd Smucker, R-Pennsylvania, pertains to formal arrangements in which an established 501(c) tax-exempt organization, the "fiscal sponsor," extends its legal and tax-exempt status to an unincorporated project or group. That allows the project to solicit tax-deductible donations without having to incorporate, apply for its own tax-exempt status, or fill out a Form 990. The bill would require tax-exempt organizations to disclose the following information about certain fiscally sponsored projects: the name of each party, other than any individuals, subject to the arrangement; the aggregate amount of funds made available or transferred to the fiscally sponsored project; a description of the activities related to the amounts made available or transferred; the name of the individual designated as the principal officer managing the fiscal sponsorship arrangement on behalf of the organization; and the date on which the arrangement began, and if applicable, the date on which the arrangement ended. It would also impose excise taxes on organizations acting merely as a conduit for a third party that is not tax-exempt. The bill passed by a vote of 23 to 15.

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. The committee passed the bill by a vote of 23 to 16.

"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 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 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 aren't 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."