Washington - Top officials at the Internal Revenue Service closed out the 2005 filing season with deepening concerns about abusive practices by tax-exempt organizations, and fresh worries about lax compliance by the nation's charities.
Charging that "abuse is increasingly present" in the nonprofit sector, IRS Commissioner Mark Everson told Congress that too many charities "are wantonly abusing the generosity and faith of the public."
Near the top of Everson's list of concerns: schemes designed to channel excessive compensation to executives at tax-exempt organizations.
This past year, the IRS implemented a comprehensive enforcement project investigating what Everson called "the seemingly high compensation paid to individuals associated with some exempt organizations."
Though rarely enforced, the penalties for charities that overcompensate their officers and directors can be severe. In addition to stripping TEOs of their tax-exempt status, the IRS may also impose an excise tax on employees of charities and social welfare organizations who receive more than their due.
The tax service's aggressive new enforcement initiative is designed to "educate" the nonprofit sector by "creating positive tension for organizations as they decide on compensation arrangements" for their officers and directors, Everson told Congress.
Testifying before the Senate Finance Committee at the close of this year's filing season, the IRS commissioner disclosed that, as part of the new enforcement crackdown, his agency is in the process of contacting "a broad spectrum of nearly 2,000 public charities and private foundations" to obtain supporting documents on their compensation practices and procedures.
The IRS is placing special attention on nonprofits that failed to provide complete compensation information on their Form 990 filings, and the agency will require these organizations to submit any missing information "immediately," he said.
At presstime, the service had completed its review of nearly 500 TEOs, and is uncovering some distinct patterns of abuse.
"It is too early to state any finding definitively, but we are seeing reporting issues of loans and deferred compensation, as well as whether all 'perks' are being appropriately reported," Everson told the Senate panel. "There may also be an issue of spreading compensation among several affiliated organizations, decreasing transparency."
Exempt from taxes, not laws
Another key area of concern at the IRS and on Capitol Hill: The suspicion that growing numbers of charities and other TEOs facilitate the marketers of abusive tax shelters by serving as "tax-indifferent parties."
"We are concerned that tax-exempt entities are being used as accommodation parties to enable abusive tax shelters," Everson said.
Significantly, the IRS chief made it clear that charities are not innocent dupes of shelter promoters, but rather knowing participants in these schemes.
"Some shelter promoters use tax-exempt organizations to create abusive shelters where, for a fee, the tax-exempt entity lets the promoter exploit its tax-free status," he testified.
Everson raised even darker concerns about nonprofit tax abuse, noting that the IRS plans to step up scrutiny of charities with foreign connections in order to reduce the likelihood that these TEOs are channeling funds to terrorist organizations.
Recently, the IRS revised its Form 1023 to require more specific information on foreign activities by nonprofits, and a soon-to-be-announced revision of the Form 990 is expected to require similar information, Everson said.
"We are also seeking better baseline information about the practices of organizations that make grants to foreign entities, and the level of oversight the organizations exercise over the use of the funds abroad," he told Congress.
The growing concern over tax abuse and non-compliance by tax-exempt organizations reflects several recent trends, including the sharp increase in the size and complexity of the nonprofit sector, and inadequate enforcement by the IRS.
The number of tax-exempt entities listed by the IRS has increased by nearly 500,000 since 1995, to 1.8 million. The value of the assets held by these organizations has grown even faster, rising 50 percent, from $2 trillion in 1998 to $3 trillion in 2002.
At the same time, Everson acknowledged that IRS resources assigned to policing this segment failed to keep pace with this growth. Although there was a 40 percent increase in the number of exempt organization tax returns filed between 1995 and 2003, the number of IRS personnel assigned to this area actually declined by nearly one third during this period.
"This decline in enforcement presence, combined with the significant growth of the tax-exempt sector ... created opportunities for noncompliance," the IRS chief testified. "We simply did not do enough 'policing' in the area to support the good actors in their quest to voluntarily comply with the rules."
