By Ken Rankin

Washington -- A new congressional plan to impose tougher auditing requirements on public charities and other tax-exempt organizations is drawing sharp objections from the nonprofit community and from the accountants who audit their financial records.

A key element in the proposal drafted by staffers at the Senate Finance Committee calls for exempt organizations with annual gross receipts of $250,000 or more to secure independent audits of their financial statements - a requirement that nonprofit groups said would impose a significant hardship on small charities.

In a statement filed with the committee in response to the discussion draft, officials at the Association of Fundraising Professionals told Congress that a $250,000 threshold for requiring audits is "far too low," and that the cost of these audits would drain many charities of badly needed funds.

Noting that CPA firms currently charge $25,000 or more to perform an independent audit, the AFP said that "10 percent of an organization's $250,000 in revenues could be required to meet this obligation."

A separate provision in the proposal that would require nonprofits to rotate auditors every five years produced equally strong objections from exempt organizations, several of whom noted that Congress considered and rejected an auditor rotation mandate as part of the Sarbanes-Oxley Act.

Forcing charities to change audit firms every five years creates significant problems for EOs "in small states with few firms knowledgeable about the nonprofit sector," National Council of Nonprofit Associations executive director Audrey Alvarado told the committee.

The result could be inflated accounting costs for nonprofits because "rebidding on audits often leads to increases in the cost from 25 percent and upward," she argued.

The American Institute of CPAs voiced concerns of its own about the auditor rotation proposal, noting that rules forcing EOs to change audit firms periodically "may do more harm than good" because of the "limited number of audit firms with exempt organization expertise" in many parts of the country.

"Expertise and experience in this niche practice are more important than partner or firm rotation," AICPA Tax Executive Committee chair Robert Zarzar said in the institute's formal comments on the plan.

The AICPA expressed particular sympathy for smaller charities, agreeing that they would suffer heavy financial burdens under the more rigorous audit requirements in the proposal. The added expenses "would make it more difficult to meet the current accepted ratios for spending between programs and administrative fundraising costs," Zarzar said.

The Senate committee's proposal was drafted in response to growing Capitol Hill concerns that many nonprofits are abusing their tax-exempt status by promoting questionable tax shelters and other shady activities.

The institute, however, rallied to the defense of the nonprofit sector, noting that "the vast majority of exempt organizations and their executives carry out their exempt purposes faithfully."

While Zarzar conceded that "some organizations have engaged in questionable practices and some individuals connected with exempt organizations have been less than honorable," he characterized these cases as in "the distinct minority."

The AICPA "cannot commend changes that will impose a financial burden on all exempt organizations as a result of the acts of a few," he told the committee.

Unexaminable information?
One aspect of the reform proposal that Zarzar singled out as potentially wasteful would require that the Internal Revenue Service undertake a stem-to-stern review of every tax-exempt organization every five years.

Under this requirement, he said, thousands of nonprofits would be forced to prepare "a great deal of information that the IRS will not have the resources to review."

The American Bar Association's Section of Taxation expressed similar objections to this requirement, warning that the IRS may get snowed under by an avalanche of information from the filings by the nation's 1.6 million exempt organizations.

Similar reviews of EOs conducted in the 1950s and 1960s, when there were "far fewer charities in the U.S.," consumed "significant resources" at the IRS, and "reduced the number of agents available to audit known problem cases," the attorney group said.

The burdens imposed on the IRS might be minor compared to the problems that such requirements would impose on smaller nonprofits, officials at the American Society of Association Executives warned. "Many, if not most, nonprofits are already labor- and resource-challenged, and some have no paid staff at all," the ASAE said.

That lack of manpower could also cause problems for smaller nonprofits as a result of a separate provision in the Senate plan that would expressly limit the ability of EOs to obtain extensions for filing their Form 990s with the IRS, several groups maintained.

Currently, many nonprofits delay filing these forms because "they cannot secure the services of a CPA to prepare the Form 990 during the January to May 'busy season' at an affordable rate," ABA representatives explained.

The Association of Fundraising Professionals put it a bit more bluntly, noting that "accountants often increase their fees around tax filing season, leading many charities to delay filing in order to save on fees and spend more of their funds on programs and services."

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