Center for Non-Profits - Senate Finance Committee Eyes Reforms

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U.S. Senate Finance Committee Eyes Charity/Foundation Reform

Center, Council of NJ Grantmakers to Co-Sponsor 10/19 Policy Forum on Federal, State Accountability Proposals

The U.S. Senate Finance Committee is considering a series of sweeping proposals aimed at reforming perceived abuses within the charity and foundation community. After holding a hearing June 22 and hosting a roundtable July 22 to explore abuses, best practices, problems and issues facing the charitable community, the Committee has now asked Independent Sector, a national coalition of charities and foundations, to convene a task force and recommend reforms by early 2005. The National Council of Nonprofit Associations, which has also been active throughout the proceedings, reports that the Committee is genuinely interested in hearing all sides of the issue and exploring proactive legislation. Feedback from the charitable community is especially important.

Initial discussion has focused on a 19-page discussion draft prepared by Senate Finance Committee staff for the June 22 hearing. The proposals under discussion are numerous, varied and sometimes complex, and are classified into broad categories:

Exempt Status Reforms: Proposals include: requiring IRS recertification of charities' tax-exempt status every 5 years; donor advised fund reforms; elimination of certain categories of supporting organizations; tightening exemption requirements for credit counseling organizations; and revoking charitable status for accommodations to tax shelters.
Insider and Disqualified Persons Reforms: These proposals, designed to address abuses by charities and persons in positions of influence, include: applying private foundation "self-dealing rules" to public charities (to make all transactions with insiders subject to excise taxes); modifying the intermediate sanctions rules for public charities; increasing various excise taxes; prohibiting or limiting compensation to trustees of private nonoperating foundations; and making compensation of foundation insiders subject to IRS review or using comparable levels paid by the federal government for similar work/time to justify salaries.
Grants and Expense Reforms: Include requiring additional reporting to the IRS for private foundations whose administrative expenses exceed 10% of total expenses; providing tax incentives for private foundations that pay more than 12% of their assets in grants in any given year; prohibiting private foundation grants to donor-advised funds; and limiting the amounts charities or foundations could pay for travel expenses, meals and accommodations.
Federal-State Coordination of Actions and Proceedings: Include establishing standards for acquisition or for-profit conversions of non-profits; and providing states the authority to pursue certain Federal tax law violations.
Improve Quality and Scope of Forms 990 and Financial Statements: Proposals include requiring the CEO to sign/certify the accuracy of the Form 990 and related forms/schedules; imposing penalties for failure to file an accurate or complete Form 990, penalties for failure to file a timely Form 990 and prohibiting extensions of more than 4 months; expediting and mandating electronic filing of the Form 990; establishing IRS standards for filing; requiring Form 990 to be accompanied by an independent audit or review for all organizations with gross receipts of $250,000 or more, and a CPA review for charities whose gross receipts are between $100,000 and $250,000; and requiring charities to change auditors at least once every five years; require increased disclosure of organizations' relationships to affiliates, taxable subsidiaries, joint ventures and the like; enhanced disclosure of performance goals (to be set by a charity's board), activities and expenses; disclosure of material changes in activities, operations or structure; enhanced reporting of joint allocation expenses (e.g., activities that accomplish program purposes and fundraising at the same time); increased disclosure of public charities' investments.
Public Availability of Documents: Proposals include making financial statements subject to public disclosure; requiring that charities post on their own web sites any return that is subject to public disclosure under current law; requiring public disclosure of the Form 990-T (unrelated business income tax return); requiring public corporations to file a return with the IRS showing all gifts of $10,000 or more.
Governance/Best Practices: Require enhanced board oversight and approval of various functions, including organizational and management policies and procedures, auditing and accounting principles, the independent auditor, performance objectives, conflict of interest policies, and a regulatory compliance/liability program. Require organizations to have between 3 and 15 board members; prohibit board service by individuals who have been convicted of various crimes related to fraudulent activity, or those not permitted to serve on boards of public corporations for similar convictions, for 5 years following such conviction; establish IRS authority to remove board members who violate self-dealing, conflict of interest, excess benefit or similar rules; provide preferences in government grants/contracts to organizations that have established best practices; establish new accreditation process for charities based on one or more of the various standards review processes in place.
Funding of IRS and State-level Government Enforcement: Appropriate funds from the existing excise tax on private foundation investment income to fund the IRS Exempt Organization office; impose an annual filing fee for Form 990/related forms to fund federal and state enforcement, information-sharing, review and accreditation efforts, and enhanced public access to information and abuse investigation.
Tax Court Equity Authorities: Enhance powers of the U.S. Tax Court, allowing the IRS or a board member to seek removal of another board member by the Tax Court; enhance ability of board members to file complaints in tax court and other venues; allow individuals to submit complaints regarding charities to the IRS; establishing an arbitration procedure to resolve federal tax valuation disputes (regarding value of donated property).

Action Needed: This issue has far-reaching implications for the non-profit community. Given competing priorities and the short time remaining in the current Congressional session and other pressing matters, major action by the Senate Finance Committee on these items is unlikely this year. However, it is clear that this issue will remain a high priority for the Committee, making it vital that the charitable community weigh in on these issues NOW. The Center intends to remain involved, directly and through its partnerships with national groups such as NCNA (where Center executive director Linda Czipo serves on the board) and Independent Sector. Meanwhile, your input is critically important.

1) Complete a short online survey - To help us ensure that our responses are as reflective as possible of the non-profit community in New Jersey, we've posted a very short online questionnaire soliciting your opinions regarding some of the Senate Finance Committee proposals. Please take 5 minutes to weigh in by going to www.njnonprofits.org/SFCsurvey.html, by October 14.

2) Join us October 19 for a special policy briefing and strategy session - "The Good, The Bad and the Uncertain" will focus on the Senate Finance Committee as well as other federal and state proposals to increase accountability and scrutiny of 501(c)(3) organizations. The event, which will feature panelists from the Council on Foundations, the National Council of Nonprofit Associations and New Jersey, will take place from 9:00 am to 12:00 noon on October 19 at Thomas Edison State College in Trenton. This forum is presented jointly by the Center for Non-Profit Corporations and the Council of New Jersey Grantmakers, and is made possible by the Community Foundation of New Jersey. Registration is $20/person for members of the Center or the Council of New Jersey Grantmakers, $30/person for non-members. For more information, contact the Center or download a conference brochure at www.njnonprofits.org/GoodBadUncertain.pdf .

More information and copies of testimony from witnesses is available on the Senate Finance Committee Web site at http://finance.senate.gov/sitepages/hearings.htm . The Committee staff discussion draft is at http://finance.senate.gov/hearings/testimony/2004test/062204stfdis.pdf .

If you have questions, contact the Center at 732/227-0800, or e-mail us at center@njnonprofits.org .

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