DATELINE: June 23, 2011, Chicago
Suzanne Garment and Leslie Lenkowsky are well-known and respected people, and rightfully so. But their op-ed piece in today's Wall Street Journal--The IRS's Charity Purge--is simply wrong. The two are troubled by the IRS's recent announcement that somewhere around 275,000 nonprofit organizations have lost their tax-exemption for failing to file a tax return for three consecutive years.
Early on in the article, Garment and Lenkowsky acknowledge that Congress' decision to enact the Pension Protection Act of 2006 is the genesis of the perceived problem. The PPA added a provision requiring all tax-exempt organizations to file a tax return. The congressional penalty for failure to file for a three-year period was loss of exemption. Congress was warned at the time...
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that the consequences for non-compliance should be suspension of tax-exemption rather than revocation. Commentators pointed out that the cost of applying for a new exemption, particularly for very small charities, would be prohibitive. But Congress--Senator Grassley and his staff in particular--chose to ignore this advice. If Garment and Lenkowsky want to be fair and accurate, they need to begin by changing the headline of their op-ed piece to "'Congress' Charity Purge." People need to understand--and this is not a theoretical distinction--that Congress is responsible for the sorry state of our tax laws, not the IRS.
Garment and Lenkowsky note that the IRS devoted countless hours to an education campaign, trying to minimize the consequences of Congress' failure to fully assess the ramifications of the laws that it passes. The IRS did that because Congress shoved the IRS between a rock and a hard place. You see, once the numbers became apparent, people from around the country began to complain to their elected representatives (the same people who voted for the law in the first place) about the evil IRS and how it was thoughtlessly harming small charities. No, the IRS was not thoughtlessly harming charities. It was doing exactly what Congress instructed it to do. At the end of the day, it was those elected representatives who harmed small charities, at least that is the case if you view small charities as sacrosanct.
We don't. Garment and Lenkowsky conclude their op-ed piece by saying that charities are private entities and government should refrain from trying to manage the sector. We couldn't agree more with that sentiment. But we agree only to the extent the direction from government represents an effort to dictate governance, mission, and policy. Like all citizens and organizations, charities are members of our society. That means some contact with government is necessary, particularly when these organizations are granted exemption from paying taxes and in the case of charities, the ability to raise money on a tax-deductible basis.
Is it really too much to ask every tax-exempt organization that is otherwise not required to file a Form 990 status to reconfirm its existence once every three years, particularly when all that requirement entails is answering six basic questions on a web-based postcard? This is hardly burdensome. Every grantmaker should demand accountability from its grantees. When the IRS recognizes an organization as a tax-exempt organization, it is making the government a grantmaker through the resulting tax subsidies. Tax-exemption represents a valuable "license" from the government that is not cost-free to the fisc (us). The government therefore should have a duty to track the organizations who hold the license. What Garment and Lenkowsky fail to acknowledge is charities and other nonprofits are free to operate without tax-exempt status if they don't like the requirements that come with tax-exemption. Tax-exemption is not a constitutional right.
Garment and Lenkowsky give short shrift to the value that comes with purging the system of defunct organizations. Such efforts make it easier for the IRS to target its enforcement efforts. The entire charitable sector is the beneficiary when the IRS is in a better position to take action against bad actors who are abusing tax-exempt status and the halo that comes with charity.
We have no sympathy for the organizations that now find themselves on the list of 275,000 former tax-exempt organizations. If an organization and its leaders are so completely in the dark when it comes to basic filing requirements, what other laws are they ignoring? Are they failing to withholding income tax and FICA from employee wages, classifying employees as independent contractors, ignoring state workers' compensation laws, violating OSHA requirements for a safe workplace, paying below minimum wage, failing to register with state charity regulators, holding illegal gaming events, discriminating against certain minorities and religious groups, providing faulty services, or using charitable assets in inappropriate ways? We certainly hope that Garment and Lenkowsky aren't suggesting that charities get a pass on compliance with all laws. And in particular, what about tax compliance? Are these organizations calculating their assets and revenues correctly for purposes of the Form 990 filing thresholds? Do they have unreported UBIT? Are they even engaged in charitable or other exempt purposes? Any organization that doesn't even know that it has a tax return filing responsibility certainly is suspect when it comes to other aspects of tax compliance. This is particularly true when the IRS's efforts to get the word out were as extensive as they were. The phrase "Herculean" comes to mind. The EO Division of the IRS is to be commended for their efforts, not condemned. In fact, it is seriously open to question whether the IRS has the legal authority to reduce the user fees that organizations reapplying for tax-exempt status must pay, but it did anyway.
Garment and Lenkowsky devote a portion of their op-ed piece to the many mistakes that occurred along the path to implementation of the congressional mandate. Our favorite one: George Washington University was included on the list of entities that had lost its tax-exempt status. Many of these mistakes are attributable to the IRS' antiquated computer system. Once again, blame should not be directed at the IRS. Because so many in Congress hate the government in general and the IRS in particular, Congress has refused to provide the funding to update a computer system that most likely is still weighed down by decades old technology despite the fact that every American has interactions with the tax system. Even if we go to a 12% flat tax, there will still be a need for the IRS. Compliant taxpayers should be screaming bloody murder about the failure of Congress to fund modernized computer systems for the IRS. The existing antiquated systems make non-compliance easier, resulting in an increased tax burden for the compliant.
At the end of the day, we are highly sympathetic to Garment's and Lenkowsky's desire to keep the grubby hands of government off the independent sector. We, for example, are not in favor of governance mandates. Organizations should feel free to operate without conflicts-of-interest or whistleblower policies, or with poor internal controls. But when things go wrong, the organization shouldn't expect mercy from grantmakers, including the government through its direct and indirect subsidies to tax-exempt organizations. Off with their heads (non-compliant charities).
Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NONPROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL. If you liked this post, please visit http://www.charitygovernance.com for a description of our training and consulting services. You will also want to acquire a copy of Jack Siegel's book, A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good."
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