Proposed Reforms to Overhaul Nonprofits Generate Buzz

Proposed Reforms to Overhaul Nonprofits Generate Buzz
New York Charities Expert Discusses

The staff of the U.S. Senate Finance Committee issued a discussion draft in late June that, in the view of one New York charities regulator, has the potential to significantly change the operations and oversight of the country’s nonprofit sector.

The draft, which the regulator, William Josephson, assistant attorney general-in-charge of the New York Charities Bureau, believes could lead to a related bill or series of bills, contains a comprehensive set of proposed reforms and best practices designed to curb perceived abuse in the not-for-profit sector, beginning with a proposal to have the Internal Revenue Service conduct five-year reviews of organizations to determine whether they are entitled to their tax-exempt status.

“The organization would be required to file with the IRS such information as would…determine whether the organization continues to be organized and operated exclusively for exempt purposes,” the draft states. “Failure to file the five-year review (to be funded by the filers) would result in a loss of tax-exempt status.”

Citing the need for these reviews, Josephson, the luncheon speaker for the July 13 Estate Planning Conference, pointed to New York’s 50,000 tax-exempt registrants, of which he said approximately 12,000 are considered delinquent for not filing their annual report on a timely basis.

Released just prior to a June 22 Senate Finance Committee hearing in which Josephson testified, the discussion draft includes a proposal to limit the size of boards to no more than 15, with no more than one member directly or indirectly compensated by the organization. In his experience, Josephson has found that boards composed of any more members tend to “lose focus.”

Form 990 Redesigned?

“One of the main themes of the draft is the clear need for an overhaul and redesign of the Form 990,” said former NYSSCPA Not-for-Profit Organizations Committee Chair Julie Floch, who attended the conference and has worked closely with Josephson and his staff in the past.

This redesign includes a Sarbanes-Oxley-type provision that would require the signature of the chief executive officer on the Form 990, which is an annul information return filed by most exempt organizations. Tax-exempt organizations would also be assessed severe penalties for failing to file complete, accurate and timely 990s. Stressing the importance of this issue, Josephson said his office rarely ever sees the “Self Dealing” section of the 4720 (pertaining to excise taxes) checked by filers.

Additional reforms to the 990, which Josephson referred to as neither “public, donor or journalist friendly” could include the development by the IRS of a common set of standards for filing the form, and the eventual requirement to file it electronically.

The Form 990 would also be subject to a review by an independent auditor, and the financial statements for organizations that meet a certain threshold would require an audit. Auditors would have to rotate every five years.

The audit provision of the draft is especially significant because currently some states, like New York, require audits of exempt organizations that meet certain threshold requirements, while others do not. A federal requirement for audits of exempt organizations does not exist at this time.

Learn to Share

Though briefly mentioned, the draft also contains a recommendation similar to provisions in existing federally proposed legislation that would give states the authority to pursue certain federal tax law violations by exempt organizations. This provision, Floch says, could dramatically assist states in their regulation of nonprofits.

Under the IRS code, the Service is prohibited from sharing taxpayer information unless it is with an agency that is considered a taxing authority. State charities bureaus regulate nonprofits and most are organized under the attorney general’s office, which is not a taxing authority. By making charities regulators taxing authorities for purposes of sharing information with regard to charities, as proposed in the federal legislation, the IRS would be permitted to communicate information about exempt organizations to these agencies.

The discussion document includes a provision that could also be crucial to state and federal ability to regulate exempt organizations. The provision would restore the intended purpose of an excise tax collected from private foundations that originally was to be kept in the Exempt Organizations sector of the IRS, but was never appropriated there. Through channeling the tax back into the Exempt Organizations sector, the funds could flow through to the states for enforcement purposes, as well as help pay for education initiatives, the five-year reviews previously mentioned, reviews of Form 990s, and the establishment of a hot line to report abuse by charities.

Since its release, the draft has sparked discussion and feedback from the nonprofit community. At the time this article went to press, the Senate Finance Committee planned to hold a follow-up private hearing on July 22.

The NYSSCPA’s Estate Planning Committee, chaired by Bernard N. Rappaport, sponsored the Foundation for Accounting Education’s Estate Planning Conference. Rappaport and former committee chair Robert L. Ecker co-chaired the event.