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Will U.S. Senate Hearing on Charity Abuses Spark Additional Legislation?

(June 28, 2004) The Senate Finance Committee is planning to introduce new legislation later this year in response to the June 22 hearing that focused on abuses in the charitable sector.

The hearing, which featured 13 witnesses from the government, academia and the charitable sector, focused on abuses involving illegal tax shelters, credit-counseling groups, in-kind contributions, insider transaction and board accountability.

The highlight of the hearing was the dramatic testimony of two witnesses whose identities were concealed from the audience. 'Mr. Car' discussed how his organization worked with charities and took up to 99 percent of the profits from the sale of donated vehicles. 'Mr. House' testified that executives of a charity created to provide house down payments to low-income individuals had stolen $20 million in a real-estate scheme.

When asked why this type of fraud was occurring, most representatives from charitable organizations answered that there was simply not enough oversight of the charitable sector. In its written comments to the committee, AFP noted that while the sector has grown from approximately 375,000 charities in 1986 to nearly 1 million charities today, resources for oversight have barely increased.

IRS commissioner Mark W. Everson asked senators to pass President Bush's budget request for the agency, which includes a 17 percent increase over last year's budget for audits of nonprofit organizations. Everson reported that the IRS now has the resources to only conduct audits on less than one-half of a percent of all charities in the country.

AFP's comments noted that despite the lack of oversight, there was not a crisis in the sector. AFP counseled the committee to move slowly in developing legislation and ensure that only specific areas that needed reform were targeted without unduly burdening the sector. During the hearing, Sen. Rick Santorum (R-Pa.) seconded AFP's concerns and warned his colleagues against smearing the good reputation of the sector because of the actions of just a few organizations.

Radical New Proposals on the Horizon?

Prior to the hearing, the Finance Committee distributed a 19-page draft document that contained a number of proposals designed to increase regulation and accountability of the nonprofit sector. The proposals covered such areas as donor-advised funds, credit-counseling agencies, board accountability and foundation compensation.

The draft document offered some radical and far-reaching ideas, including federalizing much of the regulation of nonprofits currently performed by the states, eliminating supporting organizations and requiring charities to submit information to the IRS every five years justifying their tax-exempt status.

The document probably will serve as the basis for any legislation that the committee intends to introduce. At the hearing, both committee chair Chuck Grassley (R-Iowa) and ranking member Max Baucus (D-Mont.) were adamant that charities should expect to see additional regulatory proposals this year.

AFP continues to work with members of the Senate Finance Committee to ensure that any legislation will not unduly burden charities and their ability to raise funds.

To obtain a copy of AFP's written comments to the committee, contact AFP's comments cover a variety of issues related to charities, including lack of oversight, increased cooperation between federal and state regulators, donation of vehicles, percentage-based compensation and passage of the CARE Act. Because the draft committee document was distributed only days before the hearing, AFP plans to submit supplemental comments regarding those specific proposals.

A copy of the draft document is available online in PDF format at the link below:


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