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House Ways and Means Committee Holds Hearing on the Tax-Exempt Sector

(April 25, 2005) Last week, the House Ways and Means Committee held a hearing titled 'An Overview of the Tax-Exempt Sector.' The hearing examined the legal history of the tax-exempt sector; its size, scope and impact on the economy; the need for congressional oversight; IRS oversight of the sector and what the IRS is doing to improve compliance with the law.

No Specific Reforms Were Introduced

Unlike the committee's counterpart, the Senate Finance Committee, the House Ways and Means Committee did not propose any specific reforms to the charitable sector. Instead, the committee took a holistic approach at looking at the tax code covering exempt entities.

In addition, House Ways and Means Chairman Bill Thomas (R-Calif.) noted several times that the committee would take time to implement changes to the charitable sector and that the process would be very deliberate. This approach again differs from the hurried efforts of the Senate Finance Committee

Witnesses at the hearing included the Honorable David Walker of the U.S. Government Accountability Office; Douglas Holtz-Eakin of the Congressional Budget Office; George Yin of the Joint Committee on Taxation; John Colombo, professor, University of Illinois College of Law, Urbana-Champaign, Ill.; Frances R. Hill, professor, University of Miami School of Law, Miami, Fla.; the Honorable Sheldon S. Cohen, Partner, Morgan, Lewis and Bockius, and Commissioner, Internal Revenue Service, 1965-1969; and Bruce Hopkins, attorney, Polsinelli Shalton Welte Suelthaus, P.C., Kansas City, Mo.

The hearing focused on general topics such as the definitions of 'exempt,' 'nonprofit' and 'charitable contributions.' Suggestions included instituting stronger state and federal information sharing, encouraging increased transparency and better governance and implementing a tax law spelling out clear criteria for tax-exempt status.

The panel also debated the need for more resources and nonprofit-specific expertise at the IRS and how some recommendations (e.g., implementing a five-year audit of exempt organizations) would affect the IRS if the government agency is not given additional resources.

Again, no specific recommendations were forged during the hearing. Chairman Thomas instead said that they would revisit the issue again in the future and that he looked forward to follow-up information from the panelists.

AFP Submits Written Submission

AFP submitted a written submission to the House Ways and Means Committee for the record. As was the case when AFP drafted a letter to the Senate Finance Committee, we urged the House Ways and Means Committee to oppose any proposals that overly burden the charitable sector. In particular, AFP asked Chairman Thomas (R-Calif.) to resist changes to the non-cash gift deduction rules. AFP also highlighted other proposals that would adversely affect the nonprofit sector such as the implementation of a federal accreditation program (possibly requiring charities to pay accreditation fees and dues), the creation of Form 990 filing fees to be imposed on charities, state enforcement of federal tax laws that likely would result in 50 different interpretations, restrictions on the size of boards and a requirement compelling charities to submit extensive and detailed information to the IRS every five years justifying their tax-exempt status.

AFP Urges Members to Submit Their Own Letters to the Committee

AFP members can submit a letter to the House Ways and Means Committee in response to the hearing using the committee's website:

Sample Letter

The Honorable Bill Thomas

U.S. House of Representatives

2208 Rayburn House Office Building

Washington, DC 20515

Dear Congressman Thomas:

I am writing to urge you to protect the charitable sector from unnecessary and overly burdensome regulations such as those presented by the Senate Finance Committee, particularly those proposals that would modify the tax rules regarding non-cash charitable contributions (known as 'in-kind' contributions).

The new proposals include recommendations to completely eliminate or substantially modify deductions for in-kind contributions. Many charities heavily rely upon non-cash donations, and there is no legitimate reason to attack this lifeline. [Please insert a sentence or two here about how your organization relies on in-kind gifts.]

Changing the in-kind contribution rules would unfairly compel charities to divert valuable time and resources to new valuation compliance schemes. The inability of the Internal Revenue Service to address improper donor behavior should not result in penalties for charities and the communities and populations which they serve. Significant revision of the in-kind contribution rules would greatly diminish my organization's ability to provide altruistic services.

Furthermore, these proposals are not based on any credible evidence of wide-spread abuse. In fact, empirical data indicates that there is NOT widespread abuse among the charitable sector and that proposals are unnecessary. Reports collected by the FBI, the Federal Trade Commission, State Attorneys General and even watchdog groups like the Better Business Bureau show that reports of charity fraud are less than 1 percent of all complaints of fraud. This is consistent with every single year's annual findings in the annual report on Fraud in the United States published by the FTC.

It appears that many of the suggestions are driven by a desire to raise federal revenues from the charitable sector. Such an effort is completely inconsistent with the notion of tax-exempt status, and I hope you will strongly oppose such proposals.

The Senate Finance Committee's proposals to alter the non-cash charitable gift incentives come at a precarious time for charities. Americans are a generous people, but many charities are still recovering from the past several years when charitable giving has been flat and even decreased for many organizations.

At the same time, we understand that your committee seeks to gather information on the size, scope and impact on the economy of the nonprofit sector; the need for congressional oversight; IRS oversight of the sector; and what the IRS is doing to improve compliance by the sector with the law. These are laudable objectives. We are interested in assisting the committee in identifying appropriate areas for further study as well as criteria and standards to better define and outline the sector and its players.

Again, I urge you to oppose changes to the in-kind contribution rules as well as any unreasonable and burdensome legislation that would harm the charitable sector. I very much appreciate your support.

Thank you for your consideration.


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