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Charity Reform: Overview of Finance Committee Accountability Proposals

(Sept. 6, 2005) For nearly two years, the Senate Finance Committee has been investigating reported abuses in the charitable sector and developing legislation. This month, the committee is expected to finally introduce legislation that will cover a number of areas related to charity accountability and operations.

AFP supports some proposals because a few areas need additional scrutiny and investigation. However, the association opposes most of the provisions recommended by those documents because they will simply make it more difficult for legitimate charities to operate on a daily basis while doing little to root out fraudulent organizations.

Likely Provisions in the Legislation

Based on conversations with staff, there are several issues that the legislation is likely to address:

  • Donor-advised funds. This is an issue that the committee has mentioned constantly through the two years of this investigation so far. Exactly what the committee will propose is unclear, but it has been very uncomfortable with the lack of control and oversight in this area.
  • Supporting organizations, which are groups created to support other charities but are not subject to the more stringent rules of private foundations, such as payout requirements or transactions with disqualified persons. The committee may bring the rules for supporting organizations more in line with the requirements of private foundations.
  • Self-dealing, insider transactions and abusive tax shelters. While the committee will probably move to strengthen the rules in these areas, what it will really take is additional funding for the IRS to enforce the regulations.

In general, AFP supports action in each of the above areas, although we have yet to see any definitive language or proposals.

Other Proposals

The committee is expected to address other areas related to charity operation and accountability, although it is unclear exactly which proposals will be included in the legislation. Below is a list of some of the ideas the committee has considered during its investigation.

  • Require charities to undergo a review every five years from the Internal Revenue Service to justify their tax-exempt status. AFP believes that this recommendation places unnecessary bureaucratic burdens on charities. Many small charities do not have the means to undergo such an intensive process every five years. Moreover, we fail to see how the IRS will have the time and resources to administer this proposal when it already is backlogged and overtaxed with existing paperwork.
  • Provide states the authority to pursue certain federal tax law violations by exempt organizations with approval of the IRS. AFP finds this proposal very problematic. This recommendation, if enacted, would result in 50 different interpretations of federal law. How will charities, particularly regional and national nonprofits, be able to ensure that they are fully complying with federal law in each state? Most likely, this proposal will result in confusion throughout the charitable sector and will actually hinder enforcement efforts across the country.
  • Provide funding for the IRS to create an accreditation program for charities. While accreditation can be a useful tool in many instances, AFP believes that the committee is underestimating the complexity associated with creating and administering an accreditation program. We are especially concerned that the committee fails to realize the diversity of the sector and how difficult it will be to create a program that would fairly evaluate charities of different sizes, missions, operations, etc. In addition, the amount of money recommended ($10 million) is woefully inadequate.
  • Place limitations on the size of a charity's board of directors. AFP finds this recommendation to be far too limiting and draconian. Moreover, the numbers seem arbitrary. What evidence exists that indicates that three to 15 members is the appropriate, most effective size range for a board? To date, the committee has not provided any such evidence. It appears that this proposal simply seeks to impose a 'one-size-fits-all' constraint on charities without taking into account the unique needs of individual nonprofits.

Law Enforcement is Needed, Not New Onerous Laws

Empirical data indicate that there is NOT widespread abuse among the charitable sector and that the new proposals are unnecessary. Reports collected by the Federal Bureau of Investigation (FBI), the Federal Trade Commission (FTC), state attorneys general and even watchdog groups such as the Better Business Bureau show that reports of charity fraud constitute less than 1 percent of all complaints of fraud.

Instead of implementing new laws that will detrimentally affect the altruistic work of charities, congress needs to provide sufficient resources to the IRS to enforce current laws. A recent analysis conducted by the TRUST Coalition concluded that 92 out of the 94 alleged abuses reviewed by the Finance Committee could have been addressed under existing IRS regulations.

Information about the committee's giving reform proposals are available here.

AFP members are strongly encouraged to send letters to their U.S. senators and urge them to vote against these proposals. Sample letters and additional information are available.

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