Charitable Misgivings

Tax-exempt organizations ''ought to periodically justify that they are doing the job they said they were doing when they applied for exemption.''

Add charities to the roster of organizations on the hot seat. In June, the Senate Finance Committee held a wide-ranging hearing into the abuses of tax-exempt status. (Some 3 million U.S. organizations are tax-exempt, including 1 million charitable organizations.) In his opening statements, ranking senator Max Baucus (D-Mont.) warned that, among other misdeeds, some “charities were engaging in abusive tax shelters and even funding terrorist activities.” Both items, of course, are hot-button topics on Capitol Hill.

Although quick to praise most charities as honest and “valuable,” Internal Revenue Service commissioner Mark Everson cited “increasing indications” of wrongdoing by tax-exempt organizations, including an Enronesque reference to “inappropriate related-party transactions.” (In fact, certain Enron transactions made use of foreign-based charitable trusts to hide debt.)

One likely outcome of the hearings is regular review of tax-exempt status. “Exemptions should not be permanent,” testified William Josephson, New York’s assistant attorney general in charge of charities. “Charities ought to periodically justify that they are doing the job they said they were doing when they applied for exemption.” Another likely outcome: more audits. Everson is seeking a 17 percent increase in IRS funding for investigating tax-exempt entities to ensure that they meet the requirements.

Senate members also considered whether charities should be required to adopt the types of governance reforms mandated for public companies by the Sarbanes-Oxley Act. Mark Pacella, president of the Harrisburg, Pa.-based National Association of State Charity Officials, thinks they should. “Sarbanes-Oxley [requirements] are absolutely appropriate in the charitable sector,” he asserts.

Chances are, those reforms are coming. As CFO went to press, committee chairman Charles Grassley (R-Iowa) had scheduled a July 22 “charitable-governance roundtable” to consider responses to wide-ranging reforms proposed by committee staff.

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