On November 10, Douglas Shulman, the Commissioner of Internal Revenue, spoke to the Annual Meeting of Independent Sector, a leadership forum for charities, foundations, and corporate giving programs committed to advancing the common good in America and around the world. The IRS released a transcript of his remarks today. I thought you would be interested in what he had to say as it relates to the non-profit community. I have not reprinted all of his address because, while important and very useful, his full comments were too long for this forum. However, what appears below are his verbatim comments. The dots indicate where I have deleted some of his comments.
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“Tens of thousands of charitable groups large and small and the foundations and corporate programs that help support them represent the finest American traditions of giving and volunteering… traditions that help define who we are as people and a nation. Today, 89 percent of households give and almost 84 million American adults volunteer.
“. . . . ., your advocacy of the highest ethical standards and principles are essential to maintaining the public’s trust during these times of economic duress when so many more people will come to depend on your services. Integrity and trust are two sides of the same coin and we cannot allow this valuable currency to be debased. That is already one of my priorities as IRS Commissioner.
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“. . . . ., as you know, we work very closely with the non-profit community — whether it’s processing over 70,000 determination applications per year or applying oversight or audits when we detect a problem.
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“. . . . . in case you don’t know it, the non-profit territory is familiar stomping grounds for me. I started my career in consulting, but then became what I refer to as a social entrepreneur. I was privileged to be one of the handful of people who co-founded Teach for America, which helps place teachers in urban and rural schools across the country.
“I have also been a private equity investor, a securities industry regulator and now IRS Commissioner. In one of those odd twists and turns in life, I’m back to leading a big organization without a profit mission — and thrilled about it — as I am also working closely again with the tax-exempt sector.
“I admire the tax-exempt sector: its diversity, its creativity and its risk-taking. Americans create more than 100 new exempt organizations each day — 365 days a year. This diversity means many points of view are expressed, many problems are attacked in many ways, many solutions are found, and many benefits are created for the nation.
“I firmly believe that the IRS must recognize and allow for this diversity — and not become a barrier to it. We shouldn’t supplant the business judgment of organizational leaders, and certainly shouldn’t determine how a nonprofit fulfills its individual mission. That’s not our role.
“Like the frontier of the 19th century, I think the tax-exempt sector has become a space into which American ingenuity and spirit can expand in the 21st century. Like all frontiers, the tax-exempt sector is attracting the attention and idealism of young people in our society. For many, creating or working for a non-profit, a charity, or an NGO is a mark of special distinction. The sense of mission and purpose that characterizes the tax-exempt sector inspires and motivates the best and the brightest of our times. This is a self-renewing treasure of our society, and one we all want to foster.
“Before coming to the IRS I believed, and now have witnessed, that the tax-exempt sector tends to be guided by a high-minded, rule-abiding culture. This culture manifests itself in a determination to understand and respect the parameters of tax-exemption that Congress has laid down, to comply with the Internal Revenue Code and work with the IRS, and to do the right thing. At a time when the consequences of abandoned and debilitated standards lie in disarray all around, I respect the tax-exempt sector’s adherence to fundamental principles.
“Of course, I know that this sector has had its encounters with abuse and misuse. The combination of tax-exemption and the over $3 trillion of assets held by nonprofits seems too compelling a prize to resist for some. The IRS has fought hard to protect the sector against corruption, and the diversion of tax-exemption’s public purposes to mere private benefit. We will continue to insist that the sector be squeaky-clean, and that the high ideal of public benefit that underlies tax-exemption is honored.
“I clearly see our role as working with you and others to promote good governance, beginning with the proposition that an active, engaged and independent board of directors helps assure that an organization is carrying out a tax-exempt purpose and acts as its best defense against abuse. And even though you don’t make a profit, that’s just good business.
“Indeed, as a fellow leader, I believe all of us must follow best practices in organizational leadership and management. There must be clearly articulated values, mission, goals and accountability.
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“Let me give you one example. After the collapse of Enron and World Com, Congress passed Sarbanes-Oxley — also known by the shorthand SOX — which fundamentally altered the governance landscape and brought a new, strong, vibrant meaning to the word ‘fiduciary.’ And while legally the law only applied to public companies, I would submit to you that the world of governance for all organizations changed.
“At NASD and later the Financial Industry Regulatory Authority, where I was a leader before I came to the IRS, even though we were a not-for-profit organization we adhered to the rigorous SOX 404 standards which requires management and the external auditor to report on the adequacy of the company’s internal controls. We did so at the request of our audit committee, who felt that while not legally required for a non-public company, this was the gold standard in financial controls. And even very small non-profit boards had a wake-up call from SOX, and began to focus much more on finances, management accountability and governance. And lest we forget, tax compliance is a big part of the accountability formula.
“So what is the IRS doing that’s new to keep individual taxpayers, businesses and non-profit organizations compliant? That’s where innovation and getting ahead of potential problems comes in.
“For example, we’re experimenting with what we call the automated soft notice. These are sent to taxpayers and allow them to correct underreporting issues without having to correspond extensively with the IRS, or place them in a formal audit.
“We’re also taking other proactive action like starting to check up on young exempt organizations to ensure that after a few years in operation they are in fact fulfilling an exempt purpose.
“We will be on the lookout for innovative methods to ensure compliance… and for collaboration with all taxpayer groups, including the tax-exempt sector. And I can think of no better recent example of collaboration than the Form 990 redesign. Working with Independent Sector and other organizations, the redesign is a marked improvement over the old form in terms of organization, information collected and its usefulness to the public, the tax exempt sector and the IRS. I hope you will agree with me that this was a win-win for all involved.
“We’ve also begun conducting studies of several of the largest taxpayer segments within the tax-exempt community by sending out comprehensive questionnaires that focus on an area of interest and then analyzing the responses. If necessary, we can follow up with an examination.
“In fact, we’re about to release the hospital study report. Stay tuned, but I can say this much. I’m confident that the new hospital schedule for the Form 990 — the Schedule H — is the right tool to allow nonprofit hospitals, of all types and sizes, to report how they promote the health of their communities and to justify their tax exemption. And the Schedule H will give the IRS and the public better transparency into these important institutions.
“We also recently launched a study of colleges and universities. In the spirit of collaboration and the recognition that we must be in dialogue with sectors with whom we engage, we did advance work with colleges and universities on the questionnaire. We wanted to understand how they talk about themselves, what kind of measures they use, and so forth. When we have agreement about what data means, we eliminate a lot of friction. I want to apply this lesson throughout the IRS, not just in Exempt Organizations.
“Now that I’ve touched on some of our philosophy regarding tax administration and tax exempt organizations, let me shift to the future. What lies ahead for the sector? What risks await? And how will the IRS respond?
“Let me begin with the current economy that creates uncertainty for everyone. How will a nervous economy affect the tax-exempt sector? I’m concerned it will lead to declining contributions and revenue. But will that prompt some entities to inch across permissible lines to make up budget shortfalls? Will these organizations be tempted by invitations to engage in improper transactions that might generate a fee, or to engage in questionable fundraising practices?
“I don’t know. I certainly hope not. But I do know that now is the time for both of us to be vigilant and to make sure the tax-exempt sector keeps walking away from deals that just don’t feel and smell right.
“We also face a tax code that grows more complex — even for tax exempt-organizations. We’ve seen the rise of new giving techniques and legislation intended to reign in abuses. This creeping complexity affects both of our organizations as we struggle to understand and administer the law.
“Given these challenges, what should the IRS do? I count myself lucky because I think we’re already on the right path. The promotion of transparency — the introduction of sunshine into the tax-exempt sector — is an essential first step to any progress in this area. And we’re also looking to the future.
“We’re in the process of putting the final touches on a new IRS strategic plan. Continued focused oversight of the tax-exempt sector is a key part of it. First, we are committed to providing outreach and guidance to ensure widespread adherence to the requirements for tax-exempt status. Second, we will proactively address misuse of tax-exempt organizations and tax-exempt status. And third, we will maintain a focus on universities, hospitals and other major segments of the tax-exempt community.
“We want to arm you with information and guidance you need to help you comply. We want to pay especially close attention to the largest segments of the exempt sector. And lastly, we want to protect the tax-exempt sector and the public by identifying and stopping those bad actors who misuse tax-exempt organizations or the privilege of tax-exempt status.
“Let me end by saying that the contributions that the tax-exempt sector makes to the spirit, well-being and advancement of our society cannot be overstated. I will be there with you, step-by-step, as you work toward your goals. But, I will also be committed to root out misuse or abuse of tax exempt status by any bad actors who potentially tarnish the reputation of this wonderful sector.”
I trust that this information is useful to you. If you have questions concerning your organization’s continued tax-exempt status and compliance, please contact me at 214.957.3366.
Ronnie
Copyright 2008 Ronnie C. McClure, PhD, CPA
