WASHINGTON - The Internal Revenue Service needs legislation from Congress to combat abuse among tax-exempt charitable organizations, including a measure that would allow it to impose lesser penalties than the revocation of tax-exempt status, agency officials told a House subcommittee yesterday.
"We believe it would be useful to provide us with sanctions that are short of revocation," IRS Commissioner Margaret M. Richardson told the House Ways and Means Committee's subcommittee on oversight at a hearing on nonprofit organizations, one of the fastest-growing sectors of the U.S. economy.
Such sanctions would preserve the tax-exempt status of bonds that had been used to finance the activities organizations that violated tax laws, industry officials pointed out after the hearing.
Richardson also called on Congress to consider allowing the IRS to disclose certain enforcement information about abuses among exempt organizations. IRS officials currently are prohibited under the tax laws from disclosing any taxpayer information.
In addition, she said, Congress may want to revise the IRS' Form 990, a form that exempt organizations earning more than $25,000 per year must file annually with the IRS to disclose certain financial information.
Richardson said the IRS wants to crack down on nonprofit organizations that violate tax laws by improperly financially benefiting private persons or groups. But she worried that the IRS' sole sanction, revoking the tax-exempt status, is extreme and ultimately harmful to those served by the charitable organization.
Subcommittee chairman J.J. Pickle, D-tex., said Congress ought to give the IRS the authority to impose fines or monetary penalties on exempt organizations that violate tax laws, but he expressed concern the IRS would only end up threatening to use the sanctions without actually imposing them.
"What good would it be to give you interim sanctions if you only use them as a threat?" he asked Richardson and other IRS officials at the hearing.
Pickle also grew angry when John E. Burke, the IRS assistant commissioner for employee plans and exempt organizations, said the agency needed only a "modest" increase in funding for the enforcement program for exempt organizations to avoid "growing pains."
Burke said he could use funding for the equivalent of 30 to 40 full-time employees.
But Pickle, who noted that the IRS enforcement program for tax-exempt organizations is operating with less funding and manpower today than in 1980, said, "I find that unacceptable," and added that, "common sense would tell you you've got to attack the problem with more vigor."
Pickle detailed a number of abuses that he said his staff had uncovered in their investigation of some of the nation's 250 largest nonprofit charitable organizations, including hospitals, schools, and religious groups. Many of these nonprofit groups were providing their top officials with huge salaries, expensive perks and interest-free loans for personnel needs, he said.
In one case, Pickle said, the president of a school affiliated with a nonprofit group obtained a $1 million interest-free loan for 50 years to purchase and renovate his house.
Pickle said there are more than 1.2 million organizations with combined assets of more than $1 trillion generating about $500 billion in annual revenues that have obtained tax-exempt status. About half the total number of nonprofit organizations are public charities, he said.
But the IRS' Burke told Pickle that these figures are misleading because while the IRS keeps a "master file" of all the organizations that have obtained tax-exempt status, the agency never revises the list to reflect groups that are no longer in business or that have lost their tax-exempt status.
"We've got to find a better way to do it," said Pickle. He criticized the IRS for not denying tax-exempt status to more than 500 of some 30,000 new charities that seek tax-exempt status each year.
Burke said the IRS should receive credit for organizations that withdraw their applications for tax-exempt status after the IRS asks tough questions. Pickle disagreed.
The subcommittee chairman also said the IRS should conduct audits of nonprofit organizations more quickly, after noting that some of the agency's audits have taken four to five years to complete.
He and other committee members asked the IRS which kinds of organizations appear to be most abusive. Burke said that several tele-evangelist groups investigated by the IRS appeared to violate tax laws. He said also that health-care organizations tend to raise many tax law issues.
Pickle and IRS officials said most charitable organizations operate within the tax laws and provide important services. Pickle said, however, that the subcommittee wants to work with the IRS "to more effectively identify the bad actors and make improvements where needed."