Nonprofits could see important changes in tax policy from Congress during the current session even though a broad tax overhaul is unlikely to advance this year, according to a leading tax expert in the House.
The Obama administration and many members of Congress have indicated a preference to proceed only with business-related tax changes, rather than opening up the entire tax code for debate. That means provisions like the charitable deduction are unlikely to change this year. But other areas of charitable tax policy are up for grabs, said Harold Hancock, tax counsel for the House Ways and Means Committee.
Last year Mr. Hancock played a major role in developing a draft bill authored by former Rep. David Camp, who was then the chairman of the tax-writing panel.
The draft proposed several changes to charity tax policy including compensation caps for nonprofit executives, a requirement that donor-advised funds distribute their assets to charities within five years, and tighter limits on using the charitable tax deduction. Other items included proposed changes on the tax treatment of unrelated business income and an adjustment of the foundation excise tax.
"The members are trying to sort out what can go into a business-reform plan," he told attendees at the 51st Annual Washington Nonprofit Legal and Tax Conference on Thursday.
Mr. Hancock said House members on the panel had not been given any guidance from the White House about what the administration considers ripe for debate. Meanwhile, the Senate Finance Committee has created several panels to consider changes throughout the tax code.
"We have to know what the other people at the dance want to do" to proceed, he said in an interview after speaking at the conference.
Since the draft bill was circulated last year, most of the feedback regarding tax-exempt organizations has related to the proposed payout mandate on donor-advised funds, Mr. Hancock said. He declined to characterize comments the committee received or to say whether the proposed payout requirement would be included or tweaked in future Ways and Means legislation.
"The entire Camp draft is being looked at with fresh eyes," he said.
The conference also featured a talk by Tamera Ripperda, the director of the Internal Revenue Service’s Exempt Organizations office, who gave a progress report on the 1023-EZ, a short-form for organizations requesting tax-exempt status that debuted last July. The three-page 1023EZ form can be used by smaller nonprofits instead of the 26-page 1023 form:
- The short forms have proved popular and account for about half of 1023 forms the agency receives.
- The IRS rejected 872 of the more than 20,000 of the 1023-EZ forms it received in the first six months of its use, because the organizations were ineligible for the short form, their taxpayer identification numbers didn’t match IRS records, or they didn’t respond to follow-up calls from the agency.
- Because the exempt-organization division is facing a "knowledge crisis" brought on by staff attrition, it will set up "knowledge management systems" that will compile case law, reference guides, and self-help tools for staff members. The first such system, which will focus on private foundations, will launch by early May, and eventually the information will be made public.