For years, the Internal Revenue Service has been dogged by criticism that it doesn’t do enough to oversee charities and serve the needs of nonprofit organizations. The division that keeps track of charities is underfinanced and understaffed, the poor stepchild of an agency whose overall purpose is focused on collecting taxes, not watching over organizations that are exempt from taxation, critics say.
The person who formerly managed the IRS’s nonprofit branch couldn’t agree more.
Now in private practice — and representing charities in high-profile cases coming up against the entity he once led — Marc Owens is proposing a restructuring of the way the federal government oversees and makes policy for nonprofit groups.
“The system is breaking down,” Mr. Owens says. “We need a new structure that provides better tools to regulators so they can actually address problems, and in a timely fashion.”
A Thoughtful Critic
Throughout the 1990s, Mr. Owens was synonymous with charity oversight. He headed the Exempt Organizations Division for a decade, and served in the division for 15 years before that.
Mr. Owens is using that experience to be a thoughtful critic — or thorn in the side — of the government agency to which he devoted the first 25 years of his legal career. He has led headline-making fights against the IRS when the tax agency investigated the National Association for the Advancement of Colored People and a prominent California church for possible involvement in partisan politics.
Mr. Owens’s bill of particulars with the current IRS in part sounds like what a lot of nonprofit officials and other observers have been saying. But he brings a broad, inside perspective that elaborates on the problems and explains their origins.
He says the IRS is ill-suited structurally to do the job of regulating tax-exempt groups. It can’t do enough audits to catch problem charities or issue enough guidance to help organizations follow the law; it hasn’t kept up with the pace of applications for tax-exempt status; there is a disconnect between its national and local offices; and the agency overstretches its authority.
A New Agency
Among Mr. Owens’s ideas:
- Move the IRS’s oversight of tax-exempt groups out of the tax agency and into a new public-private organization that the IRS could oversee. This organization could be modeled after the Financial Industry Regulatory Authority, known as FINRA, which regulates independent securities firms and is overseen by the Securities and Exchange Commission.
- Create a new high-level job in the Treasury Department with the responsibility of regulating charities and create a new major bureau inside the IRS that would take over the exempt-organizations division’s responsibilities for monitoring nonprofit organizations. The two moves would “almost automatically attract greater resources, attention, and responsibility than are now received” for the effort, he says.
- Create a freestanding board outside of the IRS and Treasury Department to develop, evaluate, and coordinate policies of all federal agencies that affect nonprofit groups, The work of enforcing tax laws would stay where it is, with the IRS. “This body would try to harmonize these agencies and make sure they didn’t operate at cross-purposes or in ways that create inefficiencies,” Mr. Owens says.
Mr. Owens believes his proposals could gain traction in the current economic and political climate. He points out that the Obama administration is already promoting a restructuring of how the nation’s financial industry is regulated.
“Clearly,” he says, “the administration is aware of the importance of regulation and is willing to think about new means of oversight.”
The IRS declined to comment on Mr. Owens’s critique of the agency or on his ideas for changing federal oversight.
Sen. Charles E. Grassley, the top Republican on the Senate Finance Committee, said numerous government agencies already have “massive amounts of data about nonprofits” and that the IRS’s recently revised Form 990 tax return provides more information than ever.
“Before additional layers of bureaucracy are considered, existing agencies ought to be talking to each other, sharing resources, and thinking outside the box to find charities that are abusing their tax-exempt status, charitable contributions, and government grants,” said Mr. Grassley. “And Congresssional leaders need to do their part in conducting responsible oversight.”
William Josephson, former head of the New York State Charities Bureau, says that “it’s a good thing that Marc is pushing his ideas, and there have been failures of enforcement at the IRS.”
But, Mr. Josephson says, the central problem with federal oversight of charities is a lack of money for the Exempt Organizations division.
Money’s Not Enough
More money for federal charity regulation is essential but not enough, Joel L. Fleishman, a philanthropy scholar at Duke University, says in his book The Foundation: A Great American Secret — How Private Wealth Is Changing the World. “I doubt that such a step alone would make the difference between today’s inadequate governmental oversight and what is required for everyone to have confidence in its future effectiveness,” he writes.
Mr. Fleishman endorses Mr. Owens’s idea of creating a new public-private organization to oversee tax-exempt groups. “Of all the oversight possibilities that have been suggested for dealing with willful misconduct by nonprofits,” says Mr. Fleishman, this is “the only one that promises to be effective and also unlikely to infringe on the indispensable freedom of nonprofits.”
In an interview in his office at Caplin & Drysdale, in Washington, Mr. Owens says a chief problem for IRS charity regulators currently is that the agency’s primary function and top priority is to make sure that individuals and companies pay their taxes.
When the IRS draws up its yearly budget, charity watchdogs get the short end of the stick because money is mostly directed to efforts to collect taxes. “That’s a rational way for the IRS to allocate resources,” he says. “It just turns out it makes for bad oversight of charities.”
Lack of money means that the IRS office that oversees charities always faces a series of uphill struggles, Mr. Owens says.
For example, he says, it can’t hire enough employees, which contributes to the agency’s failure to carry out enough audits or release timely advice to help charities understand what is expected of them on key matters.
He says organizations are still waiting for — and need — the IRS to issue advisories, known as revenue rulings, to help charities understand a law enacted 13 years ago that allows the tax agency to levy fines on charity officials who receive inappropriately high salaries or perquisites, as well as on trustees who authorize the arrangements.
The IRS is behind in processing “private letter rulings” that are sought by nonprofit groups that need approval of changes to their charitable mission or activities, he says, and lags in handling some types of applications for taxexempt status. Applications received in June that “involve complex issues that require further development” are just now being assigned to IRS specialists, according to the tax agency.
A Slow-Moving System
Even if the IRS charity division could receive a magical infusion of money and power, Mr. Owens says, it is stuck with a regulatory model that doesn’t allow it to move quickly enough to take action against problem charities or to deal with important issues.
“An oversight system that relies on an annual tax return filing as its core decision-making document will be structurally incapable of timely addressing issues of concern,” Mr. Owens explained in a background paper about his idea for a new independent regulating body that he prepared for the Hauser Center for Nonprofit Organizations at Harvard University.
Indeed, Mr. Owens says creating a new entity modeled on the Financial Industry Regulatory Authority could help solve the problems with federal charity regulation. That agency registers, educates, and examines financial businesses, as well as writes and enforces rules.
Such a regulatory unit would be freed from the limits inherent in using the systems developed to administer the tax-collecting provisions of the Internal Revenue Code, he says.
The new body could be authorized to write rules and standards that were not cemented to the narrow structure of the tax code, he says. And it could impose penalties that would better fit charity transgressions than those the IRS is now required by law to follow.
Mr. Owens says a new group’s governing board could include members appointed by the IRS and the National Association of State Attorneys General to help broaden its reach and foster greater cooperation between federal and state regulators.
And a new organization need no longer rely on the IRS for its operating funds. For example, he says, the organization could be allowed to turn to some of the revenue the government now receives from excise taxes on investment income paid by private foundations.
The organization would have the resources to hire more people, do more audits, churn out advisories — and create an entirely new document to replace the Form 990, he says.
“You’d come up with a clearer, easier-to-complete report and one that was more easily understood,” he adds. “It would be serving the needs of charity oversight.”