Independent Sector Comments to the Subcommittee on Oversight
Committee on Ways and Means

March 25, 2003

On Legislative Proposals Concerning Taxpayers Rights, with Respect to the Confidentiality and Disclosure Provisions of the Internal Revenue Code

Independent Sector is a coalition of more than 700 national organizations and companies representing the vast diversity of the nonprofit sector and the field of philanthropy. Its members include many of the nation’s most prominent nonprofit organizations, leading foundations, and Fortune 500 corporations with strong commitments to community involvement. This network represents millions of volunteers, donors, and people served in communities around the world. IS members work globally and locally in human services, education, religion, the arts, research, youth development, health care, advocacy, democracy, and many other areas. No other organization represents such a broad range of charitable organizations and activities.

Independent Sector and the many organizations it represents have a keen interest in ensuring that charities provide public disclosure of key information to help ensure that they operate strictly in the public interest and not for private benefit. Charities depend on public trust to raise money and carry out their missions, and transparency is essential to maintaining that trust. For that reason, Independent Sector and over 200 charities and nonprofits submitted comments supporting twelve of the recommendations offered by the Joint Committee on Taxation in its Study on Disclosure by Tax-Exempt Organizations as Required by Section 3802 of the Internal Revenue Service Restructuring And Reform Act of 1998.

In particular, Independent Sector strongly supports the JCT recommendation that electronic filing for exempt organizations be implemented as quickly as possible. IS is currently leading the Electronic Data Initiative for Nonprofits (EDIN) project with the Council on Foundations, the National Council of Nonprofit Associations, OMB Watch, GuideStar-Philanthropic Research Inc., and the National Center for Charitable Statistics. EDIN has been working closely with the Internal Revenue Service to prepare for implementation of e-filing of the Form 990 in early 2004 and to encourage strong participation in e-filing by the charitable nonprofit community. We believe electronic filing has the greatest potential of any of the current regulatory and legislative proposals to improve public oversight of charities and to ensure that they are serving public and not private purposes.

Independent Sector also supports the following JCT recommendations:

• Conform the disclosure requirements of third party communications regarding written determinations and exemption applications subject to disclosure under section 6104 to the disclosure requirements that apply to third-party communications under section 6110.
• Require disclosure of the annual return (Form 1120-POL) filed by political organizations described in section 527.
• Require disclosure of the names under which tax-exempt organizations conduct their operations on their annual information returns.
• Require the IRS to include notification of the public availability of the Form 990 through its taxpayer publications.
• Require tax-exempt organizations to disclose their World Wide Web addresses on their
  annual information returns.
• Increase the penalties for preparers of tax-exempt organizations’ annual returns if there is a willful, reckless misrepresentation or disregard of relevant rules and regulations for filing the Form 990 and related forms.

Independent Sector has supported these proposals as introduced earlier this year by Senator Charles Grassley in the CARE Act of 2003 (S. 256). In addition, we support the proposals introduced by Senator Grassley that seek to provide greater flexibility for the Internal Revenue Service to disclose to appropriate state charity regulators information related to refusal to recognize an organization as tax-exempt or revocation of tax-exemption with the stipulation that this information could only be used to administer state laws regulating tax-exempt organizations and that public disclosure of the information should be governed by the same penalties and restrictions as it is in the hands of the Internal Revenue Service.

In its report, the Joint Committee on Taxation had also recommended that tax-exempt entities (other than churches) that are below the filing threshold of the Form 990-EZ should be required to file annually a brief notification of their status with the Internal Revenue Service. Independent Sector had raised concerns about the difficulties of enforcing this provision given frequent changes in volunteer leadership and in the address of very small charities. Legislation introduced in the Senate appears to strike an appropriate balance by requiring simple postcard verification with revocation of tax-exempt status only after an organization had failed to return the verification for three consecutive years.

Provisions Regarding Charities and Lobbying

While Independent Sector supports a high degree to transparency for charities, we believe that it is extremely important to avoid reporting requirements that could have an undue chilling effect on charities’ participation in the public policy process. Charities are on the front lines of the struggle against the most significant social problems, including hunger, poverty, discrimination, and disease, and are also the vanguard of many significant social innovations. The expertise and hands-on experience charities derive from their work for the public good can help legislators make more informed and enlightened decisions on the full range of issues that come before them. In passing the landmark 1976 legislation that clarified the lobbying rules for public charities, Congress clearly indicated its position that the public interest is served by encouraging more rather than less participation by charities in the public policy process – a position that Independent Sector strongly supports.

As a practical matter, one of the chief barriers to such participation by charities is the complex set of federal and state rules governing lobbying by charities. Charities are subject not only to the federal tax laws on lobbying but also to the federal Lobbying Disclosure Act, the separate lobbying restrictions related to the receipt of federal grant funds, and to various state lobby disclosure statutes. The complexity of these rules has a substantial, and highly undesirable, chilling effect on participation in the democratic policymaking process, both for smaller organizations with limited staff and access to legal counsel and for larger organizations that must establish and maintain complex record-keeping systems. IS opposes additional reporting requirements, such as those recommended by the JCT for self-defense lobbying or expenses for nonpartisan analysis containing “indirect” calls to action, that could further deter charities from participation in the public policy process.

Independent Sector would, however, commend to the Committee recent proposals approved by the Senate Finance Committee that would simplify lobbying requirements for nonprofit organizations by eliminating the current difference between the expenditure limits for direct and grassroots lobbying and permit charities to spend as much on grassroots lobbying as on direct lobbying. This proposal would allow charities to keep a single record of lobbying expenditures, rather than separate records for direct lobbying and grassroots lobbying.

In closing, Independent Sector appreciates the opportunity to submit these comments on disclosure requirements and looks forward to working with the Subcommittee on Oversight of the Committee on Ways and Means as it considers specific Taxpayer Rights proposals and other efforts to improve tax administration.
 

Last updated 4/15/03