Charitable Reform and the Panel on the Nonprofit Sector

The Final Report of the Panel on the Nonprofit Sector was presented to Congress in June 2005. The report is the culmination of a remarkable collaboration involving hundreds of community leaders from within and without the charitable sector who served on the Panel, its Work Groups and Advisory Groups. In addition, the Final Report incorporates input from thousands of people representing charitable organizations of widely varying sizes and programs from every part of the country. All of the participants are committed to the highest standards of conduct and practice in charitable organizations and to maintaining the public trust.

The Final Report

• The Final Report contains a carefully integrated set of recommendations for actions to improve and strengthen the sector’s transparency, governance and accountability.
  
• Some of these recommendations can be acted upon by the sector itself without waiting for legislative or regulatory action. Other recommendations require Congress to make changes in the law, while still others encourage the Internal Revenue Service (IRS) to strengthen and improve enforcement of laws and regulations.

• The Panel report maintains the crucial balance between legitimate government oversight and protecting the independence that charitable organizations need to remain innovative and effective.

• The broad diversity of the charitable sector – budget size, staffing, mission, technical resources – means that in some areas there is no “one size fits all” solution. Although even the smallest charitable organizations want to be held to the highest standards of stewardship for the public and private resources entrusted to them, many small organizations lack sufficient human, financial and technical resources to comply with complex legal requirements more appropriate to larger organizations.

The Panel’s Recommendations
The seriousness with which the members of the Panel on the Nonprofit Sector approached their work is reflected in the more than 120 specific recommendations for strengthening and improving public charities and private foundations contained in the Final Report. These recommendations fall into three major categories: governance, transparency and accountability.

A brief overview of the recommendations follows:

1. The governing boards of charitable organizations must be more active.
Governing boards of charitable organizations must understand and fulfill their responsibilities to the organization. They should have clear policies and procedures to guide the organizations, including audit procedures, conflict of interest policies, travel policies and whistleblower policies, consistent with state laws. This recommendation requires action by charitable organizations only; no Congressional action is needed.

2. Greater transparency is needed to help the public make informed choices and to assist with government oversight and enforcement.
The Panel recommends that the IRS improve the design of the annual information returns (Form 990 series) filed by charitable organizations in order to obtain information that is more useful to the public and more helpful to government oversight officials. The Final Report encourages the IRS to require electronic filing of the Forms 990 so that the information can be stored electronically and made easily accessible to the public.

Financial information must also be reliable and, therefore, the Panel recommends that Congress mandate audits for charitable organizations with annual revenues of $1 million or greater and an independent accountant’s review for organizations with annual revenues between $250,000 and $1 million.

3. Congress should strengthen laws to address abuses and clarify standards and penalties.
The Panel recommends that Congress establish clearer legal guidelines for donor-advised funds, Type III supporting organizations, and participation by tax-exempt entities in potentially abusive tax shelters. It also urges Congress to tighten up rules and strengthen penalties to help prevent transactions that benefit donors, rather than the public.

4. Enforcement of laws and regulations governing charitable organizations should be strengthened.
The Final Report recommends that Congress authorize and appropriate additional resources for the IRS to enable increased and improved oversight of the charitable sector. As the number of charitable organizations has grown rapidly, the ability of the IRS to provide oversight and enforce laws and regulations has fallen far behind.

Congress is also urged to help strengthen enforcement by amending current laws that restrict the ability of the IRS to share information about charitable organizations with state attorneys general and other state charity officials. These state officials should be afforded the same access to IRS information, under the same terms and conditions, currently available to state revenue officers.

Summary
The Panel on the Nonprofit Sector presents in its Final Report a serious, integrated set of recommendations which, if adopted, will strengthen the governance of charitable organizations, and improve their transparency and accountability. The Panel’s Report offers the means to assure the public that charitable organizations adhere to the highest ethical standards and are good, trustworthy stewards of the funds and goodwill entrusted to them. It seeks a balance between government oversight and self-regulation of charitable organizations as the best way to maintain the unique and vital role of the charitable sector in America.

Last Updated: January 20, 2006

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