Nonprofits Under Scrutiny Million-dollar Salaries. Big Loans. A Hearing Puts Irs On The Hot Seat. (June 16, 1993)

Posted: June 16, 19931

WASHINGTON — Members of Congress and the IRS agreed yesterday on the need to beef up penalties and add federal investigators to police the rapidly growing number of tax-exempt groups.

Alarmed by disclosures of million-dollar salaries and no-interest loans for officers of nonprofit organizations, members of the House Ways and Means subcommittee on oversight called for tough new standards for the nation’s more than 1.2 million tax-exempt organizations.

If the IRS does not improve its oversight, the tax-exempt sector is “going to get bigger than the government,” said subcommittee Chairman J.J. Pickle (D., Texas). “We just must do a better job.”

IRS officials, including newly appointed Commissioner Margaret Milner Richardson, said they agreed on the need to come up with “some effective sanctions.”

If need be, Congress could impose a two-year freeze on new applications for tax-exempt status, Pickle said. Or it could limit a tax exemption to a specific number of years and require an organization to reapply to the IRS every five or 10 years.

“Once a tax-exempt organization gets on the books, it normally stays there forever,” Pickle said. “They last longer than the stars.”

During the last decade, the nonprofit sector has been the fastest-growing part of the U.S. economy. According to testimony yesterday, it includes 1.2 million organizations – not including 340,000 churches – with annual revenues of $500 billion and assets of about $1 trillion.

The Inquirer reported in a seven-part series in April that tax exemptions of nonprofit organizations cost the nation at least $36.5 billion a year in lost tax revenue. An 18-month examination of the nonprofit sector found that in the last 12 years an average of 29,000 new groups a year have gone off the tax rolls.

“The fact is, we do need to sit down with your staff and Treasury so that there is much more sunshine, and the public is aware of what’s going on,” John E. Burke, assistant IRS commissioner for exempt organizations, told the subcommittee.

Subcommittee members grilled IRS officials for two hours about abuses in the operations of nonprofits. Examples of abuses cited by the subcommittee – names of groups weren’t disclosed – included:

* A $1 million, no-interest 50-year loan by a university to its president to buy and renovate a house. The official also received $365,000 a year in compensation. “The Lord has taken care of him,” said Pickle.

* A nonprofit hospital that made $1.5 million in loans to officers and directors, including an $845,000 loan to the hospital’s director of surgery.

* Another hospital that made loans to physicians to set up their private office practices.

* A $1 million-a-year pay package to an executive of a tax-exempt college retirement fund.

* A university that hired a Washington lobbyist for $600,000, and two other universities that paid $650,000 between them for services from the same lobbyist.

* Expenses of $166,000 listed by one hospital executive.

* A university that earned $196 million in profits and collected $127 million in tuition in the same year. Pickle said students ought to be allowed to attend the school for free for a year and a half.

Because of such problems, Pickle said, the subcommittee plans to hold a series of hearings this year. They will address possible changes in federal tax rules affecting tax-exempt groups. “We are trying to do something about this this year,” he said.

At present, the IRS has limited options when it uncovers abuses. The agency can revoke an organization’s tax-exempt status, negotiate an agreement with the group to stop the abuse, or do nothing. IRS officials say they are reluctant to revoke exemptions because of the potential harm to people who benefit from that nonprofit group’s services. So, the agency often does nothing.

IRS officials say that, on average, they revoke the exemptions of about 30 tax-exempt charities each year. The usual reason is a finding that officers or directors have taken advantage of their positions to enrich themselves.

In such revocation cases, the IRS is required by law to keep the name of the organization secret. The exception is when a nonprofit is persuaded by the IRS to make the matter public. As a result, donors and the public rarely learn about these improprieties.

Burke said there should be more publicity when the IRS takes actions against nonprofits “so the public can know what is going on.” Richardson, the IRS commissioner, said, “We think that type of disclosure would be helpful.”

The subcommittee will explore a number of other steps to increase oversight of nonprofit groups, Pickle said. These include making the tax forms of nonprofit groups more readily available to the public and publicizing revocations and other penalties.

Other steps could include placing limits on compensation paid to executives of nonprofit groups and requiring tax-exempt organizations to provide more details when they are cited for commercial activities and lobbying. Pickle also said the IRS should consider increasing its staff in the exempt- organizations division.

Burke said the IRS would welcome a slightly larger staff, but he worried about “growing pains” if his division got too big. By using the division’s staff and resources more efficiently, the IRS should be able to do a better job of policing nonprofits, Burke said.

Growing pains shouldn’t be a concern, Pickle said. “I find that unacceptable. I would think that common sense would tell you that you’ve got to have more people and you’ve got to attack the problem with vigor.”

IRS officials also voiced reservations about placing time limits on an exemption, because it would add to the “paperwork burden” of the agency.