May 29, 2007
The Honorable Henry
Paulson
Secretary
Department of
Treasury
Dear Mr. Secretary:
We are writing to you regarding the issue of charities and transparency.
We appreciate your comments that you would make a priority during your time as
Secretary the strengthening of our nation's nonprofit sector. It is clear
that transparency and openness are pillars in encouraging our nation's charities
to be responsive to the needs of the community and to act in accordance with the
principles and goals for which they were established and that they seek
contributions from the public.
The discussion of transparency and openness naturally centers upon the Form 990
and Form 990 PF that charities file with the Internal Revenue Service (IRS).
These documents are then made publicly available through Guidestar and other
services. Our concern is that the Form 990 has not kept up with modern
practices in the charitable sector and needs significant updating.
The IRS must particularly recognize that the Form 990 is not adequate to
encompass vital information regarding major parts of the nonprofit sector --
especially hospitals and universities. It is for that reason that we view
it as vital that the IRS include for major subsectors of the charitable field,
supplemental information requests. Large, complex institutions, such as
hospitals and universities, require more detailed questions tailored to the
specifics of their fields if transparency and openness are to have real value.
In addition to the public benefits of improved openness and transparency, we
believe that an updated and more thorough Form 990 and Form 990 PF will allow
the IRS to better identify those entities that warrant additional review or
further questions -- such indications of compliance will improve the efficiency
and effectiveness of limited IRS resources and also mean that the charities that
are doing the right thing are less likely to be subject to audit.
Improvements in the Form 990 must certainly have at the forefront the goal of
improving the focus of IRS enforcement. In particular, we are concerned
that the IRS have adequate information to review bond transactions and UBIT as
well as other matters that impact on the tax gap.
There are several points that we want to touch on that from our work in and
oversight of charities we believe are in critical need of greater reporting and
transparency:
1)
Executive Compensation. We continue seeing in our oversight executives who
have compensation from different sources -- including other charities, joint
ventures, contracts and subsidiaries.
In addition, some charities are as creative as for-profit entities in providing
compensation -- paying for housing, first class-travel, spousal travel, deferred
compensation, incentive compensation and bonuses, fringe benefits, loans, dining
and often entire life-styles.
The source and the amount of compensation of an executive of a charity should be
crystal clear. We are concerned that right now it is often easier to
understand how much a Fortune 500 CEO is being paid than how much a charity is
compensating its executives. In addition, the public needs to easily see
the total amount of compensation and not have to piece it all together from
different documents.
2) Endowments. While the traditional focus has been on the endowments of
private foundations, the recent trend has been to see ever-growing endowments of
public charities. These endowments, unlike private foundations, claim they
have no legal requirement to pay out a dime (however, see the discussion of the
commensurate test below). We have seen a very strong reaction from
colleagues and the public to charities that have billions of dollars in the bank
-- or as is more common now, in investments offshore in places such as the
The public needs to understand clearer what is the endowment of the charity (to
include funds that are directly or indirectly under the control of the charity,
such as a supporting organization); what those endowment funds are being spent
on; the amount and percentage of the endowment being spent; how those endowment
funds are being invested; the size of the endowment; what endowment funds are
earmarked for specific purposes and what are those purposes; and, the costs of
the management of the endowment. Consideration should be given to having a
uniform definition of an endowment.
We want to digress for a moment and raise an aspect of endowments of public
charities that is not directly related to reporting. The former
Commissioner of the IRS spoke a few weeks ago, prior to his departure, that
charities needed to provide charitable work commensurate with their resources.
The Commissioner's statement is much in keeping with the commonsense view of the
American taxpayer who subsidizes by billions of dollars a year the work of
charities -- that the point of giving is to help the community and those in need
and not to help a charity build an even bigger bankroll. The commensurate
test is an important part of assessing whether an entity is acting as a charity.
The commensurate test is traditionally stated as: "where [a charity] is shown to
be carrying on through such contributions and grants a charitable program
commensurate in scope with its financial resources." The new Form 990
should allow the IRS and the public to easily identify how the commensurate test
is being met. Please also inform us of what guidance Treasury and IRS are
planning to put forward that will put more teeth into the commensurate test and
what is the audit plan and results so far in this area.
3) Related Organizations. As discussed above in endowments and executive
compensation, there needs to be a complete understanding of all related
organizations -- both for-profit and nonprofit -- of a charity. It is
important that the public be able to understand the big picture of what is going
on at a charity. It is for a similar reason that Congress enacted
legislation to make the Form 990T publicly available.
4) Joint Ventures. Similar to related organizations, to know the work of
the charity it is critical to understand the joint ventures in which the
organization is engaged. This information should include the purpose of
the joint venture, the participants, the resources contributed and the key
financial arrangements. We are particularly concerned that we have a
better understanding of joint ventures in regards to hospitals and universities.
While there can be benefits to joint ventures, such activities also raise red
flags, particularly of charitable assets being used for private benefit.
5) Governance. Time and time again we have seen poor governance at the
core of problems at charities. The IRS Commissioner in his March, 2005
letter to the Finance Committee made a similar finding: "Many of the situations
in which we have found otherwise law-abiding organizations to be off-track stem
from the failure of fiduciaries to appropriately manage the organization."
The Form 990 can serve a useful purpose of bringing a focus on governance issues
both for the board and management of the charity as well as the public. We
would suggest that the work of the BBB WiseGiving Alliance and the Panel on the
Nonprofit Sector can serve as a useful guide to the IRS in this area.
6) Dollars Raised v. Dollars for Charity. There is probably no greater
interest of the public then wanting to understand the answer to this question
when they make a donation: how much of their money is actually going to a
charitable activity (and not including money spent on more mailings). The
IRS should seek to make this information easily and clearly available for the
public.
7) Hospitals. Many of the issues we've discussed above have significant
applicability to hospitals. However, in addition to those issues, we
strongly urge the IRS to look closely to the supplemental reporting guidelines
of the Catholic Health Association (CHA) regarding charity care and community
benefits as a template. The CHA reporting structure has been embraced by
many hospitals already. In addition, we believe that hospitals and
other charities that engage in billing and debt collection should be required to
outline the procedures they follow. Finally, it is important that the
information provided clearly states in plain language what is the hospital's
charity care policy and how individuals are informed of that policy. The
Finance Committee heard testimony last year that it was often the case that it
was difficult to ascertain a hospital's charitable care policy.
We believe the greatest priority is speed in implementing these change to the
Form 990. It is important that you send the signal to Treasury and IRS
officials that a new and improved Form 990 and supplemental information should
be a top priority to be completed and implemented. While we always hear
that sunshine is the best disinfectant, sunshine can't do its work unless we
open the blinds. The sooner we open those blinds the better. We also
encourage the IRS to look at ways to ensure that Form 990's are made available
to the public as soon as possible -- perhaps by having charities post the Form
990 on their own website or for the IRS to more quickly provide the Form 990s
information to organizations such as Guidestar that disseminate them more
widely. We are also worried that with extensions for filing are routinely
extended and that it is often months after the end of the tax year before a Form
990 is even filed.
Finally,
the Form 990 is only as good as the information provided -- to be beneficial the
information must be complete and accurate. Unfortunately, that is too
often not the case. Please inform us of current IRS efforts to improve and
encourage accuracy of Form 990s and what are future plans in this area.
Please also provide any suggestions you may have for Congress in terms of
improving accuracy of Form 990s.
Thank you for your time and assistance on this matter. We would request a
response within thirty days.
Cordially yours,
Max Baucus
Chairman
Charles E. Grassley
Ranking Member
cc:
The Honorable Eric Solomon, Assistant
Secretary of Treasury
The Honorable Donald Korb, Chief Counsel
Mr. Kevin Brown, Acting Commissioner IRS
Mr. Steven Miller, TE/GE IRS