The View From The IRS

As promised, I attended Lois Lerner's presentation at the AICPA conference on what is happening at the IRS regarding charity regulation, and of course, the details surrounding the new 990. To be honest, I didn't get a whole lot out of the 990 discussion, so I'll stick with my original thesis that it's a pretty good new form, and I'm still concerned that they're trying to please all people with their announcement that their three priorities with the new form are a) transparency, b) accountability, and c) to ease the reporting burden on charities. I love the first two goals, but you simply cannot have all three at the same time. If you want more transparency and accountability, you're going to have to demand more of charities. By saying upfront that one of their goals is to make reporting easier on charities, I have to question how serious they are about promoting transparency and accountability. But like I said, the document itself is a good one, and Charity Navigator plans to publicly announce our support for it in short time.

So what else is going on at the Exempt Organizations Division of the IRS? Not a whole lot that will thrill donors, I'm afraid. A brief rundown of what I learned:

• The IRS is committed to making their determinations of tax-exempt status quicker for the vast majority of the groups that apply. They're very proud of this, but I'm no fan. There are too many groups as it is. I wish they'd slow down the influx, not make it easier. But that's clearly not where their priorities are.
  
• They've spent a lot of time looking at Executive Compensation ( a red herring issue if I've ever seen one) and they seem to believe that the general problem isn't that non-profit CEO compensation is too high, just that many groups aren't reporting it truthfully enough. So they're cracking down on the people who don't report it correctly, but not those who get paid too much.
  
• They're troubled by the number of 501 c3 groups that are engaged in inappropriate political activity. They surveyed groups (that were referred to them for potential political violations) in 2004 and found over 50% were abusing the laws, in activities ranging from displaying yard signs for candidates to campaigning from the pulpit to actually making campaign donations. So they ran a big public education campaign and surveyed the referred groups again in 2006. Despite it being a non-presidential election year, they still found over 50% of those groups engaged in political activity. Shocked by this continued illegal activity, the plan of the IRS is to wait until 2008, and see if it happens again.
  
• And they've instituted a new, complicated risk model for assessing potential charitable organization audits. It seems they've wasted a bunch of time and money in the past auditing groups that didn't warrant audits, so they've created a computer model driven by algorithms and regression analysis for identifying correlations between reporting data and actual improprieties, to see if they can devise a better system to identify those playing fast and loose with the rules and therefore worthy of an audit. I have a better idea. And it's a hell of a lot simpler. Go do audits of every group that claims to work on behalf of the police, firefighters, veterans, and sick kids, and has a large telemarketing budget. Sure, you'll unfairly pull in a few honest groups that don't deserve the scrutiny, but most you find will be lousy, and I suspect the good guys will endure the audit for a playing field that is subsequently cleared of the predatory outlaws.
  

I don't envy the folks at the IRS. They have an unbelievably difficult job. They have responsibility, but little authority, and a regulatory budget that hasn't changed much in the last 10 years, while the number of non-profits has doubled. They're out-manned and they're doing their best. But through no fault of their own, their best isn't good enough. Donors are on their own.