July 25, 2012
Liveblogging the Ways & Means Subcommittee Hearing
As my fellow blogger Nicholas Mirkay noted earlier in the week, the second House Ways & Means Subcommittee on Oversight hearing on exempt organizations is scheduled for this morning at 9:30 EST. I'll be liveblogging the hearing in the comments to this post (see the fine print just below the post.) I have to manually enable the comments on Typepad, so there may be a little bit of a delay as they go up. I will also be doing this *live* so I'm going to beg your forgiveness for typos and such from the outset.
It is a fantastic line up this morning. Sometimes, it is easy to get cynical about who ends up on these panels but not today - the Subcommittee did its homework and got some great people, including Prof. John Colombo (who posts here, not that we are biased!), Prof. Donald Tobin (well known to all of us who teach tax), Thomas Hyatt of SNR Denton, and Eve Borenstein, Queen of the Form 990. I really think it will be an informative hearing. Here's a link to the official announcement.
If you are so inclined, you can watch this streaming here. As statements and such become public, I'll update this post to include links to them. So warm up your coffee and off we go... To the comments!
UPDATE: Hopefully, all of those comments came through for you all. Feel free to contact me if there were any issues. Here are some of the posted materials for the day:
By the way, in my comments I sometimes refer to the Comn'r as short hand - I mean Steve Miller, who is actually Deputy Commissioner for Sevices and Enforcment and used to be the head of TEO for the IRS.
SECOND UPDATE: Some of the later comments are not showing up when I hit comments on the front page (after the post where I indicate I have technical issues). They are, however, showing up in the dashboard for bloggers, so I will try to figure that all out. Please drop a comment if the last one you see from me is that I'm having technical issues, or if they go all the way to the end of the hearing.
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Test Comment here....
Posted by: Elaine Wilson | Jul 25, 2012 6:13:35 AM
It's about 9:20 and I don't see the live stream set up coming through on Thomas quite yet. I'll stay on it.
Posted by: Elaine Wilson | Jul 25, 2012 6:22:03 AM
Well it is still not up on Thomas so sorry for the delay.. I'm looking!
Posted by: Elaine Wilson | Jul 25, 2012 6:31:58 AM
We are up.. we missed the first part of Commissioner Miller's comments.. sorry about that.
He's talking about challenges - size and growth of sector given resources (AMEN)
Hard to regulate - no bright lines, flexibility, general principles
Current law gives limited options if noncompliance is found...
Public expectations are different than tax rules.. e.g., they can't distinguish between charities that hand out candy versus food to flood victims, all they can do is give out the information
Posted by: Elaine Wilson | Jul 25, 2012 6:41:38 AM
Commissioner is responding to the Chairman's questions about the redo of the Form 990 - He indicates that they didn't have a good information into certain organizations in order to regulate them effectively. IRS focused on areas of the sector with large resources. Chair - are you satisfied with the Form 990 - good information?
Commission - yes its a success but its an ongoing effort.. we aren't done. First, was it necessary. Absolutely. Second, did we discuss it with the industry? Absolute they did... two drafts with signficant modification to respond to comments. Third, are we done? is there too much burden - probably. It needs to be a living document and talk to focus but the discussion isn't over.
Posted by: Elaine Wilson | Jul 25, 2012 6:44:46 AM
Chair changes to ask about UBIT and is the Form 990 working. Commissioner starts by noting its the 990T and then talking about setting out the 3 prong UBIT test - again, no bright line rules for substantially related. Talks then about how difficult to allocate expenses.
Chair.. are you looking at changing these definitions. Commissioner... it would be good if we had the resources but its not at the top of the list
Chair.. what does Congress need to do... Comm'r will talk to staff. Substantially related is just a difficult concept.
Posted by: Elaine Wilson | Jul 25, 2012 6:47:11 AM
Chair - how do you select UBIT audits.... they look through the 990Ts... no real red flags.
Rep. Lewis - concerned about IRS ability to oversee TEOs when your budget has been cut. (Again, AMEN)... cites statistics
Posted by: Elaine Wilson | Jul 25, 2012 6:48:46 AM
Comm'r talks about cuts to EO staff.. I had no idea that was as signficant and more to come. Rep. Lewis notes less money, less employees, growing sector. How do you do it? Is anything falling thru the cracks.
Comm'r takes the opportunity to ask for more resources.. they try to be efficient but they'd love more. EO has always been understaffed so they rely on the transparency of the 990 reporting to leverage oversight.
Posted by: Elaine Wilson | Jul 25, 2012 6:51:28 AM
Ms. Jenkins.. what are the steps for a public charity application... Comm'r Form 1023 for almost all.
Its interesting that the Commissioner noted that they look at applications by people who don't do at lot.
Posted by: Elaine Wilson | Jul 25, 2012 6:54:27 AM
Sorry had a hiccup.. Commissioner is talking about outreach programs.
New Schedule R - related entity... Why do you need that. Comm'r - we need to see window into how the entire organization works... a hospital system or college is more than just one entity.
Posted by: Elaine Wilson | Jul 25, 2012 6:59:03 AM
R is one of the areas where there is burden and we need to talk to people about that but the concept is solid.
Chair - asks to follow up to Ms. Jenkins. Do the filing threshholds make sense or should they be revised. Comm'r... open to the discussion, set in conjunction with the states. 2006 PPA raises it up to 50k and modifies other numbers because the 990 is more burdensome.
Mr. Marchand - asks about small, local group claiming exemption, many of which are politically involved.
Posted by: Elaine Wilson | Jul 25, 2012 7:01:09 AM
Comm'r are they c3s or c4s... ? Rep. Marchand.. whats the most efficient. Comm'r - if they are really doing politics they can't be a c3 - they could be a c4 maybe if a little, or a labor union, or a trade association, but mostly 527 if that's all they are going to do.
Posted by: Elaine Wilson | Jul 25, 2012 7:02:27 AM
Rep. - many of the small organizations feel like they are being harassed. What is happening. Comm'r - if its a 501c4, we did receive a huge increase in a lot of advocacy orgnaization applications but the politics isn't appropriate past an appropriate threshhold.
Politics under the internal revenue code means something specific.
Posted by: Elaine Wilson | Jul 25, 2012 7:03:48 AM
About 200 C4s fell into this category, grouped for consistency. Continue to work these cases. Over 50 have received exemption.. but many are too small and they don't know the rules.
Posted by: Elaine Wilson | Jul 25, 2012 7:04:43 AM
Rep. What are the penalties? If on application, they won't get their recognition. If its on audit, they could have revocation or political expenditure tax
Bessaro - is there a 990 portion for c4s to report political activities? Yes.. Is there a bright line test... No.
Comm'r has received a lot of comments about looking at this issue... they are discussing whether there should be guidance.
What should an organization do.. Comm'r should get professional help. The general rule has to be primarily engaged in community benefit activities. Primarily isn't a bright line - its a qualitative test.. look at expenditures, staff and volunteer time, what dollars are devoted and derived to activity, what fixed assets. This guidance is out there.
Posted by: Elaine Wilson | Jul 25, 2012 7:09:24 AM
Are c4s streching the definition of social welfare? Comm'r - this is a difficult area because a c4 org you have to look at the full year. The fact that they are doing something today, that's not the end of the inquiry. Its after the year is up to make a determination.
Rep... Do you have the resources for this? Comm'r we can always use more...
Posted by: Elaine Wilson | Jul 25, 2012 7:11:19 AM
Chair - trying to get away from c4 questions by committe and get the focus back on public charities.
Mr. Reid/Reed? (my screen is frozen) was going to continue but he wants to know about the employees who look at political issues. Comm'r - uncomforable at releasing the names of career IRS and its not one person. Service tries to make sure that its not one person. There is a 3 person referral committees. Comm'r will walk him thru the referral process.
Mr. Reed challenges that the IRS is understaffed. How did you determine that? Is there metrics? What is fully staffed?
Posted by: Elaine Wilson | Jul 25, 2012 7:14:10 AM
Comm'r - no definition of fully staffed. We have enough people but we could use more - not just staff, but IT especially. Modernize the way that small organization fill out a 1023 online, etc., with help along the way. Better and more robust number of exams with reference to the audits. Metrics.. how many people contacted the education sites.. how fast did I return? How many compliance touches did I make to reach the entire sector? Its close.
Posted by: Elaine Wilson | Jul 25, 2012 7:16:09 AM
Comm'r thinks its taking too long to get to determinations, to do outreach, and the exam rate might be low.. getting to a problem.
Dr. McDermott... he knows the chair wants to be c3s but...
What about audits? If you don't have a lot of people, you just don't audit. Comm'r .. that and in the determination letter process. Determination letter is customer driven.. I have to work it but how fast depends on the people that I have.
Do you audit everyone who is red flagged? Comm'r we never have and never will.. we have to make decisions. Do you get back money when you audit? Comm'r - we regulate more than derive revenue.. we get some but we protect the investment the gov't makes in the tax exempt sector.
When people fight back against you - Tea Party.. provide copy of newsletters, resume? What is unreasonable about those questions? Do you think they are? Comm'r can't talk to a specific case?
IRS doesn't send a standard letter. I think he has the Virginia Tea Party letter.... If the taxpayer calls in and says its too burdensome what do you do. Comm'r - its usually over the phone since the reviewer is in Cincy.
From that... c4 looking at what they are doing and does it promote social welfare. Rep. - could you send the standard for defining social welfare
Posted by: Elaine Wilson | Jul 25, 2012 7:22:34 AM
Rep. Paulson asks about real time reporting systems, which Rep. says would be very burdensome. Can you look into that -
Comm'r - we are very far away decisions on what this looks like. We can't be scared of the conversation, however. In a perfect world all that info would be available.
Paulsen .. do you think the IRS is authorized currently? Miller - it depends on what the system looks like. Paulsen - for some of the changes we you would need Congressional authorization. Do you have an idea on cost to IRS? Comm'r - hard to say with no blue print as to what it would look like.
Concludes with Steve Miller. Set up for next panel. My comment - WOW They REALLY want to talk about c4s.
Posted by: Elaine Wilson | Jul 25, 2012 7:26:43 AM
Introduction of next panel
Eve first - redesigned Form 990 generally makes the right "asks".
1st - the amount of resources has increased - its not bad it just is.
2nd - the info is more thorough allowing more effective use of IRS resouces.
3rd - transparency
4th - does have sharp learning curve but the sector is starting to learn .. hopefully the IRS can help.
Burdensome - there is more information - the is a new core - many filers didn't understsand the prior return as just a financial report, but the new form is very clearly an information return that requires meaningful participation (just don't hand it to accountants).
1. The IRS should not change midstream but focus on areas where burden can be decreased. Understand that semantics is not value laden just descriptive.
2. Don't confuse burden with the fact that many orgnaizations don't have access to competent professionals.
3. The form uses public access - set out affirmative responsibilities, especially compensation, governance, and Schedule L insider disclosures. Generates important self-reflection.
Posted by: Elaine Wilson | Jul 25, 2012 7:33:41 AM
Mr. Hyatt - Current state of complexity in the organization and operation of public charities. Many are small but we are most familiar with large organizations, which dominate the financial activies - mostly hospitals and colleges/universities.
Clearly they are more complex- multiple entities, central parents, subsidiaries, both tax and non tax. Etc.
Substantial increase in joint ventures. IRS has determined that for-profit JVs are consistent if properly structured and operated.
Many reasons for this... protection from liability, operation in regulated fields, governance, exempt law compliance, membership. It doesnt need new law but needs scrutiny to make sure that it is in compliance. At the state level, it is the AG. The IRS also plays a role. The IRS has used compliance checks to learn about these systems - both hospitals and colleges.
Congress has acted when necessary - see supporting organizations and the PPA.
Posted by: Elaine Wilson | Jul 25, 2012 7:38:22 AM
Prof. Colombo - commercial activities expanded over time to provide revenue. Legal issues are complex and confused. Two issues - do you lose exemption? if not, is it UBIT? Underlying these issues - does it matter what kind of business container the activity is housed in?
Exempt status - the main policy issue. how much if any can a charity undertake without endangering exemption. Regs - some is permitted but beyond that we don't know much. Not more than an insubstantial amount.. but another party says it can't be primary but in furtherance of exempt purpose - but undefined. How do you define it? Soup kitchen example.
UBIT - "substantially related" - if so it is not taxed. Notes that there are specific exemptions. Like the commerciality limitation, lack of consistency and definition. Classic rationale was competition, but that's not in the definition of UBIT. We know that providing revenue is not substantially related? Symphony example.
Time to consider these issues from a policy perspective to provide clairity.
Posted by: Elaine Wilson | Jul 25, 2012 7:43:49 AM
Tobin - affiliating with other tax exempt organizations - c4s and 527. (Note - he's gonna get the c4 questions.. I'm calling it now, not that its hard.)
Talks about the differences between c3, c4 and 527.. the primary social welfare test - campaign issues, etc., deductability and income tax exemption, disclosure, etc.
Public charities can create affiliates - the Schedule R is important to understand the various activities and associates among affiliates. The policy goals of each section is respected. The subsidy from the governement to c3s shouldn't go to c4 and 527. Protected speech is important lobbying etc. with non-subsidized dollars and disclosure is as well. When done correctly, this works.
Talks about the need for the lobbying/political rules to keep the government from subsidizing these activities through the exemption and deductions.
In an affiliated structure, one entity can't subsidize the activities of the other. Its complex - aggressive assingment of activites among - limited enforcement - no public disclosure for purposes of guidacne.
Posted by: Elaine Wilson | Jul 25, 2012 7:48:52 AM
Chair asks about related entity passive - Eve Borenstein - excess capacity can generate the passive income (eg excess space) - if we control it under 512b13 - loophole closer for controlled organization passive income. Schedule R now requires the disclosure of these transactions.
Chair asks Colombo - commerciality doctrine. Policy - how much if any commercial activity can you do. Can you elaborate on this?
Posted by: Elaine Wilson | Jul 25, 2012 7:56:59 AM