Perspectives

WASHINGTON WATCH

Support for a charity watchdog group grows on Capitol Hill

In the ivory towers of academia, at this season's think tank seminars, and among former government officials, there is growing support for creating a charity watchdog group in Washington.But is the Internal Revenue Service up to the job? The IRS is probably not the right agency, says Joel L. Fleishman, author of The Foundation: A Great American Secret. Fleishmans reasoning? Red tape, he says. The IRS is the closest thing the country now has to a charity regulator: its job, after all, is to determine which groups dont have to pay taxes. But is that enough? Many thought leaders in the philanthropy world think not. "If you think about it, the IRS is a bureaucracy [whose mission it is to] find the flaws and errors in individual and corporate income taxes," says Fleishman, also the director of the Heyman Center for Ethics, Public Policy, and the Professions at Duke University. Why should it deploy resources to monitor and oversee the nonprofit sector? Good question, many charity lobbyists in Washington agree. Many concur with the opinion that the IRS hasn't been doing nearly enough to stave off charity fraud and scandal in recent years.

But rather than create a new agency, some charity obbyists say, maybe the IRS should do more. In an April 10 letter to lawmakers on federal subcommittees that oversee IRS spending, Independent Sector, a Washington-based coalition of major charities and foundations, urged Congress to give the IRS more money next year so it can do a better job teaching nonprofits how to avert scandal. Independent Sector and others have long opposed the idea of mandatory regulation. Instead, they say, make the IRS do a better job spotting fraud. (No question that charity leaders are feeling the heat, wondering how much longer they can stave off federal intervention: Independent Sector is a staunch supporter of self-regulation.)

But time is running out on the status quo, and the charity sector knows it. Consider, for one thing, the spike in the number of nonprofits and their growing complexity. According to the IRS, there are now 1,709,205 tax-exempt organizations on the books, of which some 1,045,979 were exempt from paying taxes under section 501(c)(3) of the IRS Code. The types of organizations seeking tax-exempt status are
also growing more complex, including political action committees and social enterprise organizations. At the same time, the country stands on the precipice of a projected $41 trillion transfer of wealth by the year 2052, according to a Boston College report; Fleishman estimates that $6 trillion will end up in private foundations.
Perhaps then, says Independent Sector President Diane Aviv and others, its time for a new type of regulatory paradigma champion in the halls of government to help charities grow, self-regulate, and build upon the sectors successes (akin to the way
businesses have worked with the Department of Commerce and the Small Business Administration).

Okay, so if not the IRS, then what? Is a new self-regulatory entity in the offing? Maybe so. One idea gaining fast buzz in Washington comes from Marcus Owens, the former director of the Exempt Organizations Division of the IRS. Owens wants to see the creation of a new quasi-public/private entity that would work with the IRS in much the same way as does the Securities and Exchange Commission (SEC) with the National Association of Securities Dealers (NASD)the private, self-regulatory body created by Congress in 1936 to stem scandal in the stock market. Charities need an
institutional voice within or close to the federal government thats equipped to address issues from a more holistic perspective and not the narrow structure of the federal tax law, Owens says. He plans to more fully outline his idea at a fall conference of New York Universitys National Center on Philanthropy and the Law.

In an interview with CONTIBUTE, Owens said an agency patterned after the NASD could be created for the charity sector by Congressional charter. To fund it, tax-exempt organizations would pay a licensing fee; to keep it independent of charities, members of this new watchdog body would be appointed by the IRS commissioner and the National Association of Attorneys General. It would devise rules governing these tax exempts and their advisors and, as a private group, wouldnt be limited to issues covered by the Internal Revenue Code. This new body also would be able to recruit and compensate skilled attorneys, accountants, and others without constraints of standards for federal employees.

Fleishman and others like the idea. But many of the tax-exempts are skeptical—at least so far. Steve Gunderson, president and CEO of the Council on Foundations, a membership association of grantmaking foundations and corporations, says his constituents are more concerned with avoiding over-regulation—regardless of the entity, whether by the IRS, state attorneys general, or a patchwork of international regulatory bodies. "I will never forget one family foundation conference at which one gentleman stood up and said, If our attempts to do good are going to put us at risk of violating laws we didnt know about, we will revert to just writing checks on December 31," he said.

Owens, for his part, knows his idea also may face challenge because any change to the current regulatory structure would require legislationand, quite probably, months, if not years, of congressional debate. Further, he acknowledges, Congress might not be too keen to lower the excise taxes paid by charities in order to fund a new entity.

But that's not the worst of it. "There are those in the charitable sector who privately may like the idea of underfunded, inefficient, and generally inadequate oversight," Owens told CONTRIBUTE. Beyond a small group of lawyers, academics, and charity experts, he says, there isnt much public awareness of how weak IRS oversight has been, thanks to a lack of enforcement clout and funding.

As backup, there are steps being taken by some of Owens' potential supporters to develop a set of voluntary regulations for nonprofits. Fleishman heads the expert advisory group for the Panel on the Nonprofit, a group formed by the Independent Sector in 2004 as an independent effort by charities and foundations to self-regulate. The group last year submitted 150 different recommendations to Congress, some of which were included in the Pension Protection Act of 2006. The group has a set of principles for self-regulation, including effective governance and financial oversight. Its a first step, says Fleishman. But its not enough. This stuff, he says, needs to be institutionalized. By all indications, it wont be long now.