There are close to two million organizations in the United States that qualify as tax-exempt. They hold an estimated 2.5 trillion in assets and employ approximately 10% of the U.S. workforce.
Tax-exempt organizations—most of which are designated as 501(c)(3) by the tax code—are a significant economic presence in the nation, but most of the laws that regulate them are a century old and may need to be brought into line with today’s realities, according to Catholic University law school Professor Roger Colinvaux.
Invited to testify on May 21 by the House Subcommittee on Oversight of the Committee on Ways and Means, Colinvaux was among five experts in the field asked to share their views on whether the current regulatory scheme regarding tax exempt organizations still makes sense.
“(C)(3s) are a sector, with its share of business interests, bad actors, and vested interests as well,” Colinvaux testified before Rep. Charles W. Boustany Jr. (R-LA), chair of the subcommittee. “In part for this reason, the law governing our tax-exempt interests is increasingly complex and also adrift. I’m here today to express my concern that the law is developing without a clear sense of the federal role for a tax policy toward (C) (3) organizations.”
Colinvaux’s opinions are sought by lawmakers in part because of his recent scholarship analyzing legislative trends in the sector – which was cited by lawmakers during the hearing. Colinvaux also served as legislation counsel with the Joint Committee on Taxation from 2001-2008 and played an important role in the charitable giving and reform provisions in the Pension Protection Act of 2006.
Noting that it’s relatively easy to become a (c)(3) and remain one, the CUA Law tax professor said that historically, federal law has proscribed certain activities by tax exempt organizations, but required little from them in an affirmative sense.
“We don’t say that they must do anything to secure their status,” he said.
Colinvaux recommended that Congress grant the IRS greater scope within its toolbox for dealing with malfeasance in the (c)(3) sector. Currently, the agency can take the drastic step of revoking tax-exempt status, but largely lacks the ability to impose in-between measures.
“The results are legal standards that facilitate growth but are somewhat limited in oversight capability, in large part because there is not much for the IRS to measure. This can lead to problems and it has,” observed Colinvaux.
Last fall, Chairman Boustany asked the IRS to provide information related to the agency’s administration and oversight of tax-exempt organizations, including charitable organizations.
“Oversight of the tax-exempt sector has been an area that both Republicans and Democrats agree needs greater attention,” said Boustany.
According to Colinvaux, in recent years Congress has shown a preference for brighter enforcement lines and more intermediate sanctions, indicating its impatience with the current facts and circumstances approach to enforcement.
He urged lawmakers to shift tax policy focus to consider whether the eligibility standards for other tax benefits, especially the charitable deduction, should be tightened, including by changing from a deduction to a credit.
“Focusing on the tax policy in support of charitable donations would lead, appropriately in my view, to greater emphasis on promoting activities, such as certain types or levels of output of public goods, rather than merely curbing abuses,” said Colinvaux.
The hearing was the first in a series of hearings by the Subcommittee on the tax-exempt sector and IRS oversight of tax-exempt activities.