Congressional Hearing of IRS Monitoring of Nonprofits

Representative Charles Boustany Jr. (R – LA) has called a hearing of the House Ways and Means Committee scheduled for next week to discuss tax-exempt organizations and concern that the IRS has not been aggressive enough in monitoring charity abuses.

Up for discussion are items outlined in Boustany’s letter to the IRS sent October 6, 2011 as follows:

• How many tax-exempt organizations have been audited since 2008 and what issues were identified?
• How has the redesigned Form 990 increased transparency and accountability?
• Analysis of unrelated business income, revenues and the value of assets held by nonprofits for the years 2008 – 2010.
• What is the process for following up on allegations of excessive political campaign activity?
• Discussion of the level of charity care provided by all hospitals.

Click here to see the entire letter.

Per the Ways and Means Committee website, nonprofits are invited to submit their opinions on the topics by written statement. In order to submit your thoughts, go to the Committee homepage, http://waysandmeans.house.gov, select “Hearings.” Select the hearing for which you would like to submit, and click on the link entitled, “Click here to provide a submission for the record.” Once you have followed the online instructions, submit all requested information. ATTACH your submission as a Word document, in compliance with the formatting requirements listed below, by the close of business on Wednesday, May 30, 2012.The hearing will take place on Wednesday, May 16, 2012, in Room 1100 of the Longworth House Office Building, beginning at 10:00 A.M.

See specific formatting requirements for submissions and more details on the hearings here.

Additional Source: Chronicle of Philanthropy

Faith-based Organizations and Political Candidates: What Are the Rules?

In an election year, lots of questions come up about what churches and religious organizations can and can’t do in regards to politics.  Can pastors outside of their church speak on behalf of a candidate?  Is it ok to introduce a candidate during a worship service?  Are ministers permitted to preach on hot topics being addressed by candidates? Can houses of worship invite candidates to speak during normal worship services?  The IRS provides guidance in its Tax Guide for Churches and Religious Organizations. The section covering political activities begins on page 7.  There are many helpful examples. Violations of the IRS rules could put the organization’s 501(c)(3) status at risk!

“World’s Largest Global Hack Ever” of Nonprofits and Governmental Entities

The Nonprofit Quarterly is reporting that “the computer security company McAfee has issued a 14-page report describing what is being called the world’s largest ‘global hack’ ever.” Bloomberg is calling it a “Hacker Armageddon” that will force security software companies to revamp.

The revealing of this 5 year long series of attacks on governmental and nonprofits has caused many to step forward to claim that while there were attacks sustained, their networks are secure, such as the World Anti-Doping Agency reported to the Associated Press in the Washington Post. 

McAfee is calling the hacking campaign “Operation Shady RAT” (an apt acronym for “remote access tool”) and has traced activity back to 2006 across 72 global organizations across 14 countries that appear as widespread as the United Nations, the International Olympic Committee, two unnamed think tanks, one political nonprofit, Lockheed and RSA Security, among others. The details show that the hackers had access for months in some cases.

The director of malware research for Dell SecureWorks, Joe Stewart, traced the activity to networks in Beijing and Shanghai according to PCWorld. The Chinese government is denying involvement and saying it is not responsible for the accessing of hundreds of Gmail accounts. Google announcedin June that it had disrupted a targeted phishing campaign designed to hijack Gmail accounts belonging to governmental, military, and activist individuals.

McAfee has made a distinction between the RAT group and the recent wave of less sophisticated attacks from cyber activist groups such as Anonymous and LulzSec in its report. The report continues to note, “what we have witnessed over the past five to six years has been nothing short of a historically unprecedented transfer of wealth – closely guarded national secrets (including from classified government networks), source code, bug databases, email archives, negotiation plans and exploration details for new oil and gas field auctions, document stores, legal contracts, SCADA configurations, design schematics and much more…” A few pages later the report continues, “After painstaking analysis of the logs, even we were surprised by the enormous diversity of the victim organizations and were taken aback by the audacity of the perpetrators.”

McAffee states that its goal in releasing this report, including specific names of entities that were targeted, is to raise the level of public awareness – especially since voluntary disclosures from victims is unlikely. Written by Dmitri Alperovitch, McAfee’s VP of Threat Research, the report ends with the quote “This is a problem of massive scale that affects nearly every industry and sector of the economies of numerous countries, and the only organizations that are exempt from this threat are those that don’t have anything valuable or interesting worth stealing.”

Fiesta Bowl Fighting for Tax Exempt Status

The Tostitos Fiesta Bowl is organized as a public charity – with 501(c)(3) status.  The bowl sent letters June 30 to 31 state politicians explaining that providing tickets and luxury travel to bowl games all over the country may not have been within the tax exempt purpose of the Fiesta Bowl.  In its fight to retain its tax exempt status, the Fiesta Bowl has put every politician they worked with in a very awkward position.  The Bowl is asking them to explain how their acceptance of the benefits contributed to the mission of the organization.  The letter sent out included a list of politicians and the estimated amount of benefits received.  Topping the list was Republican Russell Pearce, the Arizona Senate President, claimed as $39,347.  One of the other irregularities pointed out in an investigation by a committee of the Bowl’s board, was reimbursing employees for political campaign contributions.   Read the article on ESPN.

The Committee on Ways and Means believes the IRS is unfairly threatening political speech

The Chairman of the House Ways and Means Committee, Dave Camp, has released his letter to the IRS regarding its recent increased scrutiny of 501(c)(4) organizations. As recently noted in a previous post on this topic, the IRS is considering notifying donors of civic leagues and social welfare organizations that engage in significant political activity that these donations may be retroactively subjected to gift tax. Chairman Camp believes that this sudden interest on behalf of the IRS is selectively targeting certain taxpayers engaged in protected political speech. He goes on to say that the IRS’ involvement threatens its “credibility as an impartial enforcer of the nation’s tax law”.

After decades of silence on the issue of the applicability (or violation) of the gift tax laws, the recent about-face by the agency raises concerns about their intent that the chairman believes the committee has an obligation to pursue. His letter to the agency includes a number of questions and requests that he requires a response to within the month. These include: the names and titles of all individuals involved in the recent decision to investigate 501(c)(4) donors; copies of all internal memoranda regarding the applicability of the gift tax to c4 organizations; the criteria utilized in selecting taxpayers for gift tax examination; all information analyzing the legal or political consequences of gift tax audits of contributions to c4 organizations; and any correspondence between the IRS and the Dept. of the Treasury. Many of the questions seem to suggest possible conflicts of interest although no such statement is directly made.

Corporate Campaign Contributions

A federal judge struck down a long-time ban on corporate contributions directly to political campaigns. The ruling is based on the precedent set by the reversal of Citizens United v. Federal Election Commission.  This constitutes an enormous step in how political campaigns are funded. The Citizens United reversal ruling established that it was unconstitutional to ban corporations from engaging in political activity. The reversal means that corporations can now spend unlimited funds towards political objectives – so long as it is not a direct campaign contribution. Or that’s how it was. Now this new ruling is striking down the ban on direct campaign contributions. There are still legal limits that a corporation would have to adhere to that would match the annual limits of any individual contribution.

The ruling is likely to be appealed to the Supreme Court and legal blogs are in a tizzy over the likelihood of it being overturned.

501(c)(4) Lobbying and Political Activity Puts Donors On the Hook

The IRS is leaping into the political fray by notifying donors that their contributions to 501(c)(4)’s may be retroactively subject to gift tax.

501(c)(4)’s are organizations and civic leagues created to promote social welfare (such as AARP or NAACP). They run in a similar manner to 501(c)(3)’s with a few key distinctions. Both are nonprofit and exempt from federal income tax, but 501(c)(4)’s can engage in an unlimited amount of lobbying.  Donations to 501(c)(4)’s that are public entities may be deductible if they are used for public service but the majority of 501(c)(4) donations are not deductible.

501(c)(3)’s are required to disclose substantial contributors but 501(c)(4)’s are not which has resulted in some controversy. Many donors that wish for their political agendas to remain anonymous may contribute large sums with little to no transparency. New groups were formed once Citizens United v. Federal Election Commission, the Supreme Court ruling that struck down limits on corporate campaign spending, occurred. There seems to be many leaks sprouting in the effort to curtail corruption and the ability to buy influence.

The IRS specifically cautions that “the promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. However, a section 501(c)(4) social welfare organization may engage in some political activities, so long as that is not its primary activity. However, any expenditure it makes for political activities may be subject to tax…” The agency’s 2011 work plan included expanding monitoring of political activity – especially 501(c)(4)’s “founded by party strategists and financed with large individual, corporate and labor union checks” reports politico.com. The effect may be a drop in this type of donation as the reality of the tax implications sets in. The stepped up enforcement serves as “a powerful signal to the outside groups that the regulators will be on duty during the presidential campaign season”, according to Politico.

WHAT IS THE EFFECT OF CITIZENS UNITED ON POLITICAL ACTIVITIES OF NONPROFIT CHARITES AND PRIVATE FOUNDATIONS?

President Obama brought the flak around the recent Supreme Court case Citizens United vs. Federal Election Commission to an even higher crescendo when he made a pointed remark during his first State of the Union address criticizing the ruling while a majority of the Court was seated directly In front of him.  So, with all this excitement, headlines in the papers and general hoopla over the case, what you want to know is, how does this ruling affect me as a 501(c)(3) public charity or private foundation? 

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