May 4, 2022
A Senate Finance Subcommittee held a hearing on May 4th about the IRS’s inability to enforce disclosure laws on tax-exempt organizations, which allowed these groups to illegally partake in political discourse and garner larger donations.
“A very important piece of information [on disclosure] that we require to be good citizens of the United States is to know who the hell is behind the megaphone that is blaring at us,” said Senator Sheldon Whitehouse (D-RI), who chairs the Senate Finance Subcommittee on Taxation and IRS Oversight.
Disclosure issues raised during the hearing were not aimed to just one class of tax-exempt organization. Problems with nearly all 501(c) groups were discussed. However, much of the discussion focused on 501(c)(4) groups.
Senator Whitehouse illustrated how 501(c)(4) tax-exempt groups can circumvent contribution limits by giving half of the donations to a political organization and the other half to another tax-exempt group. The new group mimics the first group in divvying-up the money received (half to a political organization and the other half to another tax-exempt organization). The cycle continues until all the money is gone.
“You have a spin-cycle of donations that at the end of the day the donor would have achieved the goal of getting 96.75% of his money into politics not withstanding the 50% [donation] restriction,” the Senator said.
Lawmakers called for the enactment of the Disclosure Act, which would require organizations spending money in federal elections to disclose their donors. It is not clear if this bill will get a vote in either the House or the Senate.
Whitehouse ended the hearing without stating what his next steps will be on the issue of disclosure.
Enforcement Falls, Donations Increase:
One of today’s witnesses, Philip Hackney, an Associate Professor of Law University of Pittsburgh School of Law who recently worked in the Office of the Chief Counsel at the IRS in Washington D.C., told the Subcommittee that the IRS does not have the resources, human or capital, needed to enforce the current tax law. Also, the IRS places low budget priority on the exempt organization sector likely because it delivers little in tax revenue.
Recent scandals involving the IRS prompted lawmakers to provide less funding to the agency. Overall, the IRS budget fell by 20% in real (inflation adjusted) dollars between 2010 and 2018. This resulted in a 22% decrease in employees working at the agency, and a 30% decline in enforcement employees, according to Hackney.
Enforcement of tax-exempts took a hit as well.
“The IRS workforce on exempt organization matters shrank about 5% from 2010 (889 full time equivalent employees (FTEs)) to 2013 (842 FTEs). That workforce then shrank significantly to around 550 FTEs by FY 2019. There was a change in the exempt organizations group at the IRS after the Tea Party controversy of 2013 where many employees of exempt organizations moved over to the Chief Counsel to manage guidance projects from that office,” Hackney said.
As the IRS tax-exempt workforce eroded, the tax-exempt sector itself flourished.
“A look at IRS data from Forms 990 suggests assets and revenue have increased quite a bit in the sector over the decade,” Hackney said.
According to the data supplied by Hackney, in 2010 there were a little over 186,000 charitable organization that filed Form 990s. The charitable sector held over $2.9 trillion in assets and almost $1.6 trillion in revenue. In 2017, over 217,000 charitable organizations filed Form 990s and reported over $4.3 trillion in assets with almost $2.3 trillion in revenue.
More information on tax-exempts is here.
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