Lawmakers considered how best to increase transparency around tax-exempt organizations’ activities and funding mechanisms at a July 23 hearing — amid calls to revamp Form 990 and move forward on legislation limiting 501(c)(3) status.
According to House Ways and Means Oversight Subcommittee Chair David Schweikert (R-AZ), “17% of the US economy is in the tax-exempt space.” He added that there’s a “history of very bad actors using that as a way to wash money” because of the reduced reporting requirements. Schweikert asked whether “we created a vacuum” that allows for “shadow financing,” and if so, how lawmakers should move forward. He indicated that Hill staff would be looking at the issue during the August recess.
Revamping Form 990.
One recurring critique during the hearing was the lack of detail required on IRS Form 990. Schweikert asked witnesses what changes could be made to the form to better understand the “community good” that comes from a tax-exempt organization. “We have very little information” on the “good that has been done for getting the value of that tax exemption,” said Schweikert.
Lara Burns, Head of Terrorism Research at George Washington University, suggested upping oversight and reporting requirements for gifts-in-kind. Burns explained that “in reviewing available IRS Form 990s on several organizations who’ve been accused of supporting Hamas, several entities have reported a large percent of their revenue is coming from medical supplies in the form of gifts-in-kind.” But there is “little information to verify the nature of supplies, how they were dispersed, or to whom.”
The gift-in-kind mechanism allows 501(c)(3) organizations to fund donations of large shipments of goods — such as medical supplies — while providing “very few details about the entity that’s donating the shipment” and “where the shipment is going,” said Burns. There is “no real verifiable information” on whether “what was claimed to be in those shipments actually existed.”
Burns called for enhanced reporting requirements for tax-exempt organizations, particularly those operating in conflict zones, to increase transparency and help identify “potential illicit funds” coming into and going out of these organizations.
Oren Segal, Vice President at the Anti-Defamation League, told lawmakers that another big issue is nonprofit “fiscal sponsors” serving as “pass-throughs.” He said sponsor organizations “must exercise oversight and provide information on their projects,” including “the funding they receive and where that money is spent.”
The “easy part,” said Segal, is seeing what organizations benefiting from 501(c)(3) fiscal sponsorship are doing — “they’re promoting extremism, they’re promoting terrorism.” But it’s more “difficult” to see “exactly where the money is coming from,” he explained.
Segal asked Congress and the IRS to thoroughly review a list of fiscal sponsors identified by the Anti-Defamation League and “ensure compliance with existing laws and greater transparency and oversight moving forward.” Segal specifically called out the Westchester Peace Action Committee (WESPAC), which he said operates as a 501(c)(3) and “is lending that same status to the projects that it is funding without them having to declare what they’re doing.”
Legislation limiting tax-exempt status, requiring funding disclosure.
Another suggestion offered by Segal was for Congress to move forward with legislation (HR 6408) that would amend Code Sec. 501(p), which currently prohibits tax-exempt status for terrorist organizations. That bill would expand the prohibition to “terrorist supporting organizations” — defined as those providing “material support or resources” to a terrorist organization “in excess of a de minimis amount.”
Introduced by Representatives David Kustoff (R-TN) and Brad Schneider (D-IL), the bill passed the House with overwhelming bipartisan support back in April. “Engaging in antisemitism” should preclude groups from maintaining 501(c)(3) status, explained Segal. Schneider agreed, adding that “it’s imperative” that we don’t make antisemitism a partisan issue.
And in May, Ways and Means advanced a package of legislation aimed at increasing transparency around how tax-exempt organizations raise and spend money. Lawmakers on both sides of the aisle widely supported two bills that target exempt organization spending — the Foreign Grant Reporting Act (HR 8290), sponsored by Representative Lloyd Smucker (R-PA), and the No Foreign Election Interference Act (HR 8314), sponsored by Representative Nicole Malliotakis (R-NY).
Schweikert sponsored a third bill targeting exempt organization funding, the American Donor Privacy and Foreign Funding Transparency Act (HR 8293), which advanced with a 23-16 vote. That bill would require certain 501(c) organizations to provide information about contributions from foreign sources on their tax returns.
Smith targets Chamber Foundation.
Ways and Means Chair Jason Smith (R-MO) is also prioritizing greater transparency around tax-exempt organizations. Smith sent a letter on Monday to Chamber of Commerce Foundation President Michael Carney asking about its ties to the Tides Foundation — which he blames for recent antisemitic activities on US college campuses.
In the letter, Smith asks whether the Chamber Foundation, a 501(c)(3), “was previously aware of the Tides Foundation’s partners prior to accepting contributions through their [Donor Advised Funds] DAF.” He also asks Carney about the Chamber Foundation’s “due diligence process” for contributors, its standards for declining contributions, and its history of declining contributions. Smith requests a response by August 5.
The letter follows up on a May 6 letter Smith sent asking about funds the Chamber Foundation received from the Tides Foundation, whether it shares Tides’ “vision,” and what the donated funds were used for.
For more on exempt organization information returns, see Checkpoint’s Federal Tax Coordinator ¶ S-2800 et seq. For more on “terrorist organizations” defined for purposes of IRS’ suspension of the organization’s tax-exempt status, see ¶ D-4066.
Get all the latest tax, accounting, audit, and corporate finance news with Checkpoint Edge. Sign up for a free 7-day trial today.
