OMB Watch Comments on the Work Group Recommendations to the Panel on the Nonprofit Sector (as posted for public comment on January 24, 2005) Submitted January 28, 2005 These comments on the “Work Group Recommendations” are submitted by OMB Watch, a nonprofit research and advocacy organization dedicated to promoting government accountability and citizen participation in public policy decisions. Thank you for the opportunity to comment on the recommendations. We are very pleased that Independent Sector has provided leadership in addressing oversight and governance issues affecting the nonprofit sector. However, we remain concerned that this process is moving too quickly to incorporate the necessary feedback from nonprofits around the country. While you have made every effort to be transparent, your process remains at times unclear. For example, on your website, the nonprofit community was given until February 18 to comment on the recommendations. Yet on the January 26 conference call you organized, we were encouraged to submit our questions and thoughts by January 28 if we wanted to have an impact on the decisions made by the Panel. We have followed your efforts in a supportive manner, disseminating information about your work and providing commentary when asked. Because we feel so much is at stake, we have treated your request with importance. But it remains unclear how we can be most helpful. We rushed to provide these initial comments on your “Work Group Recommendations to the Panel” without the opportunity to consultant with our constituency because of the limited 48-hour comment period announced on the conference call. Yet even as we completed these comments, we learned that the Panel met today, before our input could be received. This is disquieting. We hope as this initiative moves forward there is greater clarity on the process so that we know how to contribute usefully to this work. The “Work Group Recommendations” demonstrate an enormous amount of work, and we commend the Work Groups for accomplishing so much in so short a time. We like the format for each recommendation, including the Statement of Problem that starts each one. At the same time, we would like to see a preamble that addresses an overall perspective on the problem that is being addressed, including the depth and frequency of the problem. The recent spate of abuses noted by the Senate and press have been largely anecdotal; and while we acknowledge these as real problems, it is not clear whether this is a sector-wide problem or a question of a few bad actors. Additionally, it is not clear whether the problems that do exist can be addressed by existing laws or whether new laws and regulations are needed. Until there is a thorough assessment of governance and oversight in our sector, it is difficult to evaluate the problem that needs to be addressed, the appropriate reforms or solutions, or the priority that should be given to specific recommendations. Consequently, because there has been no real study of incidences of corruption in the nonprofit sector, we do not know if the problem lies in the need for new regulations or simply better education about current rules and increased funding for enforcement. We strongly support your recommendation #14 that “government has a responsibility to fund enforcement of tax laws.” We believe this is such a high priority that it should be identified in the preamble to your recommendations. We all recognize if the very agencies which regulate the sector are not adequately funded and cannot provide enforcement, any new legislation or regulation has little value. While we believe government oversight is the first responsibility in ensuring effective oversight of our sector, we also support leadership by nonprofits to establish practices that foster accountability and encourage transparency. It is essential for the viability of the nonprofit sector that we become increasingly vigilant in regulating our own actions, for they reflect on the larger community. However, self-regulation is no substitute for government regulation and oversight. Serious problems necessitate serious enforcement. We are pleased that recommendation #21 notes that “demonstrating compliance should be commensurate with the size and scale of the organization.” We hope this principle is better woven into the other recommendations instead of being added at the end. We also hope the Panel will keep in mind the need for simplicity and consistency across the rules. The organizations most likely to need to know when they have crossed a threshold and incurred new obligations are smaller organizations without sophisticated legal or administrative tracking systems. The fewer different benchmarks they have to remember to watch for, the better compliance will be. Before we address specific reactions to most of the individual recommendations, we would like to raise some topics that did not make it into this draft. These include, but are not limited to:

1. Lobby rule simplification. OMB Watch strongly encourages nonprofits to engage in public policy. To avoid public confusion about the role of charities, we advocate simplifying the lobby rules for those nonprofits that elect the expenditure test. We strongly support removing the distinction between direct and indirect lobbying so that there is only one expenditure ceiling. We also recommend adjusting that ceiling for inflation.
2. Trustee fees. A number of the media reports raising governance issues stem from foundations paying trustees fees. We believe foundations should eliminate trustee fees or that a reasonable threshold be established.
3. Compensation of family members connected to family foundations. Some recent news stories raise issues about family foundations that have family members receiving compensation for work done for the foundation. Perhaps more research is needed on the extent of compensation and the type of work that is being done. We also believe a discussion should be started on whether this kind of arrangement should be restricted; and, if not, how greater transparency can be brought to the practice.
4. Payouts for endowments. We believe there should be some discussion on extending the private-foundation payout requirements to other types of endowments – perhaps endowments of a certain size or purpose. If the Panel concludes that payouts should not be extended, we would like to see a discussion of the rationale for distinguishing between types of entities.
5. Campaign finance reform issues. With the spate of controversy surrounding the 527 groups and campaign finance reform, we encourage the Panel to be proactive on examining the impact of this issue on the nonprofit sector. In particular, we believe the Panel should address ways to protect issue advocacy by 501(c) (3) organizations.

Reactions to Specific Recommendations Item #1: Certification of IRS information returns The IRS requires that an authorized officer of the organization sign Form 990 under penalties of perjury. The Work Group has suggested that the chief executive officer (CEO) should be required to sign the 990 forms. However, we believe the board chair and/or treasurer should sign the 990. Self-regulation starts with the board and with responsible oversight of the organization. This puts more of a burden on the board officers but will strengthen understanding of organizational financial matters and heighten accountability. Item #2: Penalties for Inaccurate or Incomplete Returns Currently, some nonprofit organizations return their 990s with incomplete or missing information, or do not file at all. This is attributable to a host of reasons, but first and foremost is the complexity of the Form 990. We support efforts to simplify the 990 and to create uniformity with other financial reporting. As for the Work Group’s specific recommendations:

1. We agree completely that existing penalties for failure to complete the forms are sufficient, and that penalties should be extended to the preparers of the Form 990.
2. The Working Group also suggested giving IRS the discretion to suspend or revoke an organization’s tax-exempt status for failure to file. We believe that the organization’s tax exempt status should not be automatically revoked for failure to file. Instead the IRS should retain the discretion to revoke the status after suspension and warning.
3. We agree that the IRS should be required to set up systems and notification procedures in coordination with sector wide assistance; however, we would like to note that this will require additional funding and enforcement.
4. We agree that electronic filing be made mandatory immediately, with the caveat that if electronic reporting is required, the software be made available to nonprofits free of charge. The IRS should not ask nonprofits to pay to file their taxes. (More on e-filing below.)

#4. Electronic Filing We agree with the Work Group that the accuracy and timeliness of reporting could be vastly improved through electronic filing. However, as stated in #21, “Demonstrations of compliance with legal requirements and sector standards of accountability that may be appropriate for large charitable organizations can place significant and sometimes unreasonable time and financial burdens on smaller organizations.” This should be taken into consideration when phasing in electronic filing. Additionally, in section B (1), we recommend striking “make publicly available to facilitate sector self-regulation and state enforcement” and add a new subsection that reads, “all data should be made publicly available in an online, searchable database to facilitate sector self-regulation and state enforcement.” Transparency is the ultimate goal in these regulations, and easy accessibility of the data would help strengthen the sector in the public eye. This should be linked more closely with recommendation #7 regarding public funding for the database. It is very important to emphasize that the database be searchable, downloadable, and free. We would also like to reiterate and emphasize the “Other Consideration,” that Form 990 is flawed and that revisions to the form be made as soon as possible. Many incomplete 990s are the result of the complexity of the current form. #5. Notification Requirement The one-page filing requirement is an undue burden on nonprofits. The individuals who handle the record keeping and funds of small organizations have varying levels of expertise and time. Furthermore, we are concerned about increased government intrusion into the affairs of small community groups. Additionally, we recognize that many states already require nonprofits to file this type of information on a yearly basis. Information-sharing between state regulators and the federal government could eliminate the need to establish a parallel and duplicative process. We encourage you to explore ways that would facilitate the sharing of this type of information between federal and state officials. However, if the notification requirement moves forward, we suggest a form that lists the organization’s identifying information, as well as its board members and yes/no questions regarding the source of funds. If there is a movement to electronically file the yearly notification, we hope that you will take into account the needs of small organizations. One reason some have sought this information is to develop a comprehensive picture of the charitable sector. In that context, we question the exemption for religious organizations. They should also be included in this requirement, as they are a vital and necessary contributor to the nonprofit community. We strongly believe that questions about “best practices” should not be included in the recommendations. “Best practices” have not always proven successful in regulating nonprofits, and, at times, have caused confusion within the sector and among the public when they have been applied. Best practices represent goals, and the diversity of sector demands flexibility in organizational structures and practices. It is not appropriate for government to intrude into the best practices arena. Because government is also a regulator with broad sanction powers, any suggestion of a best practice, no matter how “voluntary,” tends to experience creep, soon showing up in inappropriate settings and applications. #6. Financial Audits and Reviews We support the core recommendation of the Transparency and Financial Accountability Work Group, particularly with regard to the $500,000 trigger for an audit and the consistency with OMB Circular A-133. We also concur with the Expert Advisory Group that the decision on whether to rotate audit firms/partners should be based on factors such as size of the organization. This recommendation should be tied to recommendation #20 on audit committees. Finally, we would recommend a new training program for board members on how to read audits and financial statements. #7. Public Disclosure of Financial Statements We agree with the Work Group’s recommendation that financial statements be available to the public at state charity offices; however, we advocate that the 990 series database be searchable, downloadable, and free. We hope that the recommendation would include a longer-range objective of linking the public database to state-level information in order to assist the public in assessing nonprofit actions. #8. Penalty Tax on Self Dealing To address problems of self-dealing, we question whether stronger enforcement might not be more effective than imposition of stiffer penalties. We are not opposed to stiffer penalties, but the penalties may be raised without the funds to enforce them, rendering them moot. Also, while we realize the abatement of first-tier taxes may be appropriate in given situations, there needs to be far greater definition of the “appropriate circumstances” that justify the abatement. We also believe there should be a thorough review of whether existing definitions of self-dealing are adequate. Such a review should be undertaken with the notion of possibly broadening the definition. #9. Type III Supporting Organizations We are comfortable with the Work Group’s recommendation. #10. Donor Advised Funds Donor-advised funds have become a significant force in institutional philanthropy, and as such, they pose both enormous opportunities and great challenges for the field. We agree very strongly that attention to actual or potential abuses of these increasingly popular donor vehicles is long overdue and should be a very high priority of the Panel. Many of the issues raised, however, require much deeper examination and discussion before responsible recommendations can be made. We could not agree more that the public must be assured that the funds are really being put to use for charitable purposes. The “parking” issue absolutely must be addressed. The minimum payout recommendation has great merit, but many unanswered questions would first need to be resolved, both practical and philosophical. For example, one key issue revolves around subjecting only donor-advised funds to the payout requirement, not other funds or endowments held by public charities. The forfeiture recommendation, too, has arguments in its favor and but also drawbacks. The money now going into such funds is so large but so opaque that we are also not ready to reject donor disclosure out of hand. We understand and very much support the arguments for donor anonymity, but if the parking issue cannot be satisfactorily addressed, greater transparency may be a necessary alternative. In addition, opacity raises issues for grantseekers hoping to access these funds and for a suspicious public increasingly skeptical about philanthropy. Finally, as a matter of process, we would also like to express concern that the Work Group considering this topic is heavily skewed towards the perspective of the legal community and the administering charities that raise and hold these funds. The lack of representation by the grantee community is apparent in the group’s deliberations. #11. Tax Shelters We agree with the Work Group that the Senate Finance Committee’s proposal to penalize participation in tax shelters through revocation of section 170 status of charities is inappropriate. More regulation is not necessary -- the IRS needs the ability and funds to enforce the current tax shelter regulation. #12. State Enforcement of Federal Laws We support the comments of the Expert Advisory Group. We are eager for coordinated efforts to enforce federal law so that there is uniformity across states. At the same time, we would hope that the Panel makes clear that the federal government has the primary responsibility for enforcement, but that states are also encouraged to pursue enforcement. This has the positive effect of encouraging state actions when there is weaken federal enforcement, and vice versa.

1. We also believe the Panel should recommend resources for state enforcement. This could relate to recommendation #14 and one use of the private foundation excise tax. (See discussion below.).
2. The excise tax should not just cover the activities at the federal level, but instead a range of activities, such as grants to the states, administered by the Treasury Department.

#13. Standards for the Imposition of Penalties on Organization Managers. We agree with the Expert Advisory Committee’s recommendations. #14. Funding for Federal and State Enforcement As stated previously, we believe a key problem is the lack of funding and enforcement of current regulations. We believe item #3 needs greater detail Even if the excise tax is flattened to one percent, these resources should be used for a combination of federal oversight, grants to states to help undertake enforcement actions, and to organizations engaged in issues central to nonprofit sector oversight and governance, including research. #15. Information Sharing between Federal and State Officials Disclosure to the state attorneys general and other state officials will be highly beneficial to strengthen accountability. We also agree with the Expert Advisory Group that these officials should have the same access that state revenue officials have under present law. The Work Group’s concern about unauthorized disclosure could be addressed through penalties for the improper release of protected material. #16. Public Disclosure of IRS Determinations We agree with the Expert Advisory Group that the public disclosure of IRS determinations will help the transparency and accountability of the sector and enhance the community in the public eye. And we appreciate the consideration of redaction. #17. Criteria for Determining Standards of Self-Regulation We continue to believe that government enforcement is the top priority. However, it does not obviate the need for nonprofits to determine standards for self-regulation. We caution the Panel about this effort leading to a nonprofit community that becomes its own police force. #18. Whistleblower Protection We support the recommendation as well as the comments from the Expert Advisory Group. We would also like to see a discussion about support for whistleblowers in government agencies who speak out on issues pertaining to treatment of nonprofits, including inappropriately targeted audits. #19. Conflict of Interest Policy Disclosure We strongly support the Work Group recommendation and concur with the Expert Advisory Group’s recommendation to develop model conflict of interest policy provisions. #20. Audit Committee We support this recommendation and the comments of the Expert Advisory Group. We would also add that the audit committee should work closely with the board treasurer regarding internal organizational issues. #21. Small Organizations We concur with this recommendation. As stated above, we believe the principle articulated here should be discussed within the context of the other recommendations. We would like to draw attention to the comment by the Expert Advisory Group that extends this principle to family foundations and the lack of need for independent board members. As described at the beginning of these comments, we believe family foundation issues need further exploration.