The Panel on the Nonprofit Sector presented its Final Report to Senate Finance Committee Chairman Sen. Charles Grassley and Ranking Member Sen. Max Baucus on June 22, 2005.  The report recommends more than 120 actions to be taken by Congress, the Internal Revenue Service and charitable organizations in order to strengthen the sector’s transparency, governance and accountability.  The Final Report amends the Interim Report released on March 1, 2005 and discussed in earlier posts.

Among the Panel’s recommendations:

For Congressional Action:

• Amend federal tax laws to permit the IRS to require all charitable organizations to file their Form 990 returns electronically.
• Amend federal tax laws to require all 501(c)(3) organizations currently excused from filing an annual information return because their annual gross receipts fall below the specified amount (currently, below $25,000) to file an annual notice with the IRS with basic contact and financial information.
• Amend federal tax laws to require charitable organizations to notify the IRS if and when they cease operations and to file a final Form 990 return.
• Direct the Treasury to require that Form 1023 be filed electronically.
• Amend federal tax laws to require charitable organizations with at least $1 million or more in total annual revenues to conduct an audit and attach audited financial statements to their Form 990 returns, and to require organizations with annual revenues between $250,000 and $1 million to have financial statements reviewed by an independent public accountant.
• Define and regulate donor-advised funds, including aggregate minimum distributions, minimum fund activity requirements, and prohibition of private benefit transactions.
• Allow a charitable deduction for a contribution to a donor-advised fund only if the donor has a written agreement with the sponsoring charity confirming that the sponsoring charity has exclusive legal control over the fund and that neither the donor, the advisor, nor any related party may receive any substantial benefit in return for or in connection with a distribution recommendation.
• Direct the Treasury to amend regulations by (1) requiring each Type III supporting organization to distribute annually to or for the benefit of its supported organization(s) an amount equivalent to 5 percent of its net assets, excluding assets used directly to support the charitable purposes of the supported organization(s); (2) prohibiting grants, loans, compensation, and any other payments from a Type III supporting organization to, or for the benefit of, the donor or any related party; (3) prohibiting Type III supporting organizations from supporting more than five qualified entities.
• Ensure appropriate sanctions are imposed on charities and other tax-exempt entities that participate in abusive tax shelters.
• Strengthen the definition of a qualified appraisal and a qualified appraiser for purposes of substantiating the value of deductions claimed for donated property.
• Expand penalties on taxpayers who claim a tax deduction for donated property to include a penalty of 10 percent of the amount of the tax not properly paid if the claimed value of the donated property exceeds the correct value of the property by 50 percent or more.
• Allow deductions for conservation or historic facade easement donations only if they are made to a qualified charity or government entity under the terms of a written agreement specifying the restrictions on the future use of the property once the donation is accepted.
• Impose penalties on board members and other managers of charitable organizations who approve self-dealing or excess benefit transactions, including excessive compensation, not only if they knew that the transaction was improper, but also if they "should have known" that it was improper – that is, if they failed to exercise reasonable care, such as following the "rebuttable presumption" procedures or other appropriate processes, in determining the reasonableness of compensation.
• Increase penalties on board members and managers of charitable organizations who approve self-dealing or excess benefit transactions, including excessive compensation.
• Prohibit loans to board members by public charities.
• Direct the Treasury to amend regulations to require a qualifying organization (under IRC 501(c)(3)), with certain exclusions, to have a minimum of three members on its governing board;
• Direct the Treasury to amend regulations to require, with certain exclusions, that at least one-third of the members of a qualifying public charity’s governing board be independent.

The Panel recommends that Congress should not take action on the following proposals included in the Senate Finance Committee discussion draft of June 2004 and/or the Joint Committee on Taxation report dated January 27, 2005.

For IRS Action:

• Revise the format and instructions of the Form 990 returns to ensure accurate, complete, timely, consistent and informative reporting, and to provide clear information needed by state and federal regulators to enforce laws governing charitable organization.
• Revise Form 990-PF to distinguish between expenditures related to charitable program-related activities, grantmaking activities, general administrative operations and investments.
• Enforce existing financial penalties imposed on organizations or organization managers for failure to file complete or accurate returns, with appropriate provision for abatement of penalties if the errors and omissions are unintentional.
• Establish a list of the value that taxpayers can claim for specific items of clothing and household goods, based on the sale price of such items identified by major thrift store operations or other similar assessments.

For Charitable Organization Action:

The board of a charitable organization should:

• Review the organization’s Form 990 or 990-PF annually.
• Undertake a full review of its organizational and governing instruments, key financial transactions, and compensation policies and practices at least once every five years.
• Include individuals with some financial literacy in its membership.
• Incorporate into the organization’s governing documents a requirement that the full board must approve, annually and in advance, the compensation of the CEO, unless there is a multi-year contract in force or there is no change in the compensation except for an inflation or cost-of-living adjustment.
• Review, or have its compensation committee review, the organization’s staff compensation program periodically, including the salary ranges for particular positions and the benefits provided.
• Review its size periodically to determine the most appropriate size to ensure effective governance and to meet the organization’s goals and objectives.
• Ensure that the positions of CEO, board chair, and board treasurer are held by separate individuals.

The organization should:

• Provide detailed information about its operations, including methods used to evaluate the outcomes of programs, and other statements available to the public through its annual report, website, and other means.
• Provide the city of residence of each board member, along with his or her full name, on its annual Form 990 or 990-PF.
• Establish and implement policies that provide clear guidance on its travel rules, including the types of expenses that can be paid for or reimbursed and the documentation required.
• Prohibit payment or reimbursement of travel expenses for spouses, dependents, or others who are accompanying individuals conducting business for the organization.
• Adopt and enforce a conflict of interest policy consistent with the laws of its state and tailored to its specific organizational needs and characteristics.
• Establish policies and procedures that encourage individuals to come forward with credible information on illegal practices or violations of adopted policies of the organization, including the provision of protection of the individual who makes such a report from retaliation.

The charitable sector should:

• Educate, in partnership with the IRS and state oversight officials, charitable organizations about financial transactions that are potentially abusive tax shelters and the additional reporting requirements and risks such transactions may pose.
• Provide information and education to organizations on the roles and responsibilities of board members and the factors that boards should consider in evaluating the appropriate size and structure needed to ensure the most effective, responsible governance.
• Educate charitable organizations about the importance of the auditing function.
• Educate and encourage all charitable organizations regardless of size, to adopt and enforce policies and procedures to address possible conflicts of interest and to facilitate reporting of suspected malfeasance and misconduct by organization managers.

Click here for a copy of the Final Report.

Click here for the Chronicle of Philanthropy Update (June 22, 2005).