A key issue for the government is not just collecting more revenue, but also ensuring that tax benefits extended to "this sector of the economy achieve their intended results."
Grassley agreed. "In exchange for these very generous tax breaks, charitable assets should be going to those in need. More and more, we're seeing that some people view charities and charitable gifts as a chance to help themselves, not others," he said.
Growing IRS Concerns Here are examples of possible tax abuse in the nonprofit sector.
Acknowledging that "our enforcement presence faded in the late 1990s," Everson attributed much of the growth of problems to "weak governance practices" among nonprofits and "a culture [in the sector] that has become more casual about compliance [with tax laws] and less resistant to noncompliance."
Everson, who said that the IRS lacks adequate resources to rein in bad conduct, also noted that while the nonprofit sector has evolved and grown over the years, tax law and regulation have changed much less. "Since 1969 there has been only limited review of the rules relating to tax-exempt status," Everson said.
For example, many tax penalties are a function of the tax that should have been paid. When the entity is tax-exempt and thus owes no tax, doubling the taxes owed as a penalty is meaningless.
Also, in some cases, the IRS's only weapon is to revoke an organization's tax exemption -- "a 'remedy' that may work a disproportionate hardship on innocent charitable beneficiaries," Everson said.
Among the most serious problems highlighted by Everson is the growth of entities that allow taxpayers to make a deductible donation but delay shifting the money or other assets to the ultimate charitable beneficiary. These include "donor-advised funds" and "supporting organizations."
Donor-advised funds have been around since the 1930s but have become more popular in recent years, in part because major mutual fund companies have started selling such funds to the general public.
Supporting organizations are charities that support other charitable or tax-exempt organizations. University endowment funds, for example, may be supporting organizations.
There are three categories of supporting organizations, one of which is a particular source of problems because its supporting relationship is "least formalized," Everson said.
Both donor-advised funds and supporting organizations allow donors to take a deduction without requiring that the donation be received by the ultimate beneficiary, leaving assets to be held in the fund or organization and accumulate tax-free. And unlike private foundations, they are not subject to minimum payout rules or prohibitions on self-dealing. "They are, therefore, uniquely tax-favored," a study by the Congressional Research Service last month said.
"We have found that certain promoters encourage individuals to establish purported donor-advised fund arrangements that are used for a taxpayer's personal benefit, and some charities that sponsor these funds may be complicit in the abuse," Everson said.
Supporting-organization abuses include donations of money that is then lent back to the donor, and the possibility of donating assets and then buying them back at a discount, Everson and the CRS observed.
A related problem is the valuation of non-cash assets donated to these and other charities. When such assets are not publicly traded securities, the taxpayer has an incentive to inflate the value, and the charity has little incentive to challenge that. That leaves the IRS with the arduous task of revaluing the donation and then possibly defending its revaluation in court.
Currently, Everson said, the IRS is auditing 50 donors of conservation easements and several exempt organizations that receive such easements. It is doing a "pre-audit review" of 400 open-space easement donations, "to be followed by a similar review of 700 facade easements."
Donation of easements on the facades of houses in historic areas has grown dramatically. The homeowner donates an easement -- giving up the right to alter the facade -- and deducts the amount by which that has reduced the value of the house. But because of restrictions that often already apply to such property, "the taxpayers may, in fact, be giving up nothing, or very little," Everson said. "A taxpayer cannot give up a right that he or she does not have." Such easements have become a significant issue in the District.