IRS vows to step up audits of nonprofits

WASHINGTON -- The chief of the Internal Revenue Service acknowledged yesterday at a US Senate hearing that the agency for years has failed to adequately monitor the tax filings of private foundations and charities and pledged to aggressively step up those efforts starting this summer.

Mark W. Everson, commissioner of the IRS, said the federal tax agency had long seen nonprofits as a ''compliant area," and used its stretched resources instead in sectors that were more likely to produce increased revenue. ''But we can't afford to do that anymore," he told the Senate Finance Committee at a hearing on financial abuses at charities. Everson said the IRS will launch in-depth examinations of 400 foundations in the coming months and is fighting for increased enforcement funding.

While most charities carry out their missions ethically, Everson said, a minority of them are hurting the credibility of the sector. A Globe Spotlight series last year on private foundations revealed numerous instances of foundation executives treating charitable assets as their own, by taking million-dollar salaries, rich pensions, and in some cases using foundation assets to further their business interests.

JJ MacNab, a Bethesda, Md., insurance analyst and co-author of a book on charitable planning, testified before the committee that ''audits are nonexistent" in the nonprofit world. She suggested that nothing will change unless the IRS takes harsh action against charity officials who are found guilty of self-dealing or unethically overseeing nonprofit assets.

''There need to be some examples made. Right now, there is no fear," MacNab said.

The Globe found a $36 million private jet owned by the Arthur S. DeMoss Foundation of Palm Beach, Fla., for the use of its executive director, the wife of the organization's founder. In Needham, Paul C. Cabot Jr. took $5.2 million in pay over five years from a modest foundation started by his father. And in Palm Desert, Calif., Ronald M. Auen and his co-trustees at the H.N. and Frances C. Berger Foundation have taken ''profit sharing" gains from foundation assets -- payments that are prohibited under self-dealing rules but that the group stated plainly on its tax form.

When pressed by the Senate panel as to the scope of the abuse problem, Everson, the IRS chief, was unable to offer a specific dollar amount. In six to 12 months, he said, the IRS should have meaningful data to share. He did say that the IRS, in its request for $300 million in additional funding from the government, estimated a 5-to-1 return on that spending, or at least $1.5 billion in recovered revenue.

MacNab said she finds red flags in about 10 percent of the nonprofit returns she reviews. ''It's my theory that no human actually reviews them," she said.

Everson said the agency audits less than 0.5 percent of the returns for the 1 million charities it is supposed to oversee. ''Have we been slow to respond?" Everson said in response to a question from the committee. ''It's fair to say that this problem has crept up over time, and our response has lagged."

In recent months, the IRS has focused on abuses at credit-counseling organizations, following revelations of abuses in such organizations. Everson predicted yesterday that several of these groups would see their tax-exempt status revoked. This summer, he said, the IRS would be ''contacting hundreds of organizations to assess their compensation policies and procedures." In addition, he said, the agency was delving into the returns of 400 foundations, with the same level of scrutiny being applied to individuals in a current round of US tax audits.

Nonprofit leaders who testified yesterday, while defending the reputation of most charities, agreed with preliminary proposals by the Senate Finance Committee to overhaul tax form 990, which nonprofits file yearly with the IRS. Charity advocates and regulators also agreed with a call for nonprofits to file their returns electronically and to require more timely filing of returns. Often, critics said, tax filings are not publicly available until they are two years old. Everson said the IRS is working on new forms and online filing.

The constituencies agreed on the need for greater IRS funding. At present, foundations pay a 2 percent excise tax that originally was intended to pay for regulatory enforcement, but the money goes instead to the nation's general coffers. Diana Aviv, chief executive of Independent Sector, a trade group for charities, said the nonprofit community also backs increased penalties on charity officers who engage in self-dealing. She and others also pressed for a change in the law to permit greater cooperation between state and federal regulators in overseeing charitable organizations.

William Josephson, assistant attorney general in New York, in charge of charities enforcement, decried the lack of cooperation between state and federal authorities: ''We very much need to be able to work with the IRS," he said. And he urged the Senate to raise the bar for tax exemption by requiring nonprofits periodically to prove they are carrying out their charitable intent. ''Exemption is a privilege, not a right," he said.

Several charity executives yesterday objected to specifics in the finance committee proposal, which by fall could take the shape of a bill, cosponsored by Senate Finance Committee chairman Charles E. Grassley, a Republican from Iowa, and Montana Democrat Max Baucus, the committee's ranking member. For instance, Derek Bok, former president of Harvard University, objected to limiting nonprofit boards to 15 trustees and said specific, arbitrary limits on compensation of trustees could keep top people from signing up for the job.

''I would favor a more limited approach," Bok said.

Grassley is looking for changes at charities in part to shore up President Bush's efforts to have nonprofits, rather than government, handle more social-service needs. Yesterday, Grassley called on the president to support a higher standard for nonprofit governance.

''Just as I've worked with the administration on encouraging greater contributions to charities," Grassley said, ''I hope the administration will work with the finance committee to bring real reform in the nonprofit sector."

Beth Healy can be reached at bhealy@globe.com.