Non-Profit SOX Is An Unnecessary Evil

Unless you've been living under a rock for the past year, you know that Congress is well on its way to enacting a kind of Sarbanes-Oxley law for the non-profit sector. Recent scandals involving several high-profile charities have triggered a reform movement that will not be satisfied until Congress passes new laws. The charity establishment (in the form of the Independent Sector, a coalition of the country's leading non-profits) saw the writing on the wall and quickly responded to the Senate Finance Committee's invitation to make recommendations. The result is a hefty report from our side containing many specific suggestions for new rules, guidelines, statutes, safe harbors and the like. The Independent Sector used a lot of paper, legal fees and staff time to achieve this.

Yet, there are a few voices amid the clamor that claim none of this is necessary. They make the simple point that all we need to get the non-profit sector back on track is better enforcement of existing laws. They have a point.

These voices point out that the IRS, the lead agency charged with keeping charities and foundations in line, hasn't been enforcing existing law. By its commissioner's own admission the agency hasn't had the resources in recent years to properly oversee the sector. And others cite a years-long reorganization of the agency's Tax Exempt and Government Entities Division (TE/GE Division) as a huge distraction from enforcement. Less than scrupulous accountants, consultants and lawyers took note of the resulting enforcement vacuum and then proceeded to fill it with shady practices that eventually caught the public's and Congress' attention.

Hence, we're faced with more legislation. The contrarians say we don't need it. They argue for two changes, both of which could solve these problems without an entirely new regulatory scheme. First, they would give the IRS commissioner the staff and funds he says he needs to do his job. The only legislation required would be an appropriation. (While they're at it Congress also could direct him to stop shuffling the cubicles at the TE/GE Division and get down to work.)

Second, they would officially designate the director of the TE/GE Division as the Charity Ombudsman (or some equally obvious title) and publicize his or her name and address in every IRS document and public service announcement they can think of. The whistleblower protection statute is already on the books, so no new legislation is necessary to protect them. But insiders with stories to tell of cooked books or other bad acts do need to know who to call to report misdeeds. Publicizing the address it already has for such complaints--IRS-EO Classification, 100 Commerce Street, MC 4900 DAL, Dallas, TX 75242--would be an inexpensive and effective solution. Just put a name and a face with it.

The first suggestion, as reasonable as it sounds, could be politically unappealing because it would mean giving more money to the IRS, a widely demonized agency that some in Congress would like to abolish. The second suggestion, a Charity Ombudsman, should receive support because it would encourage a complaint-driven enforcement scheme that works well elsewhere in government. The FCC relies on complaints from the public to enforce its closed-captioning rules and its broadcast-indecency rules. The government relies on complaints from the public to enforce the Americans with Disabilities Act to assure accessibility of public accommodations to the handicapped. The IRS could take the same approach in regulating non-profits.

The IRS doesn't have to abandon its auditing function, nor its tweaking of the forms it requires non-profits to file. But it should actively encourage and then actually respond to public complaints. A complaint-driven approach is inherently broad and will catch abuses that the stodgy audit system misses. It will certainly keep charities on their toes more than the statistically low chance of an audit does now. It's true that complaints will tend to focus on the higher-profile or controversial non-profits and could result in arbitrary enforcement. But it's also true that audits and reporting requirements can have the same result. The IRS should use both approaches.

The momentum in Congress is to enact comprehensive non-profit legislation, and it might be that there's a need for it. But the contrarians have a few good ideas too. Less might be more.



Bruce D. Collins

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