Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, June 20, 1995 TAG: 9506210058
SECTION: NATIONAL/INTERNATIONAL PAGE: A-1 EDITION: METRO
SOURCE: ASSOCIATED PRESS
DATELINE: WASHINGTON LENGTH: Medium
A lot of money is involved. Nonprofits raise nearly $700 billion annually, about 10 percent of the gross domestic product, according to the IRS.
To better understand how nonprofits operate and better police their fund raising, the tax agency has been sending specialized teams of agents to conduct line-by-line examinations of tax-exempt groups' ledgers.
``We realized we were faced with an exceedingly sophisticated group of organizations,'' said Marc Owens, director of the IRS Exempt Organizations Division. ``There was some reason to be concerned [about] what the ultimate goal of the organization was: whether you were really looking at a tax-exempt anymore.''
The service is particularly interested in the 15 percent of the estimated 1.1 million nonprofits that account for half the sector's revenue. Hospitals and universities often fall in that category. So do two high-profile organizations targeted by the program: the National Rifle Association and the American Association of Retired Persons.
At issue in many cases is the distinction between tax-free royalties and business income unrelated to a nonprofit's mission.
Nonprofit groups say growing missions and shrinking resources require them to seek new sources of revenue, such as selling their mailing lists and allowing their logos to appear on credit cards and other products.
``If we have to pay taxes, it doesn't go to our nonprofit's mission,'' said Louis Barnes, director of finance for the Sierra Club, which is engaged in a legal battle with the IRS. ``We're trying to do something worthwhile.''
But Harvey Dale, director of New York University's Program on Philanthropy and the Law, dismisses such complaints.
``The nonprofit universe is significantly less regulated and less accountable than either government or the for-profit sector,'' he said. ``It isn't as though they're carrying any extraordinary regulatory burden.''
Owens' department has 1,000 staff members and a $125 million budget. He estimated 30 percent of the department's resources are dedicated to the nearly three-year-old Coordinated Examination Program.
The program has 91 open cases: 46 involve health care organizations, and 18 are colleges or universities, Owens said.
Examiners have closed 35 cases, including 12 looking at health providers and three involving schools.
In each of those cases, Owens said, the organization audited had to adjust its books. Some had to reduce reported operating losses.
The program also should yield clues about bookkeeping in the nonprofit sector that will enable the IRS to audit such groups more efficiently.
The National Rifle Association was recently notified that it will be audited. The IRS said the audit was part of the Coordinated Examination Program, an NRA spokesman said.
The American Association of Retired Persons paid $135 million in lieu of back taxes last year during a dispute with the IRS concerning payments the group receives from insurers that provide coverage to its members.
The dispute concerns whether providing insurance to members is part of AARP's mission, or whether it should be considered taxable income.
Discussions between AARP and the IRS continue. Owens wouldn't comment on specific cases, but he said the Coordinated Examination Program's largest settlement was $135 million.
The Sierra Club was not targeted by the program, but its lawsuit against the IRS goes to the heart of the government's plan to apply the unrelated business provision.
In the Sierra case, a federal tax court found against the IRS' argument that income should be taxed if a nonprofit actively pursued the revenue.
The Sierra Club was paid for its relationship with a credit card company and for the sale of its mailing list. It argued that the revenue came from intangible assets and therefore represented tax-exempt royalties.
by CNB