Posted on February 16, 2011

IRS Cracks Down on Supporting Organizations

In the last five years, the Internal Revenue Service has revoked the tax exemptions of seventy-two organizations created to support specific charities, including some that were created as tools in shady financial planning programs, the New York Times reports.

Of the organizations examined by the IRS, an additional thirty have agreed to shut down, while fifty-nine were reclassified as charities or private foundations, which subjects them to stricter reporting and grantmaking requirements. "We've known for a long time that these things were problematic," said Dean Zerbe, a tax consultant and former staff lawyer for the Senate Finance Committee, "and the high number of revocations is further proof."

Indeed, many of the organizations examined by the IRS had been linked to people or groups that had been identified by divisions other than the exempt organizations (EO) division. According to Lois Lerner, director of the EO division, the most common abuse involved promoters who set up supporting organizations on behalf of their clients, who would take a deduction for making a donation to the organization and then, through a series of hard-to-trace transactions, would get their money back.

As part of the 2006 Pension Protection Act, Congress ordered revisions to the regulations governing supporting organizations, effectively applying some of the rules that govern private foundations to prevent private benefit. In particular, the act required the Treasury Department to establish a mandatory payout rate. While Treasury has proposed a rate of 5 percent, its recommendation has not been finalized.

As head of the Senate Finance Committee prior to passage of the Pension Protection Act, Sen. Charles E. Grassley (R-IA) led the push in Congress for greater control of supporting organizations. "At the time, some critics of reform said concerns about abuse were overblown," Grassley told the Times in an e-mail. "It turns out there's plenty of cause for concern, and the new proposed payout rules will help. But the IRS needs to hold firm on applying them."