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There was an interesting congressional oversight hearing yesterday morning (May 16) on the tax-exempt nonprofit sector. The 90-minute hearing focused much of its attention on the redesign of the IRS Form 990. The product of years of discussion, Form 990, which requires nonprofits to report on their mission, leadership, activities and finances, has been revamped to require far more information than previously. The 12-member (seven Republicans, five Democrats) House Ways and Means subcommittee on oversight, chaired by Louisiana Republican Rep. Charles Boustany, wanted to know what nonprofits thought of the new form. Committee members asked leading questions of the witnesses. Was the IRS making their lives miserable? Was it asking too many intrusive or pointless questions?

The quick answer is yes, although the witnesses were careful to commend the tax agency for being cooperative and eager to help them comply with its requests. Still, they admitted the IRS is asking for a lot, especially from two major players, nonprofit hospitals and colleges and universities.

Michael Regier, general counsel for VHA Inc. (which used to be called Voluntary Hospitals of America), an alliance of 1,400 nonprofit hospitals, held up a binder of what looked like six inches' worth of pages of schedules and instructions for completing the 990. He noted that the Accountable Care Act (a.k.a. Obamacare) mandates that hospitals must now conduct a “Community Health Needs Assessment” every three years. Information collected for the law must be entered on IRS Form 990’s new Schedule H, which identifies what information hospitals must collect and how they should collect it.

Schedule H requires each hospital in a multi-hospital nonprofit to file its own report on how it benefits the community. Further, the regulations tell the hospital whom it must consult (e.g., public health agencies, specific disease constituencies) and prescribe how information is to be gathered, including the listing of names and titles of persons consulted (which raises privacy concerns).

While most of his testimony dwelt on process -- the IRS is asking hospital administrators to spend too much time doing too much paperwork -- one suspects VHA’s real fear is that all this information will be used by advocacy groups to argue that if nonprofit hospitals don’t serve federally-defined “community needs,” then they don’t deserve to be tax-exempt. Regier’s testimony also cautioned against any attempt to tax the interest on bonds that nonprofit hospitals issue to raise capital (since they can’t sell stock), and worried about threats to the tax-deductibility of donor contributions. Like many other nonprofits, VHA opposes the Obama administration’s continuing efforts to reduce to 28 percent the tax deductibility of contributions made by upper-income taxpayers in the 33 and 35 percent tax brackets.

Joanne DeStefano, Cornell University’s chief financial officer testified on behalf of the 2,100 college financial managers who comprise the National Association of College and University Business Officers. Her written testimony focused on an IRS audit of Cornell’s IRS Form 990 for the year ending on June 30, 2008. The audit began in the fall of 2010 and ended in March 2012.

It was a nightmare. DeStefano said the twelve trustees on Cornell’s audit committee didn’t know where to begin to address the IRS auditors’ requests for information. The new IRS Form 990 has 16 separate schedules. She said Cornell didn’t mind the questions on executive compensation, but the staff of its business office was overwhelmed by the questions asked on Schedule F (“Statement of Activities Outside the United States”), Schedule I (“Grants and Other Assistance to Organizations, Governments and Individuals In the United States”), and Schedule K (“Supplemental Information on Tax-Exempt Bonds”).

Schedule I, said DeStefano, required submitting computer data files on every sub-contract entered into by every unit of the university. And the questions on Schedule K on partnership investments were inconsistent with the requirements of Form 990-T, which nonprofits use to report taxable business income. The upshot, said Regier, the hospital spokesman, is that larger nonprofits no longer rely on in-house business staff to complete the 990. They hire outside consultants.

The concerns of the hospital and university witnesses were put in context by the hearing’s first witness, Roger Colinvaux, former legislation counsel for Congress’s Joint Committee on Taxation. He argued that the reason why the U.S. nonprofit sector is so large and growing -- 1.1 million organizations [excluding churches] with $2.5 trillion in assets -- is precisely because federal law has a broad and generous definition for determining whether an organization should be tax-exempt. Basically, if you do good to others without profiting yourself, you can be a nonprofit. Over time the law has added negative restrictions on political activity, lobbying, self-dealing and untaxed business activity, but it has imposed no positive substantive obligations on nonprofits, specifically defining what and how to “do good.”

Unfortunately, the resulting proliferation of nonprofits has produced scandals and financial abuses. This angers Congress and tempts it to meddle and tinker with the law. Hence yesterday’s hearing, the first in a series. Congress knows the only sanction available to the IRS is too severe -- loss of a nonprofit’s tax-exempt status. Hence the new Form 990, which makes nonprofits engage in exhaustive information-gathering. Fearful of making a mistake and making enemies, Congress doesn’t know what else to do.

Perhaps Congress should change the basis on which it awards an organization tax-exempt status? It’s happening already, said Colinvaux in response to a question from chairman Boustany: hospitals and universities have to answer more questions than other nonprofits. Colinvaux gingerly introduced the idea of substantive obligation and was pressed on this by Rep. Xavier Becerra (D-Calif.). Instead of awarding tax-exempt status on the basis of a nonprofit’s vaguely benevolent “purpose,” why not have the IRS grant and assess tax-exempt status but on the basis of a group’s “activities” and “outcomes”? This is sure to send a chill up many nonprofit spines.

Last October Rep. Boustany, the subcommittee chairman, sent the IRS a letter requesting responses to an extensive list of questions on its compliance policies. The next committee hearing will likely focus on the IRS commissioner’s answers.

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