Charities and other nonprofits exempted from taxes because they serve a public purpose have become a hotbed of tax evasion and abuse, according to the head of the Internal Revenue Service.

"We can see that tax abuse is increasingly present in the sector," and unless the government takes effective steps to curb it, such organizations risk "the loss of the faith and support that the public has always given to this sector," Internal Revenue Commissioner Mark W. Everson said in a letter to the Senate Finance Committee detailing abuses his agency has found.

Everson said that the IRS is finding problems in virtually every type of tax-exempt organization. Nonprofits include not only charities, but colleges and universities, many hospitals, pension plans, trade associations and think tanks. In fact, eight of the 10 largest private employers in the District are nonprofits.

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"Unfortunately, we have no precise way to gauge the revenue impact of these issues," Everson said, though he noted that the nonprofit sector, including pension plans and the like, now totals roughly 3 million entities controlling $8 trillion in assets.

Feds probe abuse
"It's a seminal letter that rips off the rose-colored glasses with which we usually look at tax-exempt organizations," Senate Finance Chairman Charles E. Grassley (R-Iowa) said yesterday. "What's going on isn't a pretty picture in the harsh light."

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The Finance Committee began examining the nonprofit sector last summer, finding, among other things, that localities and transit systems were collecting fees for allowing corporations to benefit from tax shelters designed to help finance public works. Several provisions of last fall's tax bill were aimed at abuses uncovered by the panel, but members have suspected, and Everson's letter confirms, that many more exist. Another hearing will begin today.

The findings have already sent alarms through the nonprofit community. Last month the industry-convened Panel on the Nonprofit Sector offered a preliminary report on how laws could be tightened and practices improved to curb abuse.

In some cases fraud and abuse are committed by the nonprofit itself, such as when a charity is established to benefit its main donor; in other cases, the nonprofit acts an enabler for tax-shelter promoters, such as when a municipality or union takes a fee to participate in a deal that allocates "profits" to it and losses to wealthy individuals.

Gaming the system
Everson said in his letter, which covered 14 pages, that nearly half of the IRS's list of 31 major abusive tax-shelter schemes "have the potential to involve tax-indifferent parties," as the IRS calls entities that don't have to worry about paying taxes.

Everson raised particular concerns about nonprofit hospitals and how hard it is to distinguish them from for-profit hospitals; political activity by nonprofits; misuse of entities set up to allow religious leaders to hold property and conduct business for the benefit of a religious organization; and deals designed to allow members of a tribe to benefit from gambling revenue without owing taxes.

A key issue for the government is not just collecting more revenue, but also ensuring that tax benefits extended to "this sector of the economy achieve their intended results."

Grassley agreed. "In exchange for these very generous tax breaks, charitable assets should be going to those in need. More and more, we're seeing that some people view charities and charitable gifts as a chance to help themselves, not others," he said.

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