Yesterday, ASAE President & CEO John H. Graham IV, CAE submitted the following testimony to the House Ways & Means Committee for their May 16 hearing on the nonprofit sector:
Chairman Boustany, Ranking Member Lewis and members of the Subcommittee, thank you for the opportunity to submit a written statement for the May 16, 2012 hearing on tax-exempt organizations.
My name is John H. Graham IV, CAE, and I am president and CEO of the American Society of Association Executives (“ASAE”), a section 501(c)(6) individual membership organization of more than 22,000 association executives and industry partners representing nearly 12,000 tax-exempt organizations. ASAE’s members manage leading trade associations, professional societies, and voluntary organizations across the United States and in 50 countries around the globe. We advocate for associations so that they may continue to fulfill their important missions and improve the quality of life in the United States and abroad.
As the Subcommittee has acknowledged, associations and other types of tax-exempt organizations have long played an important role in the United States. The first integrated federal income tax statute enacted in 1913 provided exemptions for business leagues, as associations were known at that time. The Revenue Act of 1913 also provided exemptions for charitable, scientific, and educational organizations. Subsequent revenue and tax reform acts in 1950 and 1969 created the contemporary structure under which associations operate today. There are currently nearly 30 different subsections of tax-exemption in the United States tax code.
Congress first gave associations favored tax treatment to recognize the public benefits derived from their activities. In simple terms, associations earn their tax-exempt status by satisfying many of the needs of various industries, professions, and the general public that the government would otherwise have to address. These needs include professional development, community service and volunteering, industry standard-setting, and more.
Unlike corporations, associations are barred from accumulating equity appreciation for private benefit. Instead, these organizations undertake programs or initiatives to benefit members and the public rather than private individuals. Their earnings, therefore, are either dedicated to furthering the primary purpose for which they were organized or are subject to unrelated business income tax.
While oversight and enforcement of existing tax law falls to the Internal Revenue Service (IRS), nonprofit organizations have historically been self-regulating in many respects. They have widely embraced their responsibility to members, donors, and the public to institute sound governance structures and employ good fiduciary practices to effectively fulfill their organizational missions. While there have been isolated and well-publicized instances of fiscal mismanagement and ethical abuse in the sector, the vast majority of nonprofit organizations engage in transparent decision-making, accurate financial reporting, and use of accepted auditing procedures that protect the public trust and ensure the health and success of member- and donor-based organizations.
Size and Scope of the Sector
Despite the lagging economy, it’s clear from IRS data that the number of nonprofit organizations continues to grow. In 2010, 1.95 million organizations qualified for tax-exempt status, up from 1.85 million in 2008.
The 501(c)(3) tax classification is by far the largest subsection of the tax-exempt community. The IRS had 1,280,739 Section 501(c)(3) organizations on file in 2010, up from 1,186,915 501(c)(3) groups in 2008. This is a very broad subsection of organizations that includes everything from public charities and cause-related groups to supporting organizations and grant-making organizations (including private foundations). This subsection also includes educational institutions, museums, and religious organizations (which are not required to register with the IRS and are not included in the numbers referenced above.)
The second-largest subsection is 501(c)(4) social welfare organizations. In 2010, there were 139,129 501(c)(4) organizations registered with the IRS, up from 134,843 in 2007.
Section 501(c)(6) tax-exempt organizations are also proliferating, according to the IRS. In 2010, there were 92,331 501(c)(6) organizations on file with the IRS, up from 88,071 in 2007. This subsection includes chambers of commerce and the majority of the trade associations and professional societies operating in the United States today. A look at some of the fastest-growing industries in the world today—such as alternative energy, biotechnology, electronic commerce, and internet publishing— provides strong clues about where we will see new trade and professional associations forming in the years ahead.
IRS Oversight and Nonprofit Compliance
As noted by the Subcommittee, tax-exempt organizations are subject to a variety of rules to ensure compliance with Federal tax law and limit abuses, including rules that prevent private inurement, limit certain activities, and subject business income related to for-profit activities to income tax.
The IRS has consistently emphasized the connection between good governance practices and compliance with the tax code. The agency has also astutely acknowledged that there is no one-size-fits-all governance structure that works for tax-exempt organizations. Given the varying types and sizes of organizations, the IRS is training its revenue agents to look at governance concerns in the context of tax code compliance and not whether specific structures or practices are in place at every organization.
That said, associations and other nonprofit organizations are providing far more information about their governance practices since the Form 990 was rewritten for the 2008 tax year. Part VI of the revised Form 990 now asks questions about the composition and independence of an organization’s board of directors, governance policies and procedures, and about how organizations make governance and financial information available to the public. Since the fall of 2009, IRS agents have also been completing a governance checksheet at the end of every 501(c)(3) public charity audit. IRS has said that process has yielded a tremendous amount of data about the different governance practices of tax-exempt organizations and the correlation between governance practices and tax compliance. For example, the IRS says that organizations with a written mission statement are more likely to be tax compliant; that organizations that use comparability data to set executive compensation are more likely to be compliant; and that organizations that engage their entire board of directors in a review of the Form 990 are more likely to be compliant.
The IRS has also made an extensive effort in the past three years to educate smaller nonprofit organizations about changes in the law that require most tax-exempt organizations to file an annual information return. The Pension Protection Act of 2006 requires small tax-exempt organizations (those with annual gross receipts of $50,000 or less for 2010) to file an electronic postcard, or Form 990-N, with the IRS. Last summer, the IRS announced that approximately 275,000 organizations had automatically lost their tax-exempt status because they did not file the legally required annual reports for three consecutive years. The IRS said it believed most of the organizations were defunct, but put special steps in place to help any existing organizations apply for reinstatement of their tax-exempt status.
The IRS also stated recently that agents have started flagging Form 990 returns filed by tax-exempt organizations that indicate they have unrelated business income but have not reported that income on Form 990-T. Organizations that report more than $1,000 of unrelated business income on their Form 990 but have not filed Form 990-T will receive an inquiry from the IRS and could be subject to audit. IRS officials who spoke in late April at a Georgetown Law Center conference in Washington, DC, said the IRS will develop a compliance project around its UBIT findings. IRS said there are sometimes legitimate reasons for not having a Form 990-T on file. If an organization is still waiting for information to complete the form, they can simply file for an extension of time to file and explain that on Schedule O of the Form 990.
ASAE commends the IRS for its oversight and outreach to the tax-exempt sector.
Preserving the Tax-Exempt Sector
ASAE respectfully asks Congress to be mindful of the important role of tax-exempt organizations in American life and not enact legislative provisions that impact the operation of these organizations and impede their vital missions. Associations and other types of nonprofit organizations make broad contributions that benefit society in substantive ways. They are an essential piece of our national, state, and local economies. They create jobs in every state. Their measurable economic benefits include more than1.2 million jobs for Americans and a total payroll of nearly $47 billion. (Source: ASAE’s Associations Matter study, 2012) Associations are also a significant part of the $263 billion meetings industry and host a wide range of meetings, seminars, conventions, trade shows, and other events in cities across the United States and abroad. Beyond their direct economic impact, associations play a vital role in enriching communities and creating positive change around the world. With their deep wells of expertise and knowledge, associations are able to address numerous social concerns and enhance our collective quality of life.
Associations enrich lives through setting industry standards, training our nation’s workforce, growing jobs, driving safety and sustainability standards, keeping the engine of Industry running smooth and safe, and drawing on the wisdom and perspective of the collective so we can predict trends and seed progress.
If you have questions about this statement or the vital role of associations and other types of tax-exempt organizations, please contact Jim Clarke, CAE, ASAE’s senior vice president of public policy, at 202-626-2703 or email him at firstname.lastname@example.org.
Thank you for your time and consideration of issues related to the tax-exempt sector. We encourage you to download a copy of our 2012 Associations Matter study for a detailed overview of the economic and societal contributions of associations at http://www.thepowerofa.org/wp-content/uploads/2012/03/Associations-Matter-FINAL.pdf.