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The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance Issuesits mission. The serious funding and staff shortages faced by regulators limit the valueof “better data” to increase enforcement. In addition, the analogy to the for-profit role ofshareholders who can vote with their feet or bring lawsuits is limited in the nonprofitsector where individual donors do not possess similar clout or have similar metrics forassessing an organization. While funders have greater leverage with an organizationwhere they control meaningful grant or other support, there are not agreed-upon criteriathat readily lend themselves to metrics (such as share price) as is the case with publiccompanies. In any event, there is little or no empirical evidence to date to show if“sufficient and comprehensible” information were made available to the public thatdonors would “use it comparatively and donate more time and money to moreaccountable nonprofits.” 94 And “among individual donors, evidence has not yetsuggested that donor choice will be a robust enforcement tool.” 95Thus efforts to increase “disclosure” as a means of engendering better compliance orimproving governance must keep these shortcomings in mind. In this vein, when theJoint <strong>Committee</strong> on Taxation in 2000 recommended greater disclosure of informationrelating to tax-exempt organizations, it balanced the competing policy objectives andlooked at a number of factors, including: 96• the public interest served by the disclosure of the information and the countervailing reasons for nondisclosure; • whether the information is relevant to determining compliance with the law;• whether disclosure of the information will increase or reduce voluntary compliance; • whether and how disclosure of the information will modify the behavior of taxexemptorganizations and those associated with such organizations, includingdonors;• privacy concerns of the organization and others;• the costs involved in complying with disclosure requirements and whether thecosts are reasonable given the benefit to be derived from disclosure of theinformation;• whether the information should be disclosed by the IRS or the organization;• whether the Federal tax laws should be used to collect the information;• whether the information will be understandable to those with an interest in theinformation; and• the extent to which the information is subject to misuse.94Id. at 603.95Id. at 603, note 176.96Joint Comm. on Tax’n, Study of Present Law Taxpayer Confidentiality and Disclosure Provisions as Required by Section 3802 ofthe Internal Revenue Service Restructuring and Reform Act of 1998 (2000), Volume II: Study of Disclosure Provisions Relating toTax-Exempt Organizations, (JCS-1-00), at 82 (hereinafter 2000 JCT Study). See also id. at 5, 62-70, 80-84.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 28
The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance IssuesThus, while disclosure and transparency play a valid role in promoting compliance withthe tax laws and in encouraging appropriate nonprofit governance, they also can impactbehavior in a manner that can be harmful to the sector, and inappropriately suggest tothe public and watchdog groups that the absence of specific governance policies orpractices is in effect misgovernance. Accordingly, the IRS should carefully consider thepublic disclosures it requires.VII. ROLE OF IRS/TREASURY IN GOVERNANCE INVOLVING TAX-EXEMPTORGANIZATIONSA. IntroductionWe have seen an evolution over the years in the IRS’s approach to governance.Historically, the IRS may have considered specific governance practices, withouttypically denominating them as such, as it grappled with determining whether certaintypes of organizations merited exemption. The law of charity has always adapted toreflect the changing needs of society, and that flexibility has challenged the IRS todetermine whether non-traditional types of organizations will meet the operational test(by engaging in sufficient charitable activity, not serving private persons more thanincidentally, and not violating the proscription against private inurement) in contexts thatcould not have been imagined a decade or two earlier, much less when the predecessorto section 501(c)(3) was enacted in 1913. 97 Only in more recent years has the IRSfocused on the adoption of “good” governance practices as an objective in itself, basedon the IRS’s view that “a well-governed charity is more likely to obey the tax laws,safeguard charitable assets, and serve charitable interests than one with poor or laxgovernance.” 98 To this end, the IRS has engaged to varying extents in seeking topromote good governance practices in each of its five points of contacts with exemptorganizations: in creating standards for exemption; on determination of exemption; onexamination or in other compliance initiatives; in 990 reporting; and in education andoutreach.B. Governance Issues on Standards for ExemptionCongress. We are not aware of Congress requiring the adoption of specificgovernance practices as a condition for exemption. 99 Congress has, however, spokenabout governance in two respects: in the context of potential excess benefit transactionsunder section 4958 and the rebuttable presumption of reasonableness establishedthereunder; and in connection with the public availability of Forms 1023 and 990.97Ch. 16, § II(G)(a), 38 Stat. 172 (1913). See Statement of Bruce Hopkins, House <strong>Committee</strong> on Ways and Means, April 20, 2005,for the history of section 501(c)(3), http://waysandmeans.house.gov/hearings.asp?formmode=view&id=2603. See Appendix 3 for adiscussion of the IRS’s application of governance issues in the health care context.98See supra note 31.99The independence of governing body members may be relevant for other purposes, such as in connection with aspects ofqualification under IRC section 509(a)(3).ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 29
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