Panel calls for changes to strengthen nonprofit sector.

By Ret Boney

A panel of influential leaders in the nonprofit and foundation sector has submitted a list of recommended reforms to the Senate Finance Committee, which is expected to introduce reform legislation later this summer.

The Panel on the Nonprofit Sector, a group of leaders created by Independent Sector, a Washington, D.C.-based network of tax-exempt groups, at the urging of the Senate Finance Committee, developed the recommendations to curb abuses in the sector.

The report contains some 120 actions to be undertaken by charities and foundations, Congress and the IRS, including recommendations on reporting requirements, IRS oversight, executive and board compensation, and regulation of donor advised funds and type III supporting organizations.

“These recommendations strike a balance between providing the oversight needed to prevent abuses and protecting the independence that is a vital element in the charitable community’s innovation and effectiveness,” Paul Brest, president of the William and Flora Hewlett Foundation and co-convener of the panel, said in a statement.

Others say the panel should have gone farther.

“By micro-inching toward increased nonprofit accountability, (Independent Sector) remains miles and miles away from substantive solutions to the problems facing the sector,” the National Committee for Responsive Philanthropy, a Washington, D.C.-based watchdog group that has urged farther-reaching reforms, said in a statement.

Jane Kendall, president of the N.C. Center for Nonprofits in Raleigh, said the report “tries to balance the issue of very best practice versus what should be the minimum in the law, or the basic requirement of the law,” The center’s own program on standards for excellence “go beyond what’s contained in this document,” she said.

The panel recommends that Congress devote more money to IRS oversight and enforcement of the sector, and do away with regulations barring the IRS from sharing relevant tax information with state charity officials investigating alleged wrongdoing.

The IRS also should simplify and improve information forms for tax-exempt groups, the panel says, and require all charities to file returns electronically.

All foundation and nonprofit heads should be required to sign off on information returns, the panel says, and Congress should require audits for groups with $1 million or more in annual revenues.

“Our standards suggest that those with a budget of $300,000 or more should have an audit,” Kendall says.  “Even though those [panel recommendations] are higher thresholds than ours, I think something in that range is about right for the law to require.”

The panel encourages greater transparency and suggests that nonprofits disclose more information about their operations through websites or annual reports, but discourages requiring that such disclosures be part of the IRS information-filing process.

The panel recommends several changes to donor-advised funds, including requiring an annual distribution of 5 percent of assets and prohibiting sponsored nonprofits from making payments of any sort to donors, advisors or private foundations.

Type III supporting organizations, charities set up to support other charities, should also have minimum payout requirements, the panel says, and should be barred from making payments to donors.

The panel urges Congress to beef up regulations for appraisals of donated property, but urges it not to place a ceiling on deductions for donated clothing and household items, but rather formulate guidelines for the value of those items.

Nonprofits should make compensation of chief executive officers public, the report says, with justification of the amount if questioned by the IRS, and boards should approve all executive compensation changes and review overall compensation plans annually.

Board members should not be paid, the panel says, but groups that do pay their board members should have to disclose the amount and provide justification.

Tax-exempt groups should be required to have at least three board members, some with financial literacy, the panel says, and for public charities, at least three board members should be independent of the organization.

All nonprofits should develop conflict-of-interest policies, the panel says, and the IRS should require groups to disclose on their IRS forms whether or not they have such a policy.

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