IRS to Investigate Tax-Exempt Groups

WASHINGTON – The Internal Revenue Service (search) plans to investigate the "seemingly high compensation" paid to leaders of some tax-exempt and charitable organizations, the agency's commissioner said Tuesday.

Commissioner Mark Everson told a Senate hearing that the agency will contact hundreds of organizations beginning this summer in an aggressive program that will include audits.

"We are launching a comprehensive enforcement project to explore the seemingly high compensation paid to individuals associated with some exempt organizations," Everson said.

He announced the initiative before a Senate Finance Committee hearing on abuses among tax-exempt and charitable organizations (search). About 3 million groups have registered with the IRS as tax-exempt entities. One-third are charities, and the remainder include groups as diverse as business leagues, labor unions and Indian tribal governments.

The IRS expects to contact public foundations and charities of various sizes this summer during the first stage of program. The groups will be asked for information and supporting documents about their compensation practices, and they will be asked to detail their methods for setting and reporting compensation for specific executives.

Later stages will see investigations into loans or sales to executives and officers, as well as a thorough review of the disclosure forms that charities must file with the IRS.

Noticing a growth in the number of private foundations, Everson said the IRS wants to contact about 400 of those groups to make sure they're complying with laws and regulations.

Everson also highlighted involvement of tax-exempt entities in tax shelters and abusive transactions. He said five of the eight abusive transactions identified by the IRS this year could involve tax-exempt groups such as employee retirement plans (search), state and local governments and Indian tribal governments.

"I cannot overstate the seriousness of the involvement tax-exempt and government entities as accommodation parties to abusive transactions," he said. "When taxpayers use artificial means to avoid their share of the tax burden, they not only shift the burden to all taxpayers but also undermine the public's confidence in the integrity of our system."

The IRS has already taken steps against abuse in credit counseling agencies, which organize as educational and tax-exempt groups. By this summer, 50 percent of the revenues among those agencies will be under examinations, Everson said.