United States: Nonprofit Hospital News Bulletin - Opening The Blinds For "Sunshine" Baucus-Grassley Letter Calls For Expanded, Specialized Form 990s And Increased Focus On The "Commensurate Test"

In a May 29 letter to the Secretary of the Treasury, Senator Max Baucus, D-Mont., and Senator Charles Grassley, R-Iowa, urged the IRS to expand and update Form 990 with supplemental information requirements for major subgroups of the nonprofit sector--especially hospitals and universities. The Senators called for more openness and transparency for the public and quicker release of information to the organizations that evaluate charities. The Senators also requested that the IRS improve the focus of its enforcement efforts to include (i) bond transaction review, (ii) UBTI and (iii) matters that impact on the tax gap. In the Senators' view, while "sunshine is the best disinfectant, sunshine can't do its work unless we open the blinds."

In an aside to the portion of the letter dealing with endowments, the Senators focused on the "commensurate test" as needing additional teeth from the IRS. It is unclear from the letter if they desire an expanded role for or application of such test or simply the vigorous application of such test in appropriate circumstances.

Areas specifically identified by the Senators as being in "critical need of greater reporting transparency" include:

The letter states total compensation from all sources should be disclosed in one place. Concern was expressed about charities paying for housing, first class-travel, spousal travel, deferred compensation and bonuses, fringe benefits and often entire life-styles.

In an aside, the Senators expressed the belief that charities need to provide charitable work commensurate with their resources and assist those in need rather than building a bigger bankroll. In this regard, the Senators articulated the "commensurate test" as: "where [a charity] is shown to be carrying on through such contributions and grants a charitable program commensurate in scope with its financial resources." The Senators asked the Treasury to identify the guidance the Treasury and IRS are planning to put forward that will put more teeth into the "commensurate test" and the audit plan and results in the area. The Senators urged a uniform definition of endowment and transparency as to the size of the endowment, including all funds directly or indirectly under the control of the charity. They also called for disclosure of the amount and percentage of the endowment being spent, how funds are invested, what funds are earmarked for specific purposes, and the purposes and costs of the management of the endowment.

The Form 990 should provide a complete understanding of all related organizations, both for-profit and nonprofit, according to the letter.

Particular concern was expressed about joint ventures of hospitals and universities, and the Senators asserted that such activities should raise red flags of charitable assets being used for private benefit. Specific information as to the purpose of the joint ventures, the participants, resources contributed, and key financial arrangements should be included on the Form 990, according to the Senators.

The letter stated that poor governance is often at the core of problems at charities and that the Form 990 should bring a focus on governance issues both for the board and management of the charity as well as the public.

The Senators stated that the IRS should seek to make clear exactly how much of the money raised is actually going to a charitable activity (specifically "not including money spent on more mailings").

The Senators noted that many of the issues described above have significant application to hospitals, but hospitals have additional and unique issues. The Treasury was urged to look at the Catholic Health Association supplemental reporting guidelines regarding charity care and community benefit. The Senators opined that hospitals and other charities that engage in billing and debt collection should be required to outline the procedures they follow and clearly state in plain language what the hospital charity care policy is and how individuals are informed of the policy.

Although the IRS is currently in the process of revising the Form 990, apparently the Senators believe the revisions are neither as far reaching nor as timely as they desire. In addition to the expansions discussed above, they urged speed in implementing the updating of the Form 990 and that the IRS look for additional ways to ensure that Form 990s are made available to the public as soon as possible via web sites and dissemination to organizations that distribute them more widely. The policy of freely granting extensions for the filing of the Form 990 also was criticized.

The letter concluded that disclosure and reporting is only as good as the information provided and requests the Treasury to report on current IRS efforts to improve and encourage accuracy of Forms 990 and for suggestions Treasury may have for Congress in terms of improving accuracy of Forms 990.

The press release and the joint letter issued by Senators Baucus and Grassley are on the Internet at this link.

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