Hudson Institute Panel Pessimistic on IRS Nonprofit Regulation

September 18, 2013; Hudson Institute

The Hudson Institute in Washington, D.C., hosted a luncheon panel to discuss the IRS and nonprofit regulation. Despite its title, the panel called “IRS + 501(c)(4) = SOS?” spent almost no time during the 90-minute event discussing social welfare organizations or their regulation. Instead, the panel gave a scathing review of current IRS nonprofit oversight and proposed varying levels of change.

Panelists included John Pomeranz of Harmon, Curran, Spielberg & Eisenberg and a key participant in the Bright Lines project; Cleta Mitchell, partner at Foley & Lardner, who has filed a lawsuit in federal court challenging the IRS actions; and Marcus Owens of Caplin & Drysdale and former director of the IRS Exempt Organizations Division. Moderator William Schambra guided the three panelists through the issues.

All the panelists agreed that the IRS’s oversight and regulation of nonprofits of all types is seriously flawed. Pomeranz may be the most optimistic of the three, as he merely suggests a rewriting of IRS regulations and training of IRS personnel is needed. The Bright Lines Project he has been involved with for several years advocates defining terms such as “social welfare,” with a goal of giving nonprofits and their advisors clear guidance on allowed and disallowed activities. Mitchell believes the EO Division needs to be abolished and a new structure designed. Owens advocates moving nonprofit oversight outside the IRS, proposing an industry-supported regulatory model similar to the former National Association of Securities Dealers (NASD), now known as the Financial Industry Regulatory Authority (FINRA).

Despite the differences in the background and political ideology of the three panelists, there was surprising agreement and willingness to consider alternate viewpoints. All agreed that Congress should have done a better job of defining terms, rather than leaving it to regulators. While Pomeranz has not advocated for abolishing the ED Division or outsourcing it, he was open to the possibilities offered by those approaches. Mitchell recounted the difficulties she had explaining IRS regulations to IRS staffers, ending up giving them a copy of their own training manual for education. Owens replied that the written manuals were discontinued in 2003, when webinars and online training replaced in-person three-day seminars with printed manuals. He said that the loss of the IRS-produced manuals was a problem for both IRS staff and taxpayers, as the manuals often provided synthesized key guidance not available elsewhere. Mitchell’s teeth were on edge, she said, watching former IRS Commissioner Douglas Schulman using terms like “political activity” and “advocacy” without caution as to their specific meanings in tax law. This observation reinforced Pomeranz’s viewpoint that a comprehensive glossary overhaul is needed. Mitchell was especially incensed that the term “advocacy” would acquire negative connotations in IRS oversight, because, she said, every nonprofit organization advocates for something. Even if the advocacy is restricted to articulating its stated mission, it is, nonetheless, advocating for its mission and seeking support from others to help achieve its mission.

Based on the presentations made, as well as the lack of challenging questions from the audience, it appears there is a common recognition that the IRS’s oversight of nonprofits is in serious need of overhaul. Whether that results in new IRS regulations and training, a new IRS EO Division, or a third-party industry-funded group taking over nonprofit regulation is yet to be seen.—Michael Wyland


Michael Wyland

Michael L. Wyland, CSL, has more than thirty years of experience in corporate and government public policy, management, and administration. An expert on nonprofit governance and public policy issues, he has been featured and quoted extensively in media including The Wall Street Journal, The New York Times, CNN, Fox News, Washington Post, The Chronicle of Philanthropy, and The Nonprofit Quarterly. He currently serves as an editorial advisory board member and contributor to The Nonprofit Quarterly, with more than 100 articles published since 2012. Michael is a partner in the consulting firm of Sumption & Wyland. Founded in 1990, the firm provides board governance consulting, public speaking and training, and executive coaching to nonprofit organizations. Sumption & Wyland has assisted more than 200 nonprofits with strategic planning services from pre-retreat research to staff-level implementation assistance and effectiveness monitoring. Speaking topics include board-CEO partnerships, nonprofit executive transition issues, and overviews of the nonprofit sector of the US economy. Michael was born in Washington, DC and raised in the Northern Virginia suburbs. Prior to co-founding Sumption & Wyland, Michael managed the computer operations for an independent oil & gas investor in Dallas, Texas and served as a staff assistant to a U.S. Representative. During his college years, he spent one summer working at the US Department of Labor and one summer working at the US Department of Justice. His past volunteer service includes various leadership positions at the local, state, and national level with the Young Republicans. He has been the secretary and president of a condominium homeowners association and the treasurer of a professional association serving computing professionals. He served as a Trustee and Vice President of Sertoma Foundation, and has been elected president of his local Sertoma club twice. In 2014, Michael was elected Chair of the South Dakota Commission for National and Community Service (Serve SD), on which he has served since its founding in 2011. He is currently working as a senior advisor to establish a national charity dedicated to the elimination of prejudice, expanding the scope and reach of the 120-year old Pi Lamba Phi fraternal organization. Michael's writing for NPQ often addresses healthcare policy and governance, scandals involving nonprofits, and the governance and policy implications of nonprofit stories in the news. He was widely quoted and cited for his work analyzing the governance issues related to the Jerry Sandusky/Penn State/Second Mile scandal in 2011. More recently, he has written more than 30 pieces for NPQ relating to the IRS scandal. In addition, he presented a paper at the national 2014 ARNOVA Conference about the IRS scandal and its implications for regulation of political activity by nonprofit organizations. Michael lives in Sioux Falls, SD with his wife, Margaret Sumption, and their dog. They have one adult son. In his leisure time, he likes to read histories and biographies, play golf, cook, and be a companion to his wife.