IRS Questions on Nonprofits' Use of the 'Net

The comment period on the questions about nonprofits' use of the Internet that were raised by IRS Bulletin 2000-84 ended February 13, 2001. (The text of the bulletin is online at -- among other places -- http://www.nonprofits.org/npofaq/misc/IRS2000-84.html.)

As might be expected, several thoughtful efforts were made to examine the issues.

The INDEPENDENT SECTOR posted a draft of their response for public comment at http://www.independentsector.org/programs/gr/IRS_Internet_Announcement.htm; the website says the final version will be posted as well.

The results of the small effort I organized can be viewed at http://www.npocomments.soceco.org. That facility will remain available for another discussion another day. Suggestions of topics welcome; send ideas to editor@nonprofits.org.

As probably also ought to have been expected, the IRS request provoked some strongly felt concerns that the IRS might use the tax code to control activities in the sensitive areas of free speech and advocacy online. For a sampling of these sorts of reactions, try a search at http://www.google.com/ with the search term "2000-84 IRS" (don't put in the quotation marks).

Of course, "electioneering" (aiding one candidate for public office or hurting another) has been forbidden for a long time to organizations that receive funds from donors who can take a tax deduction for the gift. The Internet makes it harder, perhaps, to tell what's going on, but it doesn't change the law. Similarly, there have been limits on such nonprofits' efforts to influence legislation (loosely, lobbying) in place for a long time. Again, the use of the 'net raises new practical questions about how such limits might apply, but it doesn't change the underlying law.

As the IRS works to sort through how to adapt laws and regulations developed before anyone had thought of the Internet, I hope they will focus on preserving the enormous benefits the Internet brings to our society through its flexibility, speed and low cost. I worry that costs of record keeping might exceed the costs of doing the actual work for nonprofit website operators. Or that small organizations might shy away from using the Internet at all because the effort to understand and assure compliance with the regulations is disproportionate. Having clear statements about how long-established principles should apply online could be a great benefit in reducing these risks.

Reforms in Processing of Federal Grants

Until March 17, 2001, interested parties are invited to comment on proposals for improving the way the federal government handles grants.

The January 17, 2001, issue of the Federal Register included a request for comments from a host of federal agencies seeking to implement the "Federal Financial Assistance Management Improvement Act of 1999."

The Grantsmanship Center has assembled a library of documents (including the Register notice) on this topic. The website http://www.tgci.com/fedgrant/grantreform.htm also includes links to several agencies' online comment facilities, a discussion forum sponsored the The Grantsmanship Center, and other resources.

This issue may not raise the same sort of fundamental questions about rights and responsibilities as the IRS did in Bulletin 2000-84, but it affects the way billions of dollars in vital support will be administered. Nonprofits with a direct stake in the outcome will particularly want to join the discussions, but everyone stands to benefit from a smooth, efficient and fair system of distributing federal funds for community purposes. Visit http://www.tgci.com/fedgrant/grantreform.htm to see how you might get involved.

Give Voice

The INDEPENDENT SECTOR (http://www.independentsector.org/) and the National Council of Nonprofit Organizations (http://www.ncna.org) have teamed up to create a website for action campaigns by nonprofit organizations. Called GiveVoice (http://www.givevoice.org), the site encourages individuals to take part in campaigns organized by participating organizations.

The site includes current news about public policy initiatives that affect nonprofits generally and offers practical ways to get involved in influencing the outcome. On February 14, issues from Ohio and Michigan were listed along with the INDEPENDENT SECTOR's campaign to gather support for charitable income tax deductions for people who do not itemize deductions on their tax returns.

Intermediate Sanctions

The 1998 Taxpayer Bill of Rights included two important changes in the legal environment for nonprofits.

It established the principle that nonprofits must provide copies of their 990s to anyone who asks without quibbling; this topic was extensively discussed last year when the regulations took effect; see http://www.nonprofits.org/bulletins/990508.html for a review.

It also created a framework within which the IRS can impose financial penalties on individuals who abuse nonprofit status for personal gain. This topic is called "Intermediate Sanctions" because previously the IRS really possessed only the "ultimate" sanction of denying tax-exempt status to the organization whose resources had been misused.

The IRS has now issued interim regulations explaining how intermediate sanctions will work, and started pursuing cases where abuses appear to have occurred. Identifying this sort of abuse can be very difficult and the rules about how to conduct business so as to avoid challenges are correspondingly complex. Lisa Rundquist, a Los Angeles attorney, offers an explanation online at her website -- see http://www.runquist.com/article_intermedsancts.htm

Putnam Barber
February 13, 2001