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tax evasion
Simple Charity Reforms Could Unlock Hundreds of Billions for Nonprofit Sector
An estimated $1.7 trillion in donations, ostensibly earmarked for philanthropy, are currently languishing in private foundations and donor-advised funds—while charities like Feeding America and Habitat for Humanity are under-resourced.
Aug 09, 2024
Thanks to outdated charity tax laws, the U.S. is missing out on hundreds of billions of dollars that could flow toward housing and food security, health research, education, advocacy, and other crucial nonprofit efforts aimed at uplifting the common good—but simple reforms could unlock some of the extreme wealth that is currently "warehoused" in private foundations and donor-advised funds.
This is according to a new Institute for Policy Studies analysis that shows charitable groups currently hold an estimated $1.7 trillion in donations that are "ostensibly earmarked for philanthropy," but are able to "languish in go-between funds" while working charities remain under-resourced.
The foundations and donor-advised funds (DAFs) are able to collect tax breaks while sitting on billions of dollars thanks to provisions in the Tax Reform Act of 1969 that haven't been updated in decades, wrote IPS associate fellow Helen Flannery and associate director of charity reform initiatives Bella DeVaan at Inequality.org, a project of the organization.
"Initially, in the Tax Reform Act of 1969, private foundations were mandated to give away 6 percent of their wealth or the annual net growth from their investments: Whichever was higher," wrote Flannery and DeVaan. "Foundations' tax benefits wouldn't provide license for funds to just grow forever and ever, and they were to be consistently responsive to shifting economic reality. A decade of revisions to payout requirements reflected those principles and eventually created our flat 5% mandate. But that 5% is overdue for re-evaluation, and our elected representatives have fallen asleep at the wheel."
"It's worth imagining a future in which billions more flow towards life-saving medical cures, food security, housing access, and environmental protection through organizations that are already woven into our social fabric."
While the nation's largest foundations give charitable donations at a rate of about 5%, "their gains in the market have averaged 9% over the last five years," they explained.
In other words, said Flannery and DeVaan, the funds "are growing faster than the rate at which they give" while donations to working charities like Habitat for Humanity, United Way, and Feeding America fall behind.
The wealth of DAFs has skyrocketed by 411% in the last decade, with the funds stockpiling an estimated $230 billion in assets in 2023.
IPS noted that billions of dollars in DAF gifts have been directed as dark money contributions—whose donors "might well have second thoughts" if tax laws were reformed to require both boosted payouts and more transparency.
In its policy brief, IPS proposes reforms that would:
- Increase the minimum payout rate requirement to 10% for foundations with assets of $50 million or more, and increase it to 7% for all other foundations;
- Exclude private foundation overhead expenses above 1% of assets from counting towards payout;
- Exclude grants from private foundations to DAFs from counting towards payout;
- Require DAFs to pay out funds within five years of receipt (and provide individual account-level transparency);
- Exclude grants from DAFs to other DAFs from counting toward payout; and
- Generate excise tax revenue from intermediaries that don't meet the new requirements.
The new rules would generate more than $110 billion in additional funding for working charities each year, as well as $339 billion in donations over three years.
"It's worth imagining a future in which billions more flow towards life-saving medical cures, food security, housing access, and environmental protection through organizations that are already woven into our social fabric," wrote Flannery and DeVaan, "or organizations that could and should be with strengthened access to funding."
IPS released the analysis as legislators prepare to overhaul the tax code in 2025.
"We're hopeful that this can be a watershed moment for charity reform akin to 1969," wrote Flannery and DeVaan, along with IPS program director Chuck Collins.
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Democrats' IRS Crackdown on Millionaires Draws in $1 Billion
"This is what happens when you fund the IRS," said one tax fairness group. "Anyone trying to cut IRS funding just wants to protect rich tax cheats."
Jul 11, 2024
As the U.S. Internal Revenue Service announced Thursday that it had recovered $1 billion in unpaid taxes from wealthy individuals, economic justice advocates said the news served as a reminder of a top priority for the Republican Party: ensuring that tax evasion can continue among the richest Americans.
The IRS was able to recover the tax payments "thanks to historic funding from Democrats," said Rep. Bill Pascrell (D-N.J.). "Every single Republican in Congress voted against it and Republicans are hellbent on helping millionaires [to] keep stealing from you."
The Biden administration and Democrats in Congress pushed for the inclusion of $80 billion for the IRS in the Inflation Reduction Act (IRA) in 2022, with the money earmarked to allow the agency to hire more tax evasion enforcement staff and hold wealthy people and corporations accountable for tax avoidance.
When former House Speaker Kevin McCarthy (R-Calif.) took the gavel last year, he said a proposal to repeal the funding would be the "very first bill" introduced by the party, claiming the Democrats aimed to force working Americans to pay more in taxes.
The GOP managed to repeal $20 billion of the funding as part of a deal to suspend the debt ceiling in May 2023.
"Our message for these taxpayers is that now that we are resourced, we can do the job of ensuring that they pay."
Stopping the IRS from cracking down on wealthy tax cheats, said Bobby Kogan, senior director of federal budget policy for the Center for American Progress, "is THE biggest GOP priority."
Under former Republican President Donald Trump's administration, an analysis by Americans for Tax Fairness (ATF) showed last year, the IRS audited low-income Americans at a higher rate than millionaires for the first time.
The IRS said the new funding allowed it to track down and contact 1,600 taxpayers with more than $1 million of income who owed more than $250,000 in tax debt.
"Our message for these taxpayers is that now that we are resourced, we can do the job of ensuring that they pay," said IRS Commissioner Daniel Werfel.
Last month the IRS proposed a rule to stop "partnership basis shifting," which allows a business or individual to move assets to avoid paying taxes. The rule could recover more than $50 billion in revenue over a decade, according to the Treasury Department.
The results announced Thursday come from the agency's spending of $5.7 billion—about 10%—of its IRA funding.
"This is what happens when you fund the IRS," said ATF. "Anyone trying to cut IRS funding just wants to protect rich tax cheats."
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In Latest Crackdown on Rich Tax Cheats, IRS Pursues 125,000 Non-Filing Cases
"At this time of year when millions of hard-working people are doing the right thing paying their taxes, we cannot tolerate those with higher incomes failing to do a basic civic duty of filing a tax return," the IRS chief said.
Mar 01, 2024
The Internal Revenue Service announced on Thursday that it was going after high-income earners who had dodged taxes by failing to file tax returns since 2017.
The agency said it would begin mailing compliance letters this week in more than 125,000 cases in which people making over $400,000 a year had refused to file. The enforcement action was made possible by increased IRS funding in the Inflation Reduction Act (IRA).
"At this time of year when millions of hard-working people are doing the right thing paying their taxes, we cannot tolerate those with higher incomes failing to do a basic civic duty of filing a tax return," IRS Commissioner Danny Werfel said in the announcement. "The IRS is taking this step to address this most basic form of non-compliance, which includes many who are engaged in tax evasion."
"Funding the IRS to track down wealthy tax cheats pays off big time."
Non-filing by the wealthiest Americans has cost the federal government a significant amount of money in recent years. In 2023, a report found that more than 1.4 million high-earning U.S. taxpayers had not filed at all from 2017 to 2020, depriving the government of $65.7 billion.
The IRS does not know exactly how much it might recuperate through this current round of compliance letters. While the cases deal with financial activity of more than $100 billion, taxpayers may be able to claim credits or deductions. However, the agency said that "even with a conservative estimate, the IRS believes hundreds of millions of dollars of unpaid taxes are involved in these cases."
The IRS will send out between 20,000 and 40,000 compliance letters, or CP59 notices, each week, starting with the highest earners. That includes more than 25,000 who made more than $1 million between tax years 2017 and 2021 and more than 100,000 who made between $400,000 and $1 million. Individuals may be included in the total case count more than once if they refused to file on more than one year during the target period.
Those who fail to respond to the letters will face additional notices and enforcement actions, including audits, collections, and "potential criminal prosecution."
The IRS is making this effort now because it finally has the resources to do so, the agency explained.
"Without adequate resources, the IRS non-filer program has only run sporadically since 2016 due to severe budget and staff limitations that didn't allow these cases to be worked," the agency said.
However, the IRA earmarked $80 billion for the agency following years of chronic underfunding from Republican lawmakers and administrations, which has already allowed it to claim more than $500 million from wealthy tax evaders since 2022.
"With the Inflation Reduction Act resources, the agency finally has the funding to identify non-filers, ensure they meet this core civic responsibility, and ultimately help ensure fairness for everyone who plays by the rules," Werfel said on Thursday.
Thursday's announcement is only the latest in the IRS' renewed efforts to crack down on wealthy corporations or individuals who cheat on taxes. Last week, it announced plans to audit the use of private jets for non-business travel. The agency has also collected more than $480 million so far from a group of 1,600 millionaires who each owed at least $250,000, CNBC reported last week.
Overall, Werfel told CNBC there was a "tax gap" of over $150 billion each year that the wealthy owe but do not pay. However, spending on enforcement works: The IRS calculates that it earns back around $6 for every $1 spent.
"$13,011 per hour—that's the amount of unpaid taxes that the IRS has found by auditing the ultra-rich who made over $10 million in 2022," Sen. Elizabeth Warren (D-Mass.) posted on social media Thursday. "Funding the IRS to track down wealthy tax cheats pays off big time."
However, the IRS' new funding is already threatened by congressional Republicans. As part of the debt-ceiling deal, they successfully persuaded the Biden administration to slash $20 billion of the new IRA funding, and House Speaker Mike Johnson (R-La.) is pushing for more cuts. If the funding remains in place, the Treasury Department and IRS have calculated that the agency could boost government revenue by up to $561 billion over the next decade. The revenue would be around $100 billion less if the $20 billion in cuts go through.
"If millionaires and billionaires actually paid all the taxes they already owe, we'd have enough money to fund universal child care and STILL have more left over," Warren said further. "The IRS' crackdown on wealthy tax cheats is paying off—but Republicans are trying to stop it."
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