Prepared Remarks of Commissioner of Internal Revenue Douglas H. Shulman at the Council on Foundations 2010 Annual Conference, Denver, Colo.

April 24, 2010

Thank you for that warm introduction and gracious welcome. And it’s a great honor to be addressing such a distinguished audience this afternoon whose members are at the forefront of philanthropy. 

The non-profit territory is familiar stomping grounds for me. I started my career in consulting, but then became what I refer to as a social entrepreneur. 

I was privileged to be one of a handful of people who helped co-found and launch Teach for America, which helps place teachers in urban and rural schools across the country. Since that time, I have also started a business, been a private equity investor and a securities industry regulator and now, IRS Commissioner.

In one of those odd twists and turns in life, I’m back to leading a big organization without a profit mission — and thrilled about it — as I am also working closely again with the tax-exempt sector, including foundations.

The IRS is responsible for administering the tax laws that apply to just over 80,000 organizations that file a Form 990-PF each year, with total assets of over half-a-trillion dollars. You can understand, from these figures alone, why private foundations are important to us. They play a huge role in our economy. But they matter even more to us for another reason — and that is because of the enormous contributions private foundations make to our society through their diverse programs and the many needs they address.

Before I discuss what I believe are some common ground between our organizations — points where we intersect, if you will — I want to provide you with a broad overview of an IRS that is very different from some of the popular images that some Americans may have of the “tax agency.” The IRS is changing and I believe it is important that we keep the public and leaders like you apprised of this evolution.  

At its core, the IRS is responsible for collecting 96 percent of all federal receipts — around $2.5 trillion — to run the federal government.

In a very real sense, the IRS is one of the largest financial services institutions in the United States. In a typical year, we issue over $300 billion in refunds — important money in taxpayer’s pockets, especially during tough economic times — that help stimulate the economy.

Indeed, in past years, the Commerce Department has seen a 12 to 20 percent spike in retail sales in March, April and May as compared to February, partially as a result of the tax season’s refunds. These refunds help millions of individuals not only purchase items they need but help businesses pay off debt, and increase savings.

Like a major financial services institution, we have to innovate, take advantage of new technology, provide numerous service channels and deal with all the realities of running a large business, such as personnel, resource allocations and strategic planning.

In this regard, I believe in the imperative for positive change … for evolution … and constant improvement in performance. I believe that an institution, government or business must always be able to pivot, shift and innovate as the world changes. As Will Rogers once said, “Even if you are on the right track, if you are standing still, you will get run over.”

And one of the biggest changes and challenges our enterprise has encountered recently is the growth in the IRS’ portfolio as we take on new and important roles and responsibilities in administering social benefits program, such as an expanded Earned Income Tax Credit and other benefits contained in the Recovery Act and the HIRE Act (the recent “jobs” act) that help struggling taxpayers. We put out billions of dollars to help people buy homes and stabilize the housing market through the first-time home buyer credit, and we added $400 to $800 to families’ paychecks through the Making Work Pay Credit, just to name two provisions.

These new responsibilities demonstrate that the IRS is now recognized as an efficient and effective distribution mechanism that the public and federal policy makers have come to rely upon to carry out important initiatives far beyond the traditional realm of tax administration.

However, our primary responsibility continues to be administering the more traditional aspects of our nation’s self assessment tax system that requires we appropriately balance our service and our enforcement responsibilities. This is not an either/or proposition. We must do both. We serve honest and hardworking taxpayers by answering their tax questions, quickly processing their returns and refunds, but also through a robust and evolving enforcement program that ensures that everyone pays the taxes they owe.

Here, too, we are innovating. A good example is our global high wealth unit which we launched last year, which will look at the entire web of economic entities controlled by a high wealth individual. In the past, we looked at each legal entity separately. Now we will look at an individual’s tax return, business holdings, trusts, related charitable entities, foreign holdings and other tax-related activities as an integrated whole to look for patterns of non-compliance.

That is just one example of our evolving, smarter approach to compliance. We are also innovating in the international area, recognizing that tax administration must keep up with a global economy.  

When it comes to enforcement, I have also stressed deterrence … preventing problems up front. And as I will be discussing later in my speech, I view strong governance as a cornerstone to prevention and ensuring compliance.

From a resource point of view, it is far better for both the taxpayer and the IRS to utilize this approach. To this end, we rely heavily on outreach and education and leveraging our stakeholders in the larger tax community. For example, we recently launched an initiative to require the registration, minimum competency testing and continuing education of paid tax return preparers. This will improve service to taxpayers, increase compliance and enhance the integrity of the overall tax system.    

That’s the 30,000 feet view of the IRS. Now, I would like to discuss what I believe is some common ground between the IRS and America’s foundations. I want to explore how we share mutual interests and work separately, but in parallel to assure the promotion and delivery of a broad array of societal benefits.

Like the IRS, a non-profit’s mission is not to achieve bottom-line results for shareholders. Indeed, we have a different stakeholder to whom we are accountable to — the public. Our respective missions are the same: to serve the public by promoting the public’s interests and welfare. 

And when you think about it, we are both agents of lasting change … change for the better … change that will benefit our nation, its people and institutions ... and change for the public good.

For the IRS, this has now become a very important part of our mission. As I touched upon earlier, the IRS has become the “go-to” government agency to implement and administer the tax provisions contained in economic recovery legislation that could have lasting impact for generations.

Three examples of domestic priorities where we play a role leap to mind: health care, energy and education — areas of focus for many of your foundations too. These areas affect every American taxpayer, large or small, rich or poor, individual or business.  

The IRS will play a key role in carrying out the tax provisions of the landmark health care reform legislation that President Obama signed into law last month. It contains hundreds of billions of dollars in new tax credits for families and $40 billion of health tax credits for small employers, including tax-exempt organizations. This legislation will help provide health insurance for millions of uninsured and the underinsured Americans. Its goal of affordable health care for every American is as important a policy objective as any today. 

We are also playing a critical role in administering a number of energy efficiency and renewable energy tax incentivesfor businesses and individuals, such as credits for money spent on solar, wind, geothermal and fuel cell equipment, or for making energy efficiency improvements to a taxpayer’s existing home. 

Education is probably one of the wisest long-term investments our nation can make. I think everyone recognizes the value of education as a key to our nation’s long-term health. Under the Recovery Act, more parents and students qualify for a tax credit — the American Opportunity Credit — to pay for college expenses. The Recovery Act also expanded so-called 529 Plans to help families pay for future expenses associated with college, or other qualified post-secondary training. And last year, we partnered with the Department of Education to re-design the Free Application for Federal Student Aid to streamline the income eligibility portion with pre-populated income data from the IRS.

So we, like you, help to promote and fund key public priorities that make our nation stronger every day. I think and hope that we share common values and principles that emphasize respect and compliance with the law and doing the right thing. I believe it is here where our institutions most closely intersect in values and principles. 

The Council’s “ethical principles” are mission, stewardship, accountability and transparency, diversity and inclusiveness, governance and respect. These mirror the IRS’ core values of honesty and integrity … respect … continuous improvement …  inclusion …openness and collaboration … and accountability.

Last year, I gave a speech to the annual conference of the National Association of Corporate Directors, an association of board members of for-profit businesses, on the important role that corporate boards of directors can play in overseeing tax risk. I emphasized how important it is for a corporate board to oversee and understand a for-profit corporation’s tax risk and tax strategies, in large part because of the potential impact on an organization’s bottom line and reputation. I encouraged board members to have conversations with their organization’s management to assess whether the board’s appetite and philosophy regarding tax risk aligned with how tax risk assessment and management were carried out in the corporation.    

On a fundamental level, good governance is essential to public trust and accountability, and critical to the success of all organizations and institutions, including governments, non-profits and for-profits. Good governance requires an organization’s leaders — whether a for-profit board of directors or a non-profit board of trustees — to assess and oversee all of the organization’s key business and financial risks. And this entails institutional risk that may include, but is not limited to, tax risk.   

Now, I recognize there are fundamental differences between the large corporate businesses I addressed last fall and the non-profit community. Tax risk for corporations represents financial and earnings exposure; but tax risk for non-profits represents potential loss of the tax exemption itself. The standards for tax exemption are based on the need to pursue a public mission, without being diverted by private interests. As a result, good tax governance for a non-profit is mostly the same as general good governance — both involve oversight of the organization’s effectiveness in pursuing its mission. 

Earlier, I discussed some of the broad principles and common interests that private foundations and the IRS share. And when it comes to governance of public charities, we share many of the same goals. 

As I thought about speaking to you today, I reflected on my days as a private equity investor (putting money into companies) as well as my time in the non-profit world (trying to get money). I know that one of the key criteria for grant-making in most foundations is a strong, stable management team and board of directors for the organization receiving a grant.

While it may not seem obvious, it occurs to me that we both want many of the same things from tax-exempt organizations. We want well-run institutions that deliver on their missions — or exempt purpose — in tax parlance. We want appropriate controls in place to ensure clean books and records and adherence with legal requirements. And we both benefit from what each of us does separately. We both benefit from another set of eyes looking at similar issues.

For example, you want to spend your money wisely. Before your foundation makes a grant, you want to make sure that the organization receiving the grant is properly run and is a good steward of its assets. You want to make sure that it has good internal controls. You want to make sure that it has sound leadership and is skillfully managed to give you confidence it can and will execute on its mission and serve a public good.  Here, I think we have a lot of common ground. And frankly, you help us ensure that your grantees stay focused on their mission.

We will continue to focus on the broad issues of trust, accountability, and transparency as our strategy evolves. The new Form 990 is perhaps the best example of our recent work to promote public trust and accountability in the non-profit area. The new form is beginning to provide the public with richer information about the charities they contribute to or with which they interact.

And as I have mentioned, good governance is critical to the success of all organizations — including private foundations. Board members in general are expected to ensure that the entity stays true to its mission. Like public charities, private foundations exist to support charitable purposes and have a responsibility to the public. Many governance principles apply equally to both public charities and private foundations — for example, internal controls and safeguarding assets. 

I also understand there are key differences between private foundations and public charities — both in how they are governed and in how they are treated under the tax code. I recognize that in some cases, founders, major donors and family members may and should hold key governance positions in a private foundation, including as officers, directors and trustees. In fact, this is often a distinguishing characteristic of a private foundation compared to a public charity. 

Congress recognized this difference and the potential for absence of independent in many private foundations. It has, therefore, allowed for greater control by the original donor to a private foundation in exchange for the application of a fairly precise set of restrictions on behavior.

To some extent, these restrictions are a specific articulation of some good governance practices; including taxes on:

• acts of self-dealing involving private foundation assets;
• private foundation expenditures that are not for charitable purposes; and
• excessive business holdings or risky investments that jeopardize the financial well-being of the foundation.

I recognize that appropriate governance practices for a private foundation may in some cases look different than what exists for other charitable organizations. In the end, however, the similarities are likely to outweigh the differences, because all non-profits can benefit from effective boards and good internal controls.

And let me be clear that while we strongly believe in the value of good governance for all organizations, our job at the IRS is to administer the law without becoming a barrier to you achieving all of the good work that you do. We should not be questioning legitimate business decisions or substituting our judgment for the business judgment of a private foundation’s leaders when it comes to determining the individual mission of the organization. That is neither our role, nor our responsibility.

In conclusion, I know that you all run organizations that are essential to the economic and intellectual vigor of the country. And like me, you have all the challenges of running your organization efficiently while continually innovating. I hope that I’ve painted a picture that illustrates my belief that we have many common interests, both as the IRS is called on more and more to play a part in distributing money to further societal goals, and as we both have an interest in well-run, accountable non-profit institutions: you as grant-makers and the IRS as a regulator. 

And given your unique exempt status, we also have a responsibility to ensure that you continue to operate in the interest of the public. We will work to administer the tax law in a way that respects exempt organizations’ freedom to choose their charitable mission and how they wish to pursue that mission, and recognizes that private foundations are a valuable asset to our country.

Thank you for the opportunity to speak with you today and for your attention. Best of luck in the good work you are doing for the country and indeed, the world.