Profitable Organizations Using Tax-Exempt Status to Escape Taxes

Last updated on November 19, 2021

The country is losing millions of dollars in taxes, thanks to profitable organizations that have tax-exempt status. Many organizations that are not a charity, a school, a religious organization etc. can get tax-exempt status even as they earn millions of dollars.

With the country looking into an enormous budget deficit and finding ways to get more taxes, these profit making tax-exempt organizations are running their business without a problem.

The problem starts with the way firms obtain tax-exempt status. http://www.sfgate.com/business/article/Tax-exempt-status-for-profitable-firms-4046507.php#page-1 states:

“Anyone can start a nonprofit. It’s as simple as incorporating in any state and correctly filling out an IRS application. Once that’s done, a company is tax exempt.

“It’s complete rubber-stamping,” says Ken Berger, CEO of Charity Navigator, a watchdog group that is itself a nonprofit. “The IRS and the states are tremendously understaffed.”

For a company to get tax-exempt status, the IRS requires it to qualify in one of 28 categories, including charities, religious organizations and schools. The IRS says that some kinds of groups – such as trade associations, unions, agricultural organizations and social welfare groups – don’t even have to apply for nonprofit status.

Such groups, which include ABS and the Polo Association, can self-declare their tax-exempt status, the IRS says. Federal law on tax-exempt companies is so lax and vague that organizations can legally skip taxes on hundreds of millions of dollars of profit, Dean Zerbe, a lawyer who was tax counsel for the Senate Finance Committee until 2010 says.

“The problem is growing because there is so little enforcement, and the laws are so loosey-goosey,” he says.”

The case of American Bureau of Shipping (ABS) tells of how large, profitable companies are not paying taxes. ABS is a company with tax-exempt status. Ship owners use its services. The company inspects 11,898 vessels annually and has an eight-story office building. In its IRS filing, the company showed its executives getting multimillion-dollar packages.

At the time of filing of taxes, the company fills the standard IRS filing form stating the reason for nonprofit being “to promote the security of life and property on the seas”. That is all the company needs to do to continue with the tax exempt status.

As an explanation the company only said that its nonprofit status helps them to achieve the necessary impartiality. Apart from ABS, there are hundreds and thousands of nonprofit firms that are making a fortune and not giving a share to the country. With so much money in their lockers and more coming in, they are spending generously. sfgate adds:

“One explanation for such lavish spending is that nonprofits sometimes have more money than they know what to do with – and one thing they don’t have to do is pay taxes.

“The problem with a nonprofit is, when you start grinding out money, what do you do with it?” says Jack Devanney, a retired executive of companies that own ships that used ABS services. “There are only so many fancy cars you can buy your top executives.”

The important thing is that the country is losing valuable money in taxes. If getting the tax-exempt status is that simple and there are no inquiries into the wealth of such companies, people are sure to exploit it.