Last year’s passage of comprehensive tax reform has undoubtedly made the federal tax code fairer and more conducive to economic growth and individual prosperity. The provisions in the Tax Cuts and Jobs Act have increased wages for millions of workers, raised business confidence, and kept more money in the pockets of hardworking taxpayers. Now that House Republicans are moving forward with “Tax Reform 2.0” it’s time to put all options on the table to continue to improve the code. One such option has been floated by Senate Finance Committee Chairman Orrin Hatch -- an examination of the tax-exempt status of federal credit unions. Though he received some backlash from special interest groups for even broaching the subject, Chairman Hatch’s efforts deserve careful consideration.
NTU has written extensively on this subject and noted that a few large credit unions have taken advantage of the tax exemption and have relaxed their field of membership requirements from those who share a common bond, to virtually anyone and everyone. In many respects, these few large institutions are directly competing with tax-paying community banks for similar customers, which falls in conflict with the original intent of Congress under the Federal Credit Union Act of 1934.
We have long discussed the reasoning for Congress and the administration to review this and other provisions of the tax code, with an eye toward simplification and reducing tax rates across the board (though certainly not for purposes of fattening the Treasury’s coffers). Yet, as Congress examines what tax policy should look like, can additional progress also be made toward improving how tax policy actually functions at the filing level? The answer to this question is important, especially as it pertains to non-profit or not-for-profit groups that engage in activities with more than a passing resemblance to commercial transactions. Credit unions certainly fit in this category.
Accordingly, some have suggested that larger federal credit unions should be required to file the IRS Form 990 (state-chartered credit unions must already do so, and up until the 1980s the National Credit Union Administration, or NCUA, prepared a consolidated return for all institutions under its supervision).
In a letter to the acting IRS commissioner, Chairman Hatch addressed the need for greater transparency for these select few institutions which have expanded the scope of their operations:
“Should the IRS consider this change - which is well within the authorities Congress has granted to the IRS - it may be appropriate to expand the information return requirement only to the largest federal credit unions to those with expanded commercial activities or fields of membership.”
This is not a recommendation to be taken lightly. As NTU knows from direct experience, the scope and complexity of the 990 tax return has increased significantly over time for most nonprofit and not-for-profit organizations (although small groups are at least permitted to file the simplified Form 990-EZ or 990-N). The information reporting requirements have become a burden in their own right, especially after the redesign of the form that took place for the 2009 tax year. But the best solution to this problem is not to provide filing exemptions for a lucky, connected few -- rather, it is to simplify the process for all.
In any case, the federal credit union exemption from filing a Form 990 is highly unusual, primarily because Congressional intent has increasingly been motivated by a desire to encourage parity in transparency and accountability from organizations that don’t file corporate profit tax returns. For many years large nonprofit or not-for-profit organizations such as universities and hospitals have been required to file Form 990 - even National Taxpayers Union and our Foundation must file such a form to report our financial information and compensation for top executives. Indeed, TCJA continued this trend, by instituting an excise tax of 21 percent on certain executive compensation that works in roughly the same way as the deductibility limit on executive pay at for-profit businesses. The same goes for new reporting requirements for types of employee benefits. Simply leaving out large credit unions from this modernization likewise leaves those organizations in a tax and regulatory limbo that serves no one’s best interest.
Reinstituting 990 filing for large credit unions won’t come without compliance costs, which is why policymakers must take a thoughtful approach. While it is true that these institutions would already maintain much of the information that gets reported on Form 990, care should be taken to avoid inordinate increases in net recordkeeping burdens. For example, as an offset Congress and NCUA could work to streamline rules affecting how credit unions operate. Alternatively (and less ideally), Congress and the IRS could work to design a Form 990 “CU” that credit unions could use to expeditiously fulfill their reporting obligations with as much information they already have on hand as possible.
Congress and the IRS should take steps to rationalize and rebalance the entire Form 990 filing system to allow for information disclosure that is helpful to the public, while reducing the red tape involved with this area of tax compliance and respecting the confidentiality of certain information. Until then, the work of Chairman Hatch and his colleagues can serve as a starting point for necessary conversations over equity in tax compliance.
We look forward to working with IRS Commissioner Chuck Rettig on this topic, and many other concerns that are front and center on the minds of taxpayers across the country.