WASHINGTON – Senators and IRS officials are taking a close look at the compensation paid to executives of tax-exempt organizations in the wake of high-profile cases of abuse, in which executives appropriated donations given by unsuspecting donors.

The Senate Finance Committee is preparing to introduce a new law in the fall that would intensify federal regulation of the nation’s 3 million tax-exempt organizations, of which about one-third are charities.

A draft proposal floated at a public hearing yesterday would limit the compensation of executives at private foundations; restrict payments for travel, meals, and accommodations at private charities; impose federal liability on charitable board members, and restrict the size and composition of the boards.

Meanwhile, the Internal Revenue Service is preparing an “aggressive” investigation this summer of compensation paid to executives at hundreds of nonprofit foundations, the IRS commissioner, Mark Everson, testified at the hearing yesterday.

“We are concerned that the governing boards of tax-exempt organizations are not, in all cases, exercising sufficient diligence as they set compensation for the leadership of the organizations,” he told the committee.

IRS audits of tax-exempt organizations have fallen to historically low levels, while the number of abuses is growing, he said.

“If Americans can’t trust their charities, they will stop giving and people in need will suffer,” he said.

The committee chairman, Senator Grassley of Iowa, said he plans to introduce new legislation in the fall after consulting widely with the nonprofit sector.

“It’s sad that in a hearing about charities, we have to hear about million-dollar insider contracts, middlemen who purposely cheat charities to make an extra buck, and the fact that over half of all new tax shelters used a tax-exempt party,” Mr. Grassley said.

The committee staff’s 19-page draft proposal includes a periodic five-year review of charities’ tax-exempt status, in which the IRS would determine whether an organization continues to do the charitable works that justify its freedom from income taxes and its ability to accept tax-exempt contributions. It would also revoke the status of charities that are complicit in illegal tax-shelters.

The proposal would give states the power to pursue federal tax-law violations by exempt organizations, with the approval of the IRS.

Mr. Everson did not comment directly on the proposal, but he said the IRS is “hamstrung” by existing laws and a shortage of funds to combat the growing trend of abuses enabled by what he described as a “floating consortium of abusive attorneys.”

Mr. Everson called on Congress to implement President Bush’s 2005 budget request, which would increase the IRS budget by $490 million to $10.674 billion. Most of the increase would go to scrutiny of nonprofits, he said.

Several witnesses who appeared before the commission called on charities’ board members to do a better job of overseeing their organizations.

“Too often we see boards that are inattentive or uninvolved,” said an assistant attorney general of New York, William Josephson.

The president emeritus of Harvard University, Derek Bok, agreed that “there is not enough accountability at the present time.”

However, he found fault with a number of proposals that may not be appropriate for all organizations in a sector that includes everything from billion dollar hospitals and universities to tiny neighborhood organizations and local choral societies.

The proposal’s requirement that a board be comprised of three to 15 members would pose problems for universities, whose boards are routinely larger, he said. And a requirement that all groups provide the IRS with goals and performance measures would be difficult for nonprofits such as Harvard that “deal in intangibles,” Mr. Bok said.

Several witnesses called for better communication between the IRS and state regulators.

The president of the National Association of State Charity Officials, Mark Pacella, stressed that despite extensive legal powers, states do not have sufficient resources to properly police charities.

New York’s Mr. Josephson said the accountants in his department find potential problems in 10% of the applications for charitable status they inspect.

The committee heard repeated calls to overhaul the documents that the founders of nonprofits must file with the IRS, but several witnesses said improved disclosure will not be useful unless the IRS can verify that the groups actually do what they claim to.

The percentage of tax-exempt organization returns examined by the IRS declined to 0.7% in 2003 from 2.5% in 1993, according to the congressional Joint Committee on Taxation.

The committee’s draft proposal raised concerns about the capacity of small charities to comply.

The chair of the Iowa governor’s task force on nonprofit organizations, Willard Boyd, said almost three-quarters of the charitable organizations in Iowa have revenues under $500,000, and they have six or fewer employees on average. Their main concern is buying health insurance for their staff and lawsuit insurance for their board members, he said.

Jonathan Small, the executive director of the Nonprofit Coordinating Committee of New York, which helps train nonprofits, said he planned to submit a statement to the committee today asking senators “to consider the burdens that would be imposed in terms of additional costs of all kinds and to weigh those very carefully against the benefits they expect to be achieved.”

Several leaders of charitable groups said they welcomed the increased scrutiny to bolster the trust of donors.

“We shouldn’t be afraid of whatever might come out of this, as long as it is thoughtful and reasonable,” said the president and CEO of United Way America, Brian Gallagher.