GAO Releases Results of Study to Help IRS Strengthen Charity Oversight
Charity Oversight Background
The IRS is responsible for overseeing charitable organizations through its Exempt Organizations Unit (“EO”) within the Tax-Exempt and Government Entities Division. For example, the EO reviews all applications for tax-exempt status and analyzes the operations and finances of a small percentage of exempt organizations through audit examinations. It has the discretion to propose tax assessments or changes to exempt status where necessary. In addition, EO conducts examinations of tax-exempt organizations to assist in determining whether or not they are acting in furtherance of and in accordance with their tax-exempt purpose. While the IRS ensures that tax-exempt organizations are compliant with federal tax laws, state charity regulators monitor compliance with state trust, nonprofit corporation, consumer protection and charitable solicitation laws. The IRS has faced budget cuts in the last few years resulting in a decline of approximately $900 million and 10,000 full-time employees since fiscal year 2010. This has led to concern regarding the adequacy of its oversight of charitable organizations.
GAO Investigation Processes
The purpose of the GAO investigation was to review the IRS’s criteria for selecting tax-exempt organizations for examination. The GAO focused its evaluation on four specific issues in order to provide recommendations and ease the compliance concern
The first objective was to evaluate the number, type, size and other characteristics of charitable organizations by reviewing IRS documentation and analyzing data from the IRS Statistics of Income samples of tax-exempt organization Forms 990 and 990-EZ.
The second was to review the IRS oversight activities for charitable organizations by reviewing IRS documentation and data including referrals and examinations performed as well as interviewing IRS officials about their oversight activities.
The third objective was to determine how the IRS assesses its oversight efforts of charitable organizations to ensure that they are acting in furtherance of their charitable purposes. The GAO reviewed strategic and performance documents and interviewed IRS planning officials and division managers to evaluate how performance goals are set, measures to monitor their progress toward meeting goals are developed, data is used to identify challenges and their causes, and strategies to address challenges are created.
Finally, the GAO examined how the IRS collaborates with state charity regulators and U.S. attorneys to identify and prosecute organizations suspected of engaging in fraudulent or other criminal activity. This was done mainly by reviewing various IRS documents and interviewing IRS and Department of Justice officials as well as representatives from the National Association of State Charity Officials.
GAO Findings and Recommendations
As stated in its Report, the GAO (1) described the charitable organization sector, (2) described the IRS oversight activities, (3) determined how the IRS assesses its oversight efforts, and (4) determined how the IRS collaborates with state charity regulators and U.S attorneys to identify and prosecute organizations suspected of engaging in fraudulent (or other criminal) activity.
The GAO found that the EO lacks meaningful performance measures which hinder their ability to fully assess and communicate their effectiveness on the compliance of charitable organizations and makes setting goals for increasing compliance challenging. As a result, EO managers have added performance measures to assist in tracking inventory of applications for tax exemption, referrals and exam cases. The GAO recommended that the EO develop quantitative, results-oriented compliance goals and additional performance measures and indicators that can be used to assess the impact of exams and other enforcement activities on compliance.
The e-filing rate for tax-exempt organizations is significantly lower than corporate and partnership filings. In 2013, only 38% of Forms 990, 990-EZ and 990-PF were electronically filed. There is currently a mandated e-filing requirement for large organizations that file at least 250 returns of any type during the year with total assets of $10 million or more as well as for Form 990-N filers. If the tax-exempt organization does not fall into either of these two categories, it has the option to either paper file or e-file their annual return. This lower rate results in less digitized data and a higher labor cost to process the returns. The IRS estimates that mandated electronic filing would save the EO about $1 million over a three year period. A higher e-filing rate would also allow for more accurate and complete data that would be available more timely and the IRS would more easily be able to identify areas of noncompliance. This would also increase transparency of tax-exempt organizations which is the ultimate goal of the IRS.
The GAO determined that there is a lack of clarity about how state charity regulators are permitted to utilize IRS data and examination work to help build their cases against charitable organizations engaged in fraudulent or criminal activities. Currently, there are safeguards in place that require state regulators to sign a disclosure agreement with the IRS to agree to certain procedures for receiving and handling taxpayer information. According to subject matter experts interviewed by the GAO, this process is causing a burden on state regulators as they do not have the resources, capacity or infrastructure within the charitable oversight division to fulfill these requirements. The GAO recommends that the IRS propose revised legislation that would allow the IRS to share more data, such as information about charitable examinations, in order to encourage the collaboration of IRS and state to avoid duplicating efforts and allow for a more timely response to noncompliance issues.
In summary, the GAO provided a detailed explanation of its overall recommendations to the Commissioner of Internal Revenue including:
(1) Direct EO to develop quantitative, results-oriented compliance goals and additional performance measures and indicators that can be used to assess impact of exams and other enforcement activities on compliance.
(2) Continue to work with Treasury officials to do the following: review the flexibility afforded under The pension Protection Act of 2006 consistent with statutory protections of taxpayer data, clarify what flexibility state regulators have in how they protect and use federal tax data, make modifications to guidance, policies, or regulations as warranted, and clearly communicate this information with state charity regulators.
Conclusion
A draft of the Report for comment was sent to the Commission of the Internal Revenue and Assistant Attorney General for Administration, Department of Justice. The Department of Justice did not provide any comments; however, a number of comments were received from the IRS’s Deputy Commissioner for Services and Enforcement.
Overall the IRS concurred with the GAO recommendations. The Report outlines the IRS’s “ongoing and planned steps to (1) improve the application process for organizations seeking tax-exempt status and reduce the backlog of applications that had accrued in recent years, (2) refine its strategy and approach to better determine the effect of enforcement actions on compliance by tax-exempt organizations, including charitable organizations, and (3) improve the efficiency with which taxpayer information may be shared with state charity regulators through education efforts and outreach.”
The IRS also provided technical comments which were incorporated into the Report.
GAO Charitable Oversight Full Report
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