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entitled 'Tax Gap: Requiring Information Reporting for Charitable Cash 
Contributions May Not Be an Effective Way to Improve Compliance' which 
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Report to the Committee on Finance, U.S. Senate: 

United States Government Accountability Office: 
GAO: 

May 2009: 

Tax Gap: 

Requiring Information Reporting for Charitable Cash Contributions May 
Not Be an Effective Way to Improve Compliance: 

GAO-09-555: 

GAO Highlights: 

Highlights of GAO-09-555, a report to the Committee on Finance, U.S. 
Senate. 

Why GAO Did This Study: 

Individual taxpayers who misreport charitable cash contributions they 
deduct on their tax returns contribute to the tax gap, the difference 
between tax amounts taxpayers report and pay voluntarily and on time 
and the amounts they should pay under the law. The Internal Revenue 
Service (IRS) most recently estimated a gross tax gap of $345 billion 
for tax year 2001. One approach that tends to result in high levels of 
taxpayer compliance is information reporting to IRS by third parties on 
taxpayer transactions. 

GAO was asked to (1) provide information on characteristics of 
individual taxpayer misreporting of charitable cash contributions, (2) 
provide information on actions that IRS takes to address misreporting, 
and (3) evaluate potential benefits and challenges associated with 
requiring information reporting for charitable cash contributions. 

To meet its objectives, GAO used data from IRSís tax year 2001 National 
Research Program (NRP) compliance study of individual taxpayers, 
reviewed IRS guidance and enforcement data, and interviewed IRS 
officials and representatives from charities or organizations that 
represent charities. 

GAO made no recommendations in this report. In email comments on a 
draft of this report, IRS agreed with GAOís overall conclusion that 
requiring information reporting for charitable cash contributions may 
not be an effective way to improve compliance. 

What GAO Found: 

For tax year 2001, an estimated 46 percent of taxpayers who deducted 
cash contributions misreported, resulting in an estimated $13.8 billion 
in underreported net income. Since this amount is in income, and not 
tax dollars, the tax gap from the misreported cash contributions was 
much less than $13.8 billion. About 79 percent of misreporting 
taxpayers overstated a total of $16 billion in contributions while 
about 21 percent of misreporting taxpayers understated a total of $2.2 
billion in contributions. 

Table: Distribution of Estimated Net Misreported Cash Contribution 
Amounts by Individual Taxpayers, Tax Year 2001: 

Net misreported amount per taxpayer: Overstated contributions: Less 
than $1,000; 
Number of misreporting taxpayers (in millions): 9.1; 
Percentage of misreporting taxpayers: 53%; 
Total net misreported contributions (dollars in billions): $3.2. 

Net misreported amount per taxpayer: Overstated contributions: $1,000 
to $4,999; 
Number of misreporting taxpayers (in millions): 3.9; 
Percentage of misreporting taxpayers: 23%; 
Total net misreported contributions (dollars in billions): $8.1. 

Net misreported amount per taxpayer: Overstated contributions: $5,000 
or greater; 
Number of misreporting taxpayers (in millions): 0.5; 
Percentage of misreporting taxpayers: 3%; 
Total net misreported contributions (dollars in billions): $4.7. 

Net misreported amount per taxpayer: Understated contributions: Less 
than $1,000; 
Number of misreporting taxpayers (in millions): 3.2; 
Percentage of misreporting taxpayers: 19%; 
Total net misreported contributions (dollars in billions): -$0.6. 

Net misreported amount per taxpayer: Understated contributions: $1,000 
or greater; 
Number of misreporting taxpayers (in millions): 0.4; 
Percentage of misreporting taxpayers: 2%; 
Total net misreported contributions (dollars in billions): -$1.6. 

Net misreported amount per taxpayer: Total; 
Number of misreporting taxpayers (in millions): 17.1; 
Percentage of misreporting taxpayers: 100%; 
Total net misreported contributions (dollars in billions): $13.8. 

Source: GAO analysis of IRS data. 

[End of table] 

IRS attempts to ensure charitable cash contribution reporting 
compliance through enforcement and taxpayer service efforts. Cash 
contributions are one of the areas IRS examines most frequently for 
individual taxpayers. For fiscal year 2008, IRS examined about 175,000 
taxpayers who potentially misreported cash contributions, out of about 
1.4 million individual taxpayers it examined that fiscal year, and 
adjusted cash contribution amounts by $593 million in net terms. 
Through its taxpayer service programs, IRS provides publications and 
instructions to tax forms to help taxpayers comply with cash 
contribution reporting and recordkeeping requirements. 

Requiring information reporting for charitable cash contributions may 
not be an effective way to improve compliance. Charities could incur 
substantial costs and burdens if they were required to file information 
returns with IRS and taxpayers on the cash contributions they receive. 
Exempting some cash contributions, such as those below a certain dollar 
amount or those made to small or religious charities, from information 
reporting could reduce the burden on some charities. However, exempting 
some cash contributions from information reporting would reduce the 
effect that the reporting would have on improving compliance, in part 
because IRS may not be able to match information returns against tax 
returns without complete information reporting. Also, the extent to 
which information reporting would improve voluntary compliance is 
unclear. Since the 2001 NRP study, more stringent requirements for the 
documentation taxpayers must keep to substantiate their cash 
contributions have gone into effect. It is not yet known whether the 
requirements have improved taxpayer reporting compliance, although an 
ongoing NRP study of individual taxpayers could show this. 

View [hyperlink, http://www.gao.gov/products/GAO-09-555] or key 
components. For more information, contact Michael Brostek at (202) 512-
9110 or brostekm@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results: 

Agency Comments: 

Appendix I: Congressional Briefing on Charitable Cash Contribution 
Reporting Compliance: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

May 14, 2009: 

The Honorable Max Baucus: 
Chairman: 
The Honorable Charles E. Grassley: 
Ranking Member: 
Committee on Finance: 
United States Senate: 

Based on Internal Revenue Service (IRS) data, individual taxpayers 
overstated the deductions they took for donating cash to charities by 
an estimated $13.8 billion, in net terms, for tax year 2001.[Footnote 
1] By overstating their cash contributions, these taxpayers contributed 
to the gross tax gap, estimated most recently at $345 billion for tax 
year 2001.[Footnote 2] The tax gap is the difference between the taxes 
that taxpayers report and pay voluntarily and on time and the amounts 
they should pay under the law. Given the magnitude of the tax gap, even 
small improvements in taxpayer compliance could result in substantial 
revenue. Also, increasing compliance could improve the fairness of the 
tax system, as misreporting taxpayers increase the burden of funding 
the nation's commitments for those taxpayers who accurately pay their 
taxes. 

One approach that tends to lead to high levels of taxpayer compliance 
is information reporting, through which third parties, such as 
employers or banks, file returns with IRS and taxpayers that provide 
information on a variety of taxpayer transactions. IRS tries to match 
information from information returns filed by third parties against 
taxpayers' income tax returns to see if taxpayers have filed returns 
and reported all their income. Currently, information reporting is not 
required for cash contributions to charities.[Footnote 3] Given your 
long-standing interest in addressing the tax gap, you asked us to (1) 
provide information on characteristics of individual taxpayer 
misreporting of charitable cash contributions, (2) provide information 
on actions that IRS takes to address individual taxpayer misreporting 
of charitable cash contributions, and (3) evaluate potential benefits 
and challenges associated with requiring information reporting for 
charitable cash contributions. 

To provide information on the characteristics of individual taxpayer 
misreporting of charitable cash contributions, we used data from IRS's 
National Research Program (NRP) study of individual taxpayers for tax 
year 2001. Through this study, IRS examined about 46,000 randomly 
selected individual tax returns and used the results of the 
examinations to estimate misreporting of income and taxes for all 
individual tax returns. We also reviewed data from IRS's Statistics of 
Income (SOI) individual files for tax years 2001 through 2006, the most 
recent year for which data are available. SOI is a widely used database 
consisting of a sample of unexamined income tax returns. Since the 
estimates we provide using these data sources are based on samples, 
they involve margins of error. Unless otherwise noted, all percentage 
estimates have margins of error of 2 percentage points or less; value 
estimates have margins of error of 10 percent or less. We assessed both 
sources of IRS data and determined that they were sufficiently reliable 
for the purposes of this report. 

To provide information on the actions that IRS takes to address 
individual taxpayer misreporting of charitable cash contributions and 
any challenges that it faces with these actions, we reviewed IRS forms, 
publications, and taxpayer guidance on deducting cash contributions to 
charities and reviewed documents and data from IRS's enforcement 
programs including the Examination Operational Automation Database of 
IRS taxpayer examinations. We assessed this data source and determined 
that it was sufficiently reliable for the purposes of this report. We 
also interviewed officials from IRS's Wage and Investment; Small 
Business/Self Employed; Tax Exempt and Government Entities; and 
Research, Analysis, and Statistics Divisions and the Office of the 
Chief Counsel who have knowledge of cash contribution compliance 
issues. 

To evaluate the potential benefits and challenges associated with 
requiring information reporting for charitable cash contributions, we 
reviewed requirements of the Paperwork Reduction Act of 1995[Footnote 
4] under which federal agencies, such as IRS, must obtain approval from 
the Office of Management and Budget that the benefits of collecting new 
information outweigh the costs. We also examined IRS's policies and 
procedures relating to information reporting. For example, IRS 
generally requires that each information return include a taxpayer 
identification number for purposes of matching information returns with 
tax returns. We also reviewed prior GAO reports related to information 
reporting and interviewed IRS officials from the divisions previously 
listed. In addition, we interviewed representatives from the tax return 
preparation industry and from charities or organizations that represent 
charities. The briefing in appendix I provides details on the 
charitable organizations we interviewed. 

We conducted this performance audit from September 2008 through May 
2009 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

On March 3, 2009, we briefed your staff on the results of our work. 
This report, including the information in appendix I conveys an update 
to the information provided during that briefing. 

Results: 

For tax year 2001, an estimated 46 percent of individual taxpayers who 
deducted cash contributions misreported, resulting in an estimated 
$13.8 billion in underreported net income. Since this amount is in 
income, and not tax dollars, the tax gap from the misreported cash 
contributions was much less than $13.8 billion. About 79 percent of 
misreporting taxpayers overstated a total of $16 billion in 
contributions, while about 21 percent of misreporting taxpayers 
understated a total of $2.2 billion[Footnote 5] in contributions. 

We also found that: 

* about two-thirds of taxpayers who overstated their cash contributions 
overstated less than $1,000, 

* about 70 percent of the $16 billion in overstated contributions were 
from taxpayers who overstated less than $5,000, 

* most taxpayers who overstated cash contributions overstated at least 
half of the amount they deducted on their tax returns, and: 

* taxpayers who deducted cash contributions and used paid tax return 
preparers misreported about as often as those who deducted cash 
contributions and prepared their own tax returns. 

Taxpayers misreport cash contributions, for example, when they are 
unable to substantiate with required documentation the contribution 
amounts they deducted on their tax returns. 

IRS attempts to ensure charitable cash contribution reporting 
compliance through enforcement and taxpayer service efforts. As part of 
its enforcement efforts, IRS examines tax returns that include 
potential misreporting of cash contributions. Cash contributions are 
one of the areas IRS examines most frequently for individual taxpayers. 
For fiscal year 2008, IRS examined about 175,000 individual taxpayers 
who potentially misreported cash contributions out of about 1.4 million 
individual taxpayers it examined that fiscal year. IRS adjusted cash 
contribution amounts for about 76 percent of the taxpayers it examined 
that year for a net total of $593 million (IRS reduced overstated cash 
contributions by about $760 million and increased understated cash 
contributions by about $167 million). The $760 million of overstated 
contributions IRS reduced in fiscal year 2008 would have represented 
less than 5 percent of the $16 billion in estimated overstated 
contributions from tax year 2001. Through its taxpayer service 
programs, IRS provides publications and instructions to tax forms to 
help taxpayers comply with cash contribution reporting and 
recordkeeping requirements.[Footnote 6] 

Requiring information reporting for charitable cash contributions may 
not be an effective way to improve compliance. Charities could incur 
substantial costs and burdens if they were required to file information 
returns with IRS and taxpayers on the cash contributions they receive. 
Exempting some cash contributions, such as those below a certain dollar 
amount or those made to small or religious charities, from information 
reporting could reduce the burden on some charities. However, exempting 
some cash contributions from information reporting would reduce the 
effect that the reporting would have on improving compliance, in part 
because IRS may not be able to match information returns against tax 
returns without complete information reporting. Also, the extent to 
which information reporting would improve voluntary compliance is 
unclear. The Pension Protection Act of 2006 included more stringent 
requirements for the documentation taxpayers must keep to substantiate 
their cash contributions, starting in tax year 2007.[Footnote 7] It is 
not yet known whether the enhanced substantiation requirements have 
improved taxpayer recordkeeping and reporting compliance, although an 
updated NRP study of individual taxpayers could show whether compliance 
improved following the passage of the act. Finally, requiring 
information reporting could result in reduced charitable cash 
contributions from taxpayers, for example, because taxpayers may not 
want the federal government to know to which charities they donate, 
particularly for donations to religious organizations. 

Agency Comments: 

In an e-mail commenting on a draft of this report, the Director of 
Compliance from IRS's Wage and Investment Division agreed with our 
overall conclusion that requiring information reporting for charitable 
cash contributions may not be an effective way to improve compliance. 
IRS noted that information reporting could impose substantial costs and 
burdens on charities, especially smaller charities. In terms of 
exempting some contributions from a reporting requirement to reduce the 
burden on smaller charities, IRS noted that exempting some 
contributions and not others would lead to an incomplete process of 
matching information returns to tax returns, which would reduce the 
impact that reporting would have on improving compliance and produce 
disparate treatment of taxpayers. 

As agreed with your offices, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
from its issue date. At that time, we will send copies to the Chairman 
and Ranking Member, House Committee on Ways and Means; the Secretary of 
the Treasury; the Commissioner of Internal Revenue; and other 
interested parties. The report also will be available at no charge on 
GAO's Web site at [hyperlink, http://www.gao.gov]. 

If you or your staffs have any questions, please contact me at (202) 
512-9110 or brostekm@gao.gov. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. Key contributors to this report were Charlie 
Daniel, Assistant Director; Jeff Arkin; Crystal Bernard; Sara Daleski; 
John Mingus; Melanie Papasian; and Andrew Stephens. 

Signed by: 

Michael Brostek: 
Director, Tax Issues: 
Strategic Issues Team: 

[End of section] 

Appendix I: Congressional Briefing on Charitable Cash Contribution 
Reporting Compliance: 

Requiring Information Reporting for Charitable Cash Contributions May 
Not Be an Effective Way to Improve Compliance: 

Briefing for the Senate Committee on Finance: 

Engagement Objectives: 

* Provide information on the characteristics of individual taxpayer 
misreporting of charitable cash contributions. 

* Provide information on actions the Internal Revenue Service (IRS) 
takes to address individual taxpayer misreporting of charitable cash 
contributions. 

* Evaluate potential benefits and challenges associated with requiring 
information reporting for charitable cash contributions. 

Background: Misreporting of Cash Contributions and the Tax Gap: 

For tax year 2001, individual taxpayer misreporting of cash 
contributions resulted in an estimated $13.8 billion in underreported 
net income. 

* This estimate includes contributions made by cash, check, credit 
card, electronic funds transfer, or payroll deduction; 

* The estimate does not include donations of property, such as stocks 
or household items, which individual taxpayers report separately on 
their tax returns; 

* The tax gap from misreported cash contributions was much less than 
$13.8 billion. 

Misreporting of cash contributions contributes to the gross tax gap, 
which IRS most recently estimated to be $345 billion for tax year 2001. 

* The tax gap is the difference between the taxes that taxpayers report 
and pay voluntarily and on time and the amounts they should pay under 
the law; 

* IRS estimated $55 billion of the tax gap would eventually be 
recovered. 

Background: Charitable Cash Contribution Reporting Requirements: 

Individual taxpayers must itemize deductions to deduct charitable 
contributions. 

Taxpayers who receive a benefit from a contribution can only deduct the 
amount of the contribution that exceeds the value of the benefit 
received. 

* For example, a taxpayer who contributes $65 to a fund raising event 
that includes a meal valued at $25 can only deduct $40. 

* Taxpayers do not have to exclude the value of token items, such as 
mugs bearing the logos of charitable organizations. 

Taxpayers can deduct certain out-of-pocket expenses, such as car 
expenses, directly related to giving services to a charitable 
organization. 

Background: Charitable Cash Contribution Recordkeeping Requirements: 

Taxpayers must keep records to substantiate all charitable cash 
contributions they deduct. 

The type of documentation that taxpayers must keep changed with the 
passage of the Pension Protection Act of 2006 (Pub. L. No. 109-280). 

* Prior to the passage of the act, acceptable documentation included 
bank records (e.g., canceled checks or credit card statements), written 
records from charities, or other written records (e.g., taxpayer-
prepared logs). 

* For contributions of $250 or more, taxpayers had to have statements 
from the recipient charities (per contribution rather than for 
cumulative contributions) that showed whether the charities did or did 
not provide goods or services in return for contributions and a 
description and estimated value of any goods or services provided, 
among other requirements. 

Following the passage of the Pension Protection Act, beginning with tax 
year 2007, taxpayers must have a bank or written record from charities 
to substantiate their cash contributions. 

Taxpayers can no longer use other written records to substantiate their 
contributions. 

Taxpayers still must have written records from charities for 
contributions of $250 or more. 

Background: Taxpayers Who Deducted Charitable Cash Contributions: 

For tax year 2001 through tax year 2006: 

* From 28 percent to 30 percent of all individual taxpayers were 
estimated to have deducted cash contributions. 

* Total deducted cash contributions increased from an estimated $105 
billion to an estimated $144 billion. 

* From 79 percent to 85 percent of taxpayers who were estimated to have 
itemized their deductions were estimated to have reported deductions 
for cash contributions. 

Background: Information Reporting: 

Information reporting involves third parties, such as employers or 
banks, filing returns with IRS and taxpayers that provide information 
on a variety of taxpayer transactions. 

Information reporting helps ensure compliance: 

* Taxpayer voluntary compliance tends to be high for items subject to 
information reporting, in part because of the deterrent effect that 
information reporting can have on taxpayers who might otherwise 
misreport intentionally. 

* Generally, IRS matches amounts that third parties report on 
information returns against amounts that taxpayers report on tax 
returns to help identify potential misreporting and address it through 
enforcement actions (for example, through its Automated Underreporter 
program). 

Scope and Methodology: 

To provide information on characteristics of individual taxpayer 
misreporting of charitable cash contributions, we analyzed data from 
two sources: 

* IRSís tax year 2001 National Research Program (NRP) study of 
individual taxpayer compliance (the latest year available); 

* IRS Statistics of Income individual taxpayer data from tax years2001 
through 2006 (the latest year available). 

Estimates from these data sources are based on samples and involve 
margins of error, and unless otherwise noted: 

* percentage estimates have margins of error of 2 percentage points or 
less and; 

* value estimates have margins of error of 10 percent or less. 

To provide information on actions that IRS takes to address individual 
taxpayer misreporting of charitable cash contributions, we: 

* reviewed documents and data from IRSís enforcement programs, 

* reviewed IRS guidance on deducting charitable cash contributions, 
and, 

* interviewed officials from IRSís Wage and Investment; Small 
Business/Self Employed; Tax Exempt and Government Entities; and 
Research, Analysis, and Statistics divisions and the Office of Chief 
Counsel who have knowledge of cash contribution compliance issues. 

To evaluate the potential benefits and challenges associated with 
requiring information reporting for charitable cash contributions, we: 

* reviewed the requirements of the Paperwork Reduction Act of 1995(Pub. 
L. No. 104-13),under which federal agencies, such as IRS, must get 
Office of Management and Budget approval that the benefits of 
collecting any new information outweigh the costs; 

* examined IRSís policies and procedures relating to information 
reporting (for example, IRS generally requires that each information 
return include a taxpayer identification number for purposes of 
matching information returns with tax returns); 

* reviewed prior GAO reports related to information reporting; 

* interviewed IRS officials from the divisions listed previously; and; 

* interviewed representatives of the American Institute of Certified 
Public Accountants to obtain information on how information reporting 
of cash contributions might affect its members in preparing tax returns 
for taxpayers. 

We also interviewed representatives from the following organizations 
that represent different types of charitable organizations accounting 
for substantial amounts of cash contributions: 

* Independent Sector is a leadership forum for a diverse group of 
charities, foundations, and corporate-giving programs, whose members 
include some of the largest charities; 

* The National Council of Churches and the Evangelical Council for 
Financial Accountability are membership organizations that represent 
various religious organizations and denominations (religious 
organizations receive substantial amounts of cash contributions); 

* The United Way of America and the Combined Federal Campaign are 
conduits for large amounts of cash contributions collected for 
charities, some of which are given via payroll deduction; 

* The Council on Foundations is an association of grant-making 
foundations and corporations (individuals mostly make large 
contributions to foundations); 

* The National Council of Nonprofits and Independent Charities of 
America represent a diverse group of charities and nonprofit 
organizations, many of which are of small or medium size. 

Characteristics of Individual Taxpayer Misreporting of Charitable Cash 
Contributions: 

For tax year 2001, an estimated 46 percent of taxpayers deducting cash 
contributions misreported, resulting in an estimated $13.8 billion in 
underreported net income. 

About 79 percent of misreporting taxpayers overstated their 
contributions: 

* Overstated contributions resulted in an estimated $16 billion in 
underreported net income; 

* The estimated median overstated contribution amount was $504. 

About 21 percent of misreporting taxpayers understated their 
contributions: 

* Understated contributions resulted in an estimated $2.2 billion in 
overreported net income (estimate has a margin of error of 34 percent); 

* The estimated median understated contribution amount was $132 
(estimate has a margin of error of 11 percent). 

Types of misreporting of cash contributions could include the 
following: 

Overstated deductions: 

* Taxpayers being unable to substantiate with required documentation 
the cash contributions they deducted on their tax returns; 

* Taxpayers deducting cash contributions to organizations that were not 
qualified charitable organizations; 

* Taxpayers deducting portions of cash contributions for which they 
received benefits. 

Understated deductions: 

* Taxpayers who during the course of IRSís examinations identified cash 
contributions that they did not initially deduct on their tax returns. 

About two-thirds of overstating taxpayers (9.1 million out of 13.5 
million overstating taxpayers) overstated less than $1,000. 

About 70 percent of all overstated contributions ($11.3 billion out of 
$16.0 billion in overstated contributions) were from taxpayers who 
overstated less than $5,000. 

Table: Distribution of Estimated Net Misreported Cash Contribution 
Amounts by Individual Taxpayers, Tax Year 2001: 

Net misreported amount per taxpayer: Overstated contributions: Less 
than $1,000; 
Number of misreporting taxpayers (in millions): 9.1; 
Percentage of misreporting taxpayers: 53%; 
Total net misreported contributions (dollars in billions): $3.2. 

Net misreported amount per taxpayer: Overstated contributions: $1,000 
to $4,999; 
Number of misreporting taxpayers (in millions): 3.9; 
Percentage of misreporting taxpayers: 23%; 
Total net misreported contributions (dollars in billions): $8.1. 

Net misreported amount per taxpayer: Overstated contributions: $5,000 
or greater; 
Number of misreporting taxpayers (in millions): 0.5; 
Percentage of misreporting taxpayers: 3%; 
Total net misreported contributions (dollars in billions): $4.7[A]. 

Net misreported amount per taxpayer: Understated contributions: Less 
than $1,000; 
Number of misreporting taxpayers (in millions): 3.2; 
Percentage of misreporting taxpayers: 19%; 
Total net misreported contributions (dollars in billions): -$0.6. 

Net misreported amount per taxpayer: Understated contributions: $1,000 
or greater; 
Number of misreporting taxpayers (in millions): 0.4; 
Percentage of misreporting taxpayers: 2%; 
Total net misreported contributions (dollars in billions): -$1.6[B]. 

Net misreported amount per taxpayer: Total; 
Number of misreporting taxpayers (in millions): 17.1; 
Percentage of misreporting taxpayers: 100%; 
Total net misreported contributions (dollars in billions): $13.8. 

Source: GAO analysis of IRS data. 

[A] Estimates have margins of error of 21 percent or less. 

[B] Estimate has a margin of error of 47 percent. 

[End of table] 

Most taxpayers who overstated cash contributions overstated at least 
half of the contribution amount they deducted on their tax returns. 

Table: Distribution of Estimated Overstated Cash Contribution Amounts 
as a Percentage of Reported Cash Contribution Amounts for Individual 
Taxpayers, Tax Year 2001: 

Percentage of reported amount that was overstated: Less than 10 
percent; 
Number of taxpayers who overstated (in millions): 2.0; 
Percentage of taxpayers who overstated: 15%; 
Total overstated contributions (dollars in billions): $0.4[A]. 

Percentage of reported amount that was overstated: 10 percent to less 
than 25 percent; 
Number of taxpayers who overstated (in millions): 1.6; 
Percentage of taxpayers who overstated: 12%; 
Total overstated contributions (dollars in billions): $0.8[A]. 

Percentage of reported amount that was overstated: 25 percent to less 
than 50 percent; 
Number of taxpayers who overstated (in millions): 2.0; 
Percentage of taxpayers who overstated: 15%; 
Total overstated contributions (dollars in billions): $2.1[B]. 

Percentage of reported amount that was overstated: 50 percent to less 
than 75 percent; 
Number of taxpayers who overstated (in millions): 1.8; 
Percentage of taxpayers who overstated: 14%; 
Total overstated contributions (dollars in billions): $2.5[A]. 

Percentage of reported amount that was overstated: 75 percent or 
greater; 
Number of taxpayers who overstated (in millions): 6.1; 
Percentage of taxpayers who overstated: 45%; 
Total overstated contributions (dollars in billions): $10.3. 

Total: 
Number of taxpayers who overstated (in millions): 13.5; 
Percentage of taxpayers who overstated: 100%; 
Total overstated contributions (dollars in billions): $16.0. 

Source: GAO analysis of IRS data. 

Note: Estimates for overstated contributions do not sum to totals 
because of rounding. 

[A] Estimates have margins of error of 15 percent or less. 

[B] Estimate has a margin of error of 24 percent. 

[End of table] 

For tax year 2001, taxpayers who deducted cash contributions used paid 
preparers more often than taxpayers who did not deduct cash 
contributions (63 percent to 53 percent, respectively). 

Taxpayers deducting cash contributions who used paid tax return 
preparers misreported about as often as those who deducted cash 
contributions and prepared their own tax returns. 

Table: Estimated Number of Individual Taxpayers Deducting Cash 
Contributions, Misreporting Percentages, and Net Misreported 
Contributions by Tax Return Preparation Method, Tax Year 2001: 

Tax return preparation method: Self-prepared; 
Number of taxpayers deducting cash contributions (in millions): 14.1; 
Percentage of taxpayers deducting cash contributions who misreported: 
45%; 
Net misreported contributions (dollars in billions): $8.5[A]. 

Tax return preparation method: Paid tax return preparer; 
Number of taxpayers deducting cash contributions (in millions): 23.1; 
Percentage of taxpayers deducting cash contributions who misreported: 
46%; 
Net misreported contributions (dollars in billions): $5.3[B]. 

Total: 
Number of taxpayers deducting cash contributions (in millions): 37.2; 
Percentage of taxpayers deducting cash contributions who misreported: 
46%; 
Net misreported contributions (dollars in billions): $13.8. 

Source: GAO analysis of IRS data. 

[A] Estimate has a margin of error of 19 percent. 

[B] Estimate has a margin of error of 11 percent 

[End of table] 

IRS Tries to Ensure Compliance through Enforcement and Taxpayer 
Services: 

Enforcement: 

IRS examines tax returns that include potential misreporting of cash 
contributions. 

Cash contributions is one of the most frequently examined areas for 
individual taxpayers (mostly through correspondence). 

* For fiscal year 2008, IRS examined about 175,000 taxpayers who 
potentially misreported cash contributions (IRS examined about 1.4 
million individual taxpayers that fiscal year); 

* IRS adjusted cash contribution amounts for about 76 percent of these 
taxpayers for a total of about $593 million, in net terms: 

- IRS reduced overstated cash contributions by about $760 million (the 
median reduced overstatement amount was $3,573); 

- IRS increased understated cash contributions by about $167 million 
(the median increased understatement amount was $1,416); 

- The $760 million of overstated contributions IRS reduced in fiscal 
year 2008 would have represented less than 5 percent of the $16 billion 
in estimated overstated contributions from tax year 2001. 

Taxpayer services: 

IRS provides publications and instructions to tax forms to help 
taxpayers comply with cash contribution reporting requirements: 

* Instructions to Schedule A (Itemized Deductions) of the individual 
tax return; 

* Publication 526, Charitable Contributions; 

* Publication 1771, Charitable Contributions Ė Substantiation and 
Disclosure Requirements. 

Requiring Information Reporting for Charitable Cash Contributions May 
Not Be Effective: 

Charities could incur costs and burdens if information reporting were 
required for cash contributions. 

Exempting some cash contributions could reduce the burden on charities 
but would limit the effect that reporting would have on improving 
compliance. 

The extent to which information reporting would improve compliance is 
unclear. 

It is not known whether recently enhanced substantiation requirements 
have improved taxpayer reporting compliance: 

* An updated NRP study of individual taxpayers, which is under way, 
could show any improvements. 

Requiring information reporting could also result in reduced charitable 
cash contributions from taxpayers. 

Charities could incur substantial costs and burdens if information 
reporting were required for cash contributions: 

* Some administrative practices could be foreign to smaller charities, 
which may make up a large share of charitable organizations; 

* Although some charities already collect and maintain information 
about their donors and donations, all charities would need to routinely 
employ this practice; 

* Charities may need to bear costs to safeguard and ensure against 
stolen donor information (especially if Social Security numbers were 
required with reporting); 

* Charities would need to spend time filing information returns or pay 
to have the returns filed on their behalf; 

* Charities are evaluated on having low overhead costs; information 
reporting would likely increase those costs. 

Exempting some contributions from a reporting requirement could reduce 
the burden on charities associated with information reporting: 

For example: 

* Exempting yearly contributions below a certain dollar threshold that 
a taxpayer makes to a single charity; 

* Exempting contributions to charities with annual gross receipts of 
$25,000 or less and religious organizations, which generally do not 
have to report income and asset information to IRS as is required for 
other charities. 

However, exempting some cash contributions from information reporting 
would reduce the effect that reporting would have on improving 
compliance. 

* Partial reporting likely would not have the same impact on taxpayer 
voluntary compliance as full information reporting. 

* Exempting certain contributions would make it more difficult for IRS 
to effectively use information returns in its enforcement efforts: 

- Many taxpayers could deduct cash contributions for which IRS would 
not receive a corresponding information return; 

- As such, IRS may not be able to address misreporting through its 
Automated Underreporter program for cash contributions, and might only 
be able to use information returns for examinations; 

- IRS contacts many more potentially noncompliant taxpayers through the 
Automated Underreporter program than through examinations. 

* Also, with a dollar threshold exemption, charities would likely need 
to collect information for all donors upon first receiving donations 
because charities would not know if their donorsí gifts would 
eventually exceed the established threshold. 

For taxpayers who misreport in that they cannot substantiate their cash 
contributions, information reporting could improve voluntary compliance 
without increasing tax revenue. 

* Some misreporting taxpayers IRS examined through NRP may have made 
the contributions they were unable to substantiate. 

* For these taxpayers, information reporting should improve compliance 
in that they should be able to substantiate the cash contributions they 
deduct. 

* However, for these taxpayers, information reporting would not likely 
change the amount of cash contributions they deduct, resulting in 
improved compliance without increased tax revenue. 

* It was not possible to determine from the NRP data the extent to 
which taxpayers misreported their cash contributions because of a lack 
of substantiating documentation (or whether taxpayers without 
documentation actually made the cash contributions they deducted). 

It is not known whether the requirement that taxpayers now must 
maintain records from banks or charities for all cash contributions has 
improved taxpayer recordkeeping. 

* IRS has not studied the impact the recordkeeping requirements from 
the Pension Protection Act have had on compliance. 

* IRS is implementing a new NRP study through which it examines 
individual taxpayers on an annual basis and will use the results of 3 
years of examinations to estimate compliance. 

* The results of examinations from tax year 2007 through tax year 2009 
could identify whether misreporting decreased with the new 
recordkeeping requirement. 

* If IRS finds a decrease in taxpayer misreporting compared to tax year 
2001, it could be, in part, because of the more stringent recordkeeping 
requirement. 

Requiring information reporting could result in reduced cash 
contributions. 

* Taxpayers may reduce giving because they are reluctant to provide 
Social Security numbers to charities given concerns over identity 
theft: 

- Social Security numbers are generally required on information returns 
and IRS uses Social Security numbers to match information returns to 
tax returns; 

- Donors may perceive that charities will not adequately safeguard 
their Social Security numbers; 

- Many charities rely on volunteers, to whom donors may not want to 
provide their Social Security numbers; 

- An alternative means to uniquely identify donors, that is, for IRS to 
provide separate, unique numbers for this purpose, could alleviate 
donor concerns about identity theft but could be burdensome to 
implement. 

With information reporting, taxpayers may reduce their contributions 
because of privacy concerns: 

* Taxpayers may not want the federal government to know to which 
charities they donate; 

* Privacy concerns may be particularly relevant for donations to 
religious organizations. 

Information reporting could lead to a reduction in spontaneous giving 
(such as at a fund-raising event) or onetime gifts (such as a memorial 
gift) if taxpayers perceived information reporting to be too 
burdensome. 

Information reporting could inhibit anonymous giving: 

* Currently, anonymous donors can receive substantiation letters from 
recipient charities through representatives on the donorsí behalf; 

* It may not be possible for taxpayers to deduct anonymous donations if 
information reporting were required. 

Other challenges to using information reporting with charitable cash 
contributions exist. 

* Information reporting would have to account for contributions for 
which the taxpayer received a benefit (i.e., gross versus net 
contributions). 

* Information reporting would not be possible for taxpayers who deduct 
out-of-pocket expenses (such as car expenses directly related to giving 
services to a charitable organization),which are classified as cash 
donations for tax purposes, because of the lack of a third-party 
document for substantiation. 

Concluding Observations: 

Information reporting generally results in high levels of voluntary 
taxpayer compliance and provides IRS with an effective enforcement tool 
to address misreporting. 

The costs and burden that information reporting for cash contributions 
could pose for charities could be mitigated to some extent by exempting 
some contributions from reporting. 

However, exempting some cash contributions would likely limit 
improvements in voluntary compliance and the effectiveness of 
information reporting as an enforcement tool for IRS. 

Also, both the extent to which misreporting is because of taxpayersí 
lack of documentation and whether a more stringent recordkeeping 
requirement that went in effect for tax year 2007 has improved taxpayer 
recordkeeping are unclear. 

The results of an ongoing NRP study could identify whether and to what 
extent reporting compliance improved following the new recordkeeping 
requirement. 

[End of enclosure] 

Footnotes: 

[1] Individual taxpayers overstated about $16 billion and understated 
about $2.2 billion in cash contributions, resulting in a net 
overstatement of $13.8 billion. The $13.8 billion includes charitable 
contributions made by cash, check, credit card, electronic funds 
transfer, or payroll deduction, but does not include donations of 
property, such as stocks or bonds, vehicles, or household items, which 
individual taxpayers report separately on their tax returns. IRS 
estimated that individual taxpayers overstated their deductions for 
these noncash contributions by about $4 billion, in net terms, for tax 
year 2001. 

[2] IRS estimated that it would eventually collect about $55 billion of 
the gross tax gap through late payments and IRS enforcement actions, 
leaving a net tax gap of around $290 billion. Unless otherwise noted, 
references to the tax gap refer to the gross tax gap. 

[3] Information reporting is required for some other types of 
charitable contributions, such as the donation of motor vehicles, 
airplanes, or boats resulting in gross proceeds of more than $500. 

[4] 44 U.S.C. ßß 3501-3520. 

[5] Estimate has a margin of error of 34 percent. 

[6] In addition to the instructions to Schedule A of the individual tax 
return, on which taxpayers itemize their deductions, including those 
for charitable cash contributions, IRS produces two publications that 
cover charitable cash contribution reporting and recordkeeping 
requirements--Publication 526, Charitable Contributions, and 
Publication 1771, Charitable Contributions - Substantiation and 
Disclosure Requirements. 

[7] Pub. L. No. 109-280, ß 1217, 120 Stat. 780, 1080 (Aug. 17, 2006), 
26 U.S.C. ß 170(f)(17). 

[End of section] 

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