Tax-Exempt Organizations:

Improvements Possible in Public, IRS, and State Oversight of Charities

GAO-02-526: Published: Apr 30, 2002. Publicly Released: May 28, 2002.

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The tremendous outpouring of charitable donations in response to September 11 has raised concerns about whether some charities are spending too much on fundraising and management and too little on the charitable purposes related to their tax-exempt status. GAO found that Form 990 expense data is inadequate for public oversight purposes because charities have considerable discretion in recording their expenses when it comes to fundraising, management, and charitable services. The Internal Revenue Service (IRS) lacks data on the type and extent of possible compliance issues among charities. Moreover, IRS oversight of charities suffers from a lack of results-oriented goals and strategies. Concerns have also been raised that IRS's resources have not kept pace with the growth in the charitable sector, and some measures suggest that available resources may not be used as effectively as in the past. State officials consider inadequate the charity data IRS shares with them. IRS does not proactively share some data that states are permitted to receive, such as denials and revocations of charities' tax-exempt status. Federal law prohibits sharing some data that state officials believe would be valuable, such as the status and results of examinations of charities' returns.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The IRS and Treasury have developed proposals for greater information sharing with the states (in concert with the states through NASCO), which have been incorporated in pending legislation such as the Care Act, S.325 of the More Act in the Senate, and Section 410 of the Taxpayer Protection and IRS Accountability Act (H.R. 1528). In testimony during April 2005, the IRS testified about these proposals and the need to balance improved sharing with privacy concerns/data protection.

    Recommendation: IRS, in concert with the Department of the Treasury and state charity officials, should identify the specific types of IRS data that may be useful for enhancing state charity officials' oversight of charities, the appropriate mechanisms for sharing the data, the resources needed, and the types and levels of protections to be provided to prevent improper disclosure and misuse. IRS and Treasury should continue drafting specific legislation to expand state access to selected IRS oversight data and ensure adequate levels of protection for any data that would be shared.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: The IRS' Tax Exempt/Government Entity division developed a process for information sharing as provided by IRC 6104(c). New procedures have been drafted and were implemented during 2003. State charity officials support the new procedures as a way to get information that federal law already allows them to get on a timely basis, after being alerted to what data are available. The IRS worked with these state officials to develop the process.

    Recommendation: To improve oversight by the public, IRS, and the states, the Commissioner of Internal Revenue should develop, in consultation with state charity officials, a procedure to regularly share IRS data with states as allowed by federal tax law.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: IRS TE/GE's Exempt Organizations (EO) office established a Strategy and Program Plan (SPP) for FYs 2005-2009. It lists a goal dealing with oversight of compliance through enforcement of the tax law and includes three major strategies. The IRS contends that because of this plan, it was able to acquire 245 new examination staff in FYs 2004-2005 for enforcement and has focused its oversight on four major areas (terrorism, abusive schemes, credit counseling, and executive compensation) and a number of specific operating priorities (e.g., expanded EO Compliance Unit). To date, the IRS's measures have not focused on progress in meeting the goals to oversee/improve compliance. Rather, these measures focus on cases closed, time spent, no change rates, and measurement against the IRS's quality standards.

    Recommendation: To improve oversight by the public, IRS, and the states, the Commissioner of Internal Revenue should develop results-oriented goals, strategies (including levels of staffing and other resources to accomplish the goals), and measures to gauge progress in accomplishing those goals when overseeing the charity community.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Not Implemented

    Comments: IRS initiated market segment compliance studies to obtain compliance data on charities. IRS began three studies on charities in 2002 and six studies on charities in 2003. However, during 2004, IRS cut back on almost all of its studies due to higher priorities. In 2004, the IRS initiated other actions that could provide better compliance data. First is the creation of the Data Analysis Unit (DAU), which was implemented by the end of FY05. Second is a data determination and acquisition study that began in FY 2005 through a vendor hired to analyze how to improve the IRS's data. Third, IRS began working to improve Form 990 reporting accuracy. A draft of those changes was released in June 2007. Fourth, during 2007 IRS released results on specific studies on executive compensation among tax exempts and nonprofit hospitals that touch on compliance, but do not provide conclusive compliance data. Thus, IRS still has not produced reliable compliance data on the full charity community, much less on a major segment. IRS's 2008 budget request attempted to get funding for a more comprehensive study of tax-exempts' compliance. In addition, in a July 24, 2007 hearing, the head of IRS's TE/GE division said that IRS is exploring whether it can measure compliance across the charity sector, although the effort would be complex, expensive, and difficult. As of September 2008, IRS had no specific plans to measure compliance for the full charitable community.

    Recommendation: To improve oversight by the public, IRS, and the states, the Commissioner of Internal Revenue should ensure (either through the planned market segment studies or other means) that IRS obtains reliable data on compliance issues (including expense reporting) for the full charity community.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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