Tax-Exempt Organizations:

Better Compliance Indicators and Data, and More Collaboration with State Regulators Would Strengthen Oversight of Charitable Organizations

GAO-15-164: Published: Dec 17, 2014. Publicly Released: Dec 17, 2014.

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What GAO Found

Charitable organizations play a major role in our economy and provide critical services and resources to families and individuals in need. Although charitable organizations vary considerably in size and purpose, in 2011 the largest number of organizations was in the human services sector, providing services such as employment and housing assistance. The highest concentration of assets was in the health and education sectors, which include hospitals and universities. In addition to being concentrated in a few sectors, a large proportion of all assets were controlled by a relatively small number of charitable organizations—less than 3 percent hold more than 80 percent of the assets.

Over the past several years, as the Internal Revenue Service (IRS) budget has declined, the number of full-time equivalents (FTEs) within its Exempt Organizations (EO) division has fallen, leading to a steady decrease in the number of charitable organizations examined. In 2011, the examination rate was 0.81 percent; in 2013, it fell to 0.71 percent. This rate is lower than the exam rate for other types of taxpayers, such as individuals (1.0 percent) and corporations (1.4 percent).

EO is grappling with several challenges that complicate oversight efforts. While EO has some compliance information, such as how often exams result in change of tax exempt status, it does not have quantitative measures of compliance for the charitable sector as a whole, for specific segments of the sector (such as universities and hospitals) or for particular aspects of noncompliance (such as personal inurement or political activity). Because EO does not have these measures and does not know the current level of compliance, it cannot set quantitative, results-oriented goals for increasing compliance or assess to what extent its actions are affecting compliance.

Statutory requirements for safeguarding taxpayer data limit both IRS's ability to share data and state regulators' ability to use it. A lack of clarity about how state regulators are allowed to use IRS data to build cases against suspect charitable organizations further impedes regulators' ability to leverage IRS's examination work.

The e-filing rate for tax-exempt organizations is significantly lower than for other taxpayers. This lower rate means there is less digitized data available for data analytics and higher labor costs for IRS. Expanded e-filing may result in more accurate and complete data becoming available in a timelier manner, which in turn, would allow IRS to more easily identify areas of noncompliance.

Why GAO Did This Study

IRS oversight of charitable organizations helps to ensure they abide by the purposes that justify their tax exemption and protects the sector from potential abuses and loss of confidence by the donor community. In recent years, reductions in IRS's budget have raised concerns about the adequacy of IRS oversight.

GAO was asked to review IRS oversight of charitable organizations. In this report, GAO (1) describes the charitable organization sector, (2) describes IRS oversight activities, (3) determines how IRS assesses its oversight efforts, and (4) determines how IRS collaborates with state charity regulators and U.S. Attorneys to identify and prosecute organizations suspected of engaging in fraudulent (or other criminal) activity.

GAO reviewed and analyzed IRS data, strategic planning and performance documents, and documented improvement efforts. We also interviewed IRS and Department of Justice officials, state charity regulators, and subject matter specialists. GAO compared IRS's practices to federal guidance on performance management.

What GAO Recommends

GAO recommends IRS 1) develop compliance goals and additional performance measures that can be used to assess the impact of enforcement activities on compliance and 2) clearly communicate with state charity regulators how they are allowed to use IRS information related to examinations of charitable organizations. GAO also recommends that Congress consider expanding the mandate for 501(c)(3) organizations to electronically file their tax returns to cover a greater share of filed returns. In written comments, IRS agreed with GAO's recommendations.

For more information, contact James R.McTigue, Jr. at (202) 512-9110 or mctiguej@gao.gov.

Matter for Congressional Consideration

  1. Status: Open

    Comments: The threshold over which Treasury/IRS can require electronic reporting is still 250 returns. As of February 18, 2016, there is no proposed legislation in the current Congress which would amend this threshold.

    Matter: Congress should consider expanding the mandate for 501(c)(3) organizations to electronically file their tax returns to cover a greater share of filed returns.

Recommendations for Executive Action

  1. Status: Open

    Comments: IRS reported it has taken a series of actions to implement this recommendation. First, in FY 2016, IRS implemented a new data-driven case selection model to identify the most non-compliant returns based upon what is reported. Starting in FY 2017, IRS plans to measure the effectiveness of these new data-analytic models and use that performance information as the basis for ongoing discussions with EO Examinations managers on which queries are yielding results and which need to be modified or deleted from the work plan. IRS also developed a weighted disposal code measure, which is intended to help examiners prioritize case selection according to criteria that give more weight to more consequential outcomes. For example, a data mining query generating a lot of revocations would take priority over a query that may only generate written advisories. IRS incorporated the new measure into its current and future work plan monitoring and projections. IRS also began discussions with TE/GE Research and SOI to figure out how to define compliance for the EO population, establish a compliance baseline, and how to develop methods to measure the impact of enforcement actions on voluntary compliance levels in the EO population. Once all these actions are fully implemented, IRS will be in a better position to use this information 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.

    Recommendation: To improve oversight of charitable organizations, the Commissioner of Internal Revenue should 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.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Open

    Comments: In 2016, IRS reported taking three actions to implement this recommendation. First, IRS coordinated a training session for State Charity Regulators on safeguards. The training included a review of the Safeguards Security Report (SSR) and covered several topics including current period safeguard activities, changes to safeguarding procedures, and disposal of information. According to IRS, there were 53 participants representing 45 different states. IRS also revised the 6104 (c)Memorandum of Understanding (MOU) inserting a new paragraph that instructs state charity regulators to contact the Tax Exempt/Government Entities (TEGE) Liaison if there are questions about whether an administrative or judicial proceeding has been initiated. This puts in place a mechanism to provide assurance to the regulator if they have concerns. Third, TEGE officials met with the Department of the Treasury and Office of Chief Counsel to discuss the Priority Guidance Plan for 2015-2016. According to IRS, this meeting included a discussion about flexibility afforded under the PPA and how state regulators can protect and use federal tax data consistent with statutory protections of taxpayer data. More recently, IRS informed us that they made additional changes to the MOU to address concerns raised by state charity officials about re-disclosures. IRS also reported on information-sharing efforts to publicize these changes among state charity regulators including a presentation at the annual National Association of State Charity Officials conference and a virtual presentation that reached over 100 participants representing 33 states. IRS informed state charity regulators that the MOU had been revised to address their concerns about re-disclosures in proceedings had been addressed in the MOU. The TEGE Liaison made a presentation at the Annual NASCO Conference in Washington DC on October 6, 2015 and included this information in the presentation.

    Recommendation: To improve oversight of charitable organizations, the Commissioner of Internal Revenue should 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.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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