IRS' Examination Selection System for Exempt Organizations' Unrelated Business Income

GGD-85-64: Published: Jul 8, 1985. Publicly Released: Jul 8, 1985.

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GAO analyzed the Internal Revenue Service's (IRS) examination selection system for tax-exempt organizations earning unrelated business income (UBI).

GAO found that, although IRS assessed over $41 million in additional tax and penalties upon UBI examinations in fiscal years 1981 through 1983, a substantial number of UBI examinations resulted in little or no additional tax revenue. GAO also found that IRS does not have sufficient information on UBI tax noncompliance to understand the nature and magnitude of UBI noncompliance and develop profiles of highly noncompliant tax-exempt organizations engaging in UBI activity. Without such information, the current IRS selection system cannot focus on the most noncompliant tax-exempt UBI organizations, which regularly fail to properly report UBI earnings or pay the UBI tax due. Because IRS data shows increasing UBI activity, high estimates of tax loss due to UBI nonreporting, and low yield from most current UBI examinations, IRS may want to focus on the UBI organizations with the highest potential for noncompliance. More targeting of highly noncompliant UBI organizations could aid in generating more revenue and increased compliance and result in more effective use of resources.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: An IRS Taxpayer Compliance Measurement Program (TCMP) was completed in September 1989 and the results were used to revidse forms 990 and 990T, as well as to develop a score to use in selecting returns for examination.

    Recommendation: The Assistant Commissioner of Internal Revenue for Employee Plans and Exempt Organizations should further analyze existing data on UBI tax examinations to gain increased insight into the nature and magnitude of UBI noncompliance.

    Agency Affected: Department of the Treasury: Internal Revenue Service: Office of the Assistant Commissioner (Employee Plans and Exempt Organizations)

  2. Status: Closed - Implemented

    Comments: IRS developed a check sheet on UBI, which is intended to identify nonfilers, as well as all types of UBI organizations. This effort will be used in conjunction with TCMP in FY 1988.

    Recommendation: The Assistant Commissioner of Internal Revenue for Employee Plans and Exempt Organizations should develop, collect, and analyze information on all types of UBI organizations and develop specific UBI activities.

    Agency Affected: Department of the Treasury: Internal Revenue Service: Office of the Assistant Commissioner (Employee Plans and Exempt Organizations)

 

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