Tax-Exempt Organizations: Better Compliance Indicators and Data, and More Collaboration with State Regulators Would Strengthen Oversight of Charitable Organizations
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.
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.
Matter for Congressional Consideration
|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.||In 2019, Congress enacted the Taxpayer First Act, which included expanding electronic reporting requirements for tax-exempt organizations. Specifically, the Act lowered the e-filing threshold for all returns--including 501(c)(3) organizations--to 100 returns starting in 2021 and 10 returns starting in 2022.|
Recommendations for Executive Action
|Internal Revenue Service||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.||
In 2014, we reported that IRS's Exempt-Organizations (EO) division did 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 did not have these measures and did not know the current level of compliance, it could not set quantitative, results-oriented goals for increasing compliance or assess to what extent its actions were affecting compliance. To improve IRS's oversight of charitable organizations, we recommended that the Commissioner of Internal Revenue direct EO to develop quantitative, results-oriented compliance goals and additional performance measures and indicators that IRS could use to assess impact of exams and other enforcement activities on compliance. IRS reported it took a series of actions to implement this recommendation. Following the publication of our report, the Tax-Exempt/Government Entities Division, which houses EO, established a new function, Compliance Planning & Classification (CP&C) in 2017. CP&C developed a new strategy based on data analytics and close collaboration with examiners to understand and address non-compliance. As part of this strategy, CP&C developed a mix of operational, efficiency, and impact metrics for EO-related compliance work. According to IRS officials, the mix of metrics will help IRS asses the effectiveness of their compliance strategy processes and how well IRS is using limited resources. For example, these measures will help them monitor workload and inventory, and try to avoid or minimize backlogs. IRS also reported that the impact metrics are useful for understanding the short and long-term impacts of their compliance strategies on actual taxpayer behavior. Specifically, IRS is using these impact metrics to understand how its compliance strategies are performing against goals such as, enhanced taxpayer awareness, increased voluntary compliance, increased filing accuracy, and reduction in issue prevalence and materiality. IRS officials said our 2014 report had a profound effect on its re-organization and efforts to strengthen exempt organization oversight. In light of these changes, IRS is better positioned to collect and use performance data to understand and address noncompliance among charitable organizations. Improved oversight has the potential to ensure that these entities abide by the purposes that justify their tax exemption and protects the sector from potential abuses and loss of confidence by the donor community.
|Internal Revenue Service||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.||
IRS took several actions to implement this recommendation. First, IRS coordinated a training session for State Charity Regulators on safeguards. The training covered topics such as current safeguard activities, changes to safeguarding procedures, and disposal of information. According to IRS, there were participants representing 45 different states. IRS also revised the 6104 (c) Memorandum of Understanding 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. IRS publicized these changes with a presentation at the annual National Association of State Charity Officials conference, which according to IRS, reached over 100 participants representing 33 states. Finally, TEGE officials met with the Department of the Treasury and the IRS Office of Chief Counsel to discuss the Priority Guidance Plan for 2015-2016. According to IRS, officials concluded that there is no flexibility afforded under the PPA consistent with statutory protections of taxpayer data imposing requirements on how state regulators protect and use federal taxpayer data.