GAO Releases Report on IRS Oversight of Charitable Organizations

Last month, the U.S. Government Accountability Office (GAO) released a report regarding tax-exempt organizations in which it reviewed the scope and efficacy of IRS charity oversight. The independent review, dubbed “Tax-Exempt Organizations: Better Compliance Indicators and Data, and More Collaboration with State Regulators Would Strengthen Oversight of Charitable Organizations (GAO-15-164),” comes after a ranking member of the Senate Committee on Homeland Security and Governmental Affairs requested the GAO to monitor the extent to which “IRS oversight of charitable organizations helps to ensure that 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.” 

To begin with, the GAO explicitly lays out the scope of the charitable sector and the gap in oversight that currently exists. It finds that the IRS audited 0.7 percent of charities in 2013, compared to 0.81 percent in 2011. This compares to 2013 audit rates of 1 percent and 1.4 percent for individuals and corporations, respectively. Additionally, the IRS has faced $900 million in budget cuts since 2010, along with 10,000 fulltime employees—47 of whom came from the exempt-organizations (EO) division.

Along with these austere conditions, the number of tax-exempt returns being filed has increased. In fact, exempt returns filed by charities alone have increased by 5 percent since 2011, according to the report. Keep in mind that this does not account for nonprofit advocacy groups and the other entities that can garner tax-exempt status, for which the EO division is also responsible for overseeing.

Additional challenges abound when it comes to overseeing charities. For one, the e-filing rate for these organizations is far lower than for individuals and corporations, resulting in less digitized data for mining and analysis, as well as higher labor costs. The GAO also noted a dysfunctional lack of clarity around how state regulators can use IRS data in cases against organizations suspected of fraud, which impedes regulators’ ability to utilize the IRS’ work.

Overall, the GAO concluded that the EO’s shrinking resource bandwidth and declining audit rate have rendered the division incapable of fully addressing and communicating the effectiveness of its oversight efforts. Without a system in place for measuring the outcomes of its work, the EO has no way of quantifying the levels of compliance that exist among charities, nor among the various other nonprofit industry subsegments. They also lack insights into the degrees of compliance surrounding specific tax issues, such as political activity or personal inurement.

Within the status quo, the GAO states that the IRS “…risks missing noncompliance, burdening tax-exempt organizations, and wasting scarce resources. Furthermore, it will be difficult for IRS to communicate agency progress to Congress and the public and thus, be held accountable.” To address and avoid these circumstances, the GAO offers three recommendations:
  1. The IRS should direct EO to develop results-oriented compliance goals and new performance measures and indicators to assess impact of exams and enforcement activities on compliance.
  2. The IRS should continue to work collaboratively with Treasury officials and state charity regulators to explain the rules for how to use IRS information surrounding charitable organization exams.
  3. Congress should consider expanding the mandate for 501(c)(3) organizations to file returns electronically.

While difficulties surrounding resource limitations will likely hamper IRS oversight efforts for the foreseeable future, especially considering the spending bill passed last month that cuts an additional $346 million from the agency’s budget, the IRS has followed up with a response letter on the heels of the GAO report. In it, the agency states that it has new initiatives in the works, as well as plans to “refine its compliance strategy and approach” to better understand the efficacy of its efforts on compliance. In the meantime, our team will monitor for new developments as the government’s response to the GAO’s findings takes shape, and will keep you apprised of the latest updates.