IRS Needs to Do More to Regulate Charities, GAO Report Finds

Budget cuts at the Internal Revenue Service have resulted in insufficient staffing levels in its Exempt Organizations division, even as the agency should be doing more to enable state regulators to regulate noncompliant groups, a report from the Government Accountability Office finds.

The report, Better Compliance Indicators and Data, and More Collaboration With State Regulators Would Strengthen Oversight of Charitable Organizations (66 pages, PDF), found that in 2013 only 0.71 percent of exempt organizations that filed a tax return were reviewed by the agency, down from 0.81 percent in 2011 and well below the rates for individuals (1.0 percent) and corporations (1.4 percent).

The study also notes that because the EO division lacks quantitative measures of compliance for the charitable sector as a whole, specific segments of the sector (such as universities and hospitals), or particular aspects of noncompliance (such as personal inurement or political activity), it cannot set quantitative, results-oriented goals for increasing compliance or assess the extent to which its actions affect compliance. In addition, a lack of clarity about how state regulators are allowed to use IRS data to build cases against charitable organizations suspected of noncompliance further impedes regulators’ ability to leverage the agency's work.

Among other things, the report calls on the IRS to develop goals and performance measures that can be used to assess the impact of enforcement activities on compliance and to clearly communicate to state regulators how they are allowed to use information gleaned from the EO division's examinations of charities. It also recommends that Congress expand the mandate for 501(c)(3) organizations to electronically file their tax returns, which would increase the amount of accurate, complete, and digitized data available for analysis, reduce labor costs at the IRS, and enable it to more effectively identify areas of noncompliance. In written comments, the IRS agreed with the recommendations.

The review by GAO was requested by Sen. Tom Coburn (R-OK) in response to an investigation by the Tampa Bay Times and the Center for Investigative Reporting which revealed that lax regulation has for years allowed some charities to allocate virtually nothing for services to the needy, with few or no consequences.

"I think that the IRS in the tax-exempt area has some talented people, but they're clearly spread way too thin," Jack Siegel, a Chicago attorney who runs a charity consulting firm, told the Tampa Bay Times. "You can't keep cutting an organizations's funding and expect it to do a job that you want it to do."