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United States General Accounting Office: 
GAO: 

Report to the Chairman and Ranking Minority Member, Committee on 
Finance, U.S. Senate: 

April 2002: 

Tax-Exempt Organizations: 

Improvements Possible in Public, IRS, and State Oversight of Charities: 

GAO-02-526: 

Contents: 

Letter: 

Results in Brief: 

Background: 

Objectives, Scope, and Methodology: 

Little is Known About Form 990 Data Accuracy Despite Concerns of IRS 
and Others: 

Imbalances Between IRS’s Charity Oversight Workload and Resources 
Necessitate Better Planning to Improve Compliance and Resource 
Decisions: 

Although Federal and State Officials Generally Support More IRS 
Sharing of Data with States, Many Issues Must Be Considered: 

Conclusions: 

Recommendations: 

Agency Comments and Our Evaluation: 

Appendix I: Description of Form 990 Reporting Requirements: 

What is the Form 990? 
What Law Governs Use of the Form 990? 
How is the Form 990 Used? 
How Has the Form 990 Changed Over the Years? 

Appendix II: Analysis of Form 990 Data on Expenses Reported by 
Charities: 
Methodology and Statistical Variations for SOI Data: 
Total Charities, Revenues, Expenses, and Assets: 
Functional Expenses: 
Object Class Expenses: 
Charity Assistance Expenses: 
Description of Charities by NTEE Code: 
Description of Charities by Asset Category: 
Joint-Cost Reporting, Part II of Form 990: 

Appendix III: The Internal Revenue Service’s Application Process: 
What are the Steps to Apply for Tax-Exempt Recognition as a Charity? 
Which IRS Employees Review Applications? 
How is the Work Assigned? 
What does a Revenue Agent do when He or She Receives a Charity 
Application? 
How do Revenue Agents make Determinations for Charity Applications? 
What Happens after a Determination Is Made? 
Can a Charity Change Its Purpose once a Favorable Determinations 
Letter Is Sent? 
How Long does the Determination Process Take? 
How does IRS Measure the Quality of Decisions and Adherence to 
Procedures? 

Appendix IV: IRS’s Process for Examining Forms 990 Filed by Tax-Exempt 
Organizations: 
Identifying and Selecting Which Returns to Examine: 
Initiating the Examination: 
Doing the Examination: 
Reviewing the Quality of the Examination: 
Data on Examinations: 
Revocations: 

Appendix V: Overview of Selected Federal Agencies that Can Oversee 
Charities: 
FBI: 
FEMA: 
FTC: 
USPIS: 
OPM: 

Appendix VI: Comments from the Internal Revenue Service: 

Appendix VII: Comments from the Department of the Treasury: 

Tables: 

Table 1: Line Items as a Percentage of Program Service Expense, Filing 
Years 1994-1998: 

Table 2: Number of Charity Applications Received and Disposed, by 
Fiscal Year: 

Table 3: Number of Examinations and Examination Rates for Charity 
Returns, by Fiscal Year: 

Table 4: Availability of IRS Application and Examination Data on 
Charities to States: 

Table: 5: Number of Denied Charity Applications, Revoked Charities, 
and Notices of Tax Deficiencies Sent to Charities, Fiscal Years 1996-
2001: 

Table 6: Sample Size and Coefficients of Variation, by Filing Year: 

Table 7: Number of Charities and Reported Amounts of Revenues, Assets, 
and Expenses, by Filing Year: 

Table 8: Total Expenses, Total Functional Expense Amounts, and Total 
Expenses Reported as “Other,” by Filing Year: 

Table 9: Total Functional and Total “Other” Expenses as a Percentage 
of Total Expenses, by Filing Year: 

Table 10: Representation of Line Item as a Percentage of Functional 
Category Total: 

Table 11: Assistance From Charities, by Filing Year: 

Table 12: NTEE Categories: 

Table 13: Description of NTEE Major Group Categories: 

Table 14: Overview of Charities by Asset Category, by Filing Year: 

Table 15: Joint-Cost Reporting, by Filing Year: 

Table 16: Joint-Cost Allocation by Functional Expense Category, by 
Filing Year: 

Table 17: Number of Exempt Organizations Field Technical Staff and 
Total Staff, by Fiscal Year in FTEs: 

Table 18: Average Hours Per Charity Examination by Type of Closure, 
All Examinations, by Fiscal Year: 

Table 19: Average Hours Per Charity Examination by Type of Closure, 
Non-CEP Examinations, by Fiscal Year: 

Table 20: Average Hours Per Charity Examination by Type of Closure, 
CEP Examinations, by Fiscal Year: 

Table 21: Primary Reasons for Revocations by Fiscal Year, 1996-2001: 

Figures: 

Figure 1: Charity Expenses for Program Services, General Management, 
and Fundraising as a Percentage of Total Expenses, 1994-1998: 

Figure 2: Total Expenses Compared to Percent of Total Expenses 
Reported as “Other,” 1994-1998: 

Figure 3: Percent of Charitable Organizations Receiving Public 
Contributions and Reporting No Fundraising Expenses, 1994-1998: 

Figure 4: Functional Expense Categories and Related Lines for Specific 
Expenses: 

Figure 5: Form 990: 

Abbreviations: 

AICPA: American Institute of Certified Public Accountants: 

GPRA: Government Performance and Results Act: 

IRC: Internal Revenue Code: 

IRS: Internal Revenue Service: 

NASCO: National Association of State Charity Officials: 

SOI: Statistics of Income: 

[End of section] 

United States General Accounting Office: 
Washington, DC 20548: 

April 30, 2002: 

The Honorable Max Baucus: 
Chairman: 
The Honorable Charles E. Grassley: 
Ranking Minority Member: 
Committee on Finance: 
United States Senate: 

Millions of donors annually give hundreds of billions of dollars to 
charities.[Footnote 1] While this giving helps meet charitable 
purposes, congressional and media concerns have arisen about whether 
some charities spend too much on fundraising and general management 
and not enough on program services to meet the charitable purposes 
related to the tax-exempt status.[Footnote 2] Such concerns have 
heightened since the outflow of charitable giving after the tragedies 
of September 11, 2001. 

Given these concerns, you asked us to review the oversight of 
charities. Oversight relies on the public (including donors, 
organizations that oversee charities—referred to as “watchdogs”—and 
the media), the Internal Revenue Service (IRS), and states. This 
combined oversight not only checks compliance with relevant laws, but 
also guides the public’s decisions about donations and stems abuses by 
charities. Although the common belief is that the vast majority of 
charities strive to meet their charitable purpose, if a few charities 
abuse the public trust, the support given to the charitable community 
can be undercut. 

This report focuses on the adequacy of (1) publicly reported Form 990 
(see appendix I) data on charity spending in facilitating public 
oversight of charities,[Footnote 3] (2) IRS’s oversight of charities, 
and (3) IRS’s data sharing with state agencies that oversee charities. 
In researching these issues, we met with IRS and Department of the 
Treasury officials and reviewed IRS documents. We did the same at 
state and watchdog groups that oversee charities. We reviewed studies 
on charities and analyzed IRS’s data on its oversight of charities and 
its Forms 990 on charity operations from filing years 1994 through 
1999. Data for more recent years were not available when we did our 
work. 

Results in Brief: 

Publicly available data on spending by charities can facilitate public 
oversight of charities, but the Form 990 data alone are not adequate 
for such oversight, and caution is warranted in using the data. 
Although one principal use of Form 990 data on charities’ spending is 
to show the portion of funds that a charity spends on its charitable 
purpose, the accuracy of such data has not been measured. Various 
groups such as public watchdog groups have expressed concerns about 
expense reporting, and IRS has found and acted on instances of 
inaccurate reporting. However, IRS has not assessed, and is just 
beginning to develop plans to assess, the extent to which charities 
are properly reporting expenses. 

Moreover, caution is warranted in using the Form 990 expense data, 
especially to compare charities, because charities have considerable 
discretion in recording their expenses in the program services, 
general management, and fundraising categories. Different approaches 
for charging expenses as well as different allocation methods can 
result in charities with similar types of expenses allocating them 
differently among the three categories. IRS has added a checkbox to 
the Form 990 to collect information about whether a charity is using 
the guidance issued in 1998 by the American Institute of Certified 
Public Accountants (AICPA) for allocating certain types of fundraising 
expenses. IRS also is asking for comments on whether adherence to this 
guidance should be required for certain charities. 

IRS has neither data on the type and extent of possible compliance 
issues in the charity community nor results-oriented goals and 
strategies for its oversight of charities. As a result, it is 
difficult to make judgments about the adequacy of its oversight of 
charities. At the same time, concerns arise about the adequacy of 
oversight because IRS’s resources have not kept pace with the growth 
in the charitable sector, and some measures indicate that available 
resources may not be used as effectively as in the past. From 1996 
through 2001, IRS staffing for overseeing exempt organizations fell by 
about 15 percent while the number of applicants to become tax-exempt 
charities increased 9 percent, and the number of Forms 990 filed by 
charities increased 25 percent. The rate at which IRS examined these 
returns rose from 0.64 percent in 1996 to 0.73 percent in 1998 and 
1999, before falling to 0.43 percent in 2001. Although IRS has plans 
to improve its oversight of tax-exempt organizations, including some 
in the charity community, it does not plan to measure the overall 
compliance of charities with federal tax laws and Form 990 reporting 
requirements, and it has not developed long-term, results-oriented 
goals, and a strategy for achieving them across charities. 

State officials believe that inadequate data are shared by IRS to 
assist them in overseeing charities. IRS does not proactively share 
certain data that states are permitted to receive, such as denials and 
revocations of charities’ tax-exempt status. Furthermore, federal tax 
law prohibits sharing certain data that state officials believe would 
be valuable, such as the status and results of examinations of 
charities' returns. IRS has agreed to develop plans to improve its 
sharing of data currently available to states and to work with 
Treasury and state officials to explore possible changes to federal 
law to expand data sharing with the states, coupled with protections 
of the confidentiality of the data. 

We are recommending that IRS ensure that it obtains reliable data on 
charities’ compliance with applicable laws and regulations—including 
for Form 990 reporting—and develop longer-range, results-oriented 
goals and strategic plans to help identify the level of oversight and 
resources that IRS should devote to charities. In addition, we are 
recommending that IRS develop in consultation with states better ways 
to share data as allowed by law and, identify whether and how 
additional IRS data that are unavailable to the states could be shared 
to enhance their charitable oversight while protecting the 
confidential nature of the data in concert with the Department of the 
Treasury and state officials. 

We obtained comments on a draft of this report from IRS. (See appendix 
VI.) IRS agreed with the findings in the report and said that the 
agency would assist in tax administration related to charities and 
identified the actions underway or planned to address our 
recommendations. IRS also said that the report did not sufficiently 
recognize certain ongoing agency efforts related to the issues covered 
in the report. While the IRS’s letter provided additional context on 
those issues, we believe the issues did not need additional 
elaboration in the report. We did change our draft to more explicitly 
recognize that IRS is beginning to develop plans to assess the 
accuracy of charities’ expense reporting. The Agency Comments and Our 
Evaluation section discusses the IRS’s comments. 

The Department of the Treasury’s Office of Tax Policy also provided 
comments on this report. (See appendix VII.) Treasury officials said 
they would continue pursuing legislation to expand state access to 
selected IRS oversight data. 

Background: 

Internal Revenue Code (IRC) Section 501(c) establishes 27 categories 
of tax-exempt organizations. The largest number of such organizations 
falls under Section 501(c)(3), which recognizes charitable 
organizations. Generally, charities pay no income taxes on 
contributions received, but they can be taxed on income generated from 
unrelated business activities. These charities and related parties may 
be subject to several additional IRS excise taxes and penalties for 
certain actions, such as not filing a required tax return. Generally, 
taxpayers may deduct the amount of any contributions to charities from 
their taxable income. 

By 2000, IRS had recognized 1.35 million tax-exempt organizations 
under Section 501(c), of which 820,000 (60 percent) were charities. 
[Footnote 4] Social welfare, labor, and business leagues accounted for 
280,000 (21 percent) of the tax-exempt organizations. The remaining 
organizations (about 19 percent) were exempt under other Section 
501(c) categories. At the end of 1999, the assets of Section 501(c)(3) 
organizations approached $1.2 trillion and their annual revenues 
approached $720 billion. 

The term charitable, as defined in the regulations that underlie IRC 
Section 501(c)(3), includes assisting the poor, the distressed, or the 
underprivileged; advancing religion; advancing education or science; 
erecting or maintaining public buildings, monuments, or works; 
lessening neighborhood tensions; eliminating prejudice and 
discrimination; defending human and civil rights; and combating 
community deterioration and juvenile delinquency. An organization must 
apply for IRS recognition as a tax-exempt charity that strives to meet 
one or more of these purposes. In general, a charity is to serve broad 
public interests, rather than specific private interests. 

Generally, public charities are required to file annual information 
returns with IRS that are also available to the public. The larger 
charities file Form 990, Return of Organization Exempt from Income 
Tax. Smaller charities-—with gross receipts of less than $100,000 and 
total assets of less than $250,000—-are allowed to file an abbreviated 
Form 990-EZ. The smallest charities, with less than $25,000 in gross 
receipts, and certain other types of organizations, such as churches 
and certain other religious organizations, are not required to file. 
The Form 990 is to be filed within about 5 months of the end of the 
charity’s accounting year, with extensions available. 

Form 990 has 105 line items on 6 pages, as well as 45 pages of 
instructions. The data on various finances and activities provide a 
basis for reviewing whether the organization continues to meet the 
requirements for tax exemption. The form also has two schedules: 
Schedule A and Schedule B. Schedule A covers several areas, including 
compensation of employees and independent contractors earning over 
$50,000 annually; lobbying activities; sources of revenue; and 
relationships with noncharitable exempt organizations, such as social 
welfare organizations. Schedule B is to be filed by certain charities 
that receive contributions of $5,000 or more from one or more donors. 
Charities may be required to file other forms in specific situations. 
[Footnote 5] Appendix I describes the Form 990. 

IRS and various stakeholders—-such as the states and “charity watchdogs”
-—oversee charitable operations to protect the public interest in part 
by reviewing the Forms 990. Certain charities, including those 
receiving federal and private grants, obtain independent financial 
audits. To the extent that such audit information is available in 
conjunction with Forms 990, those doing the oversight have more 
information on the financial status of the charities, and individuals 
can make more informed choices about donations to specific charities. 
Recognizing the importance of public oversight and a “free market”, 
where charities compete for donations, Congress expanded public 
disclosure of and access to the Form 990. Such oversight is important 
to help support charities, inform donors about how their money is 
spent on a charitable purpose, and stem potential abuses. 

Objectives, Scope, and Methodology: 

Our objectives in this review were to analyze the adequacy of (1) 
publicly reported Form 990 data on charity spending in facilitating 
public oversight of charities, (2) IRS’s oversight activities for 
charities, and (3) IRS’s data sharing with state agencies that oversee 
charities. 

For the spending data reported by charities, we interviewed IRS 
officials and experts (e.g., AICPA, the Urban Institute) to learn 
about charities’ reporting of expense data on the Form 990 and about 
independent financial audits. We reviewed studies such as those done 
by the Urban Institute, academicians, and the Chronicle on 
Philanthropy to better understand the expense data. We analyzed 
expense data reported by charities on the Form 990. IRS’s Statistics 
of Income (SOI) Division had available data on charity expenses, but 
those data only covered up to 1998 and did not include data on “joint-
cost allocations” (e.g., allocating selected expenses between 
education and fundraising).[Footnote 6] To obtain at least 2 years of 
joint-cost data, we purchased filing years 1998 and 1999 data from the 
Urban Institute which contracts with IRS to digitize Form 990 data for 
the full population of charities that filed Form 990. For some large 
charities, primarily hospitals, expense data such as by line items of 
the Form 990 were not available to the Urban Institute. Thus, only 
joint-cost data and aggregate data for expenses, assets, and revenues 
for 1999 are presented throughout our report. Because several sources 
of data were used, data are presented by filing, tax, and fiscal years 
in this report. 

For IRS oversight of charities, we talked with responsible IRS 
officials to identify oversight processes when charities apply for 
recognition of their tax-exempt status and when IRS examines Forms 990 
filed by charities. For these types of oversight, we reviewed 
documentation on IRS’s processes and criteria used to review 
applications and examined Forms 990. We also analyzed related data for 
fiscal years 1996 through 2001. For applications, such IRS data 
included the number and types of applications received and their 
dispositions. For examinations, such data focused on the number and 
types of examinations and their results. In addition, we contacted 
other federal agencies, such as the Federal Trade Commission, to 
understand the types of oversight of charities that they conducted and 
the extent to which they coordinated that oversight with IRS. Appendix 
V discusses our selection of the agencies and our work. For IRS data 
sharing with states, we interviewed IRS officials and reviewed IRS 
documents. We did the same at the National Association of State 
Charity Officials (NASCO), which represents 38 states that oversee 
charities to protect public interests. We participated in an October 
9, 2001, annual NASCO conference. At the conference, we asked state 
officials about their oversight and coordination with IRS or others. 
We talked with Treasury, IRS, and state officials about the tradeoffs 
of changing the law to allow IRS to share oversight data (e.g., 
examination results) with state charity officials. We also reviewed 
related studies and articles. 

For all three objectives, we collected documents from and talked with 
officials at various organizations. We talked with officials at the 
Joint Committee on Taxation about its reports in 2000 on disclosure of 
tax data on charities and on public, IRS, and state oversight. On the 
basis of referrals from IRS and NASCO, we talked with and collected 
documents from officials at the Council on Foundations, the 
Independent Sector, the GuideStar project at Philanthropic Research 
Inc., the Direct Marketing Association, and others that were 
knowledgeable about charity data, oversight, or fundraising. We 
reviewed documents from and talked with officials at three watchdog 
groups—Better Business Bureau Wise-Giving Alliance, Charity Navigator, 
and American Institute of Philanthropy—that oversee charities. 

We also asked for comments on short sections or summaries of the draft 
report from the organizations that provided data or perspectives on 
those sections. We made technical changes to the report where 
appropriate after receiving their comments. For example, we did not 
use the 1999 detailed expense data from the Urban Institute after 
receiving its comments. The Urban Institute did not have the necessary 
data to resolve certain discrepancies with the detailed data (e.g., 
reported line item amounts not equaling reported aggregate amount for 
expenses) before we issued the report. As a result, we deleted 
analyses of the detailed expense data for 1999 that had been in the 
draft report. 

We conducted our work in Washington, D.C., from June 2001 through 
March 2002, in accordance with generally accepted government auditing 
standards. We provided a draft of this report to IRS for review and 
comment. IRS’s and Treasury’s comments are in appendices VI and VII, 
respectively. 

Little is Known About Form 990 Data Accuracy Despite Concerns of IRS 
and Others: 

Although disclosure of charity spending data can facilitate public 
oversight, caution in interpreting the data, is warranted. No measures 
are available on the accuracy of the expense data and substantial 
discretion in allocating the expenses makes use of the data 
problematic in comparing charities. Given such data limitations, 
public oversight of charities cannot rely solely on the expense data 
reported on the Form 990. 

A key potential use of data on charities’ spending is to show what 
portion is spent on charitable purposes through program services 
(i.e., efficiency). In aggregate, the data show that from 1994 through 
1998, charities allocated, on average, 87 percent of their spending to 
charitable program services and the remainder to fundraising and 
general management,[Footnote 7] suggesting a high-level of spending 
efficiency, as shown in figure 1. These percentages did not vary much 
by size of the charity.[Footnote 8] 

Figure 1: Charity Expenses for Program Services, General Management, 
and Fundraising as a Percentage of Total Expenses, 1994-1998: 

[Refer to PDF for image: pie-chart] 

Program services: 87%; 
General management: 12%; 
Fundraising: 1%. 

Source: SOI 1994-1998. 

[End of figure] 

Accuracy of Form 990 Data Has Not Been Measured: 

Although Form 990 expense data are a principal source to support donors’
 informed judgments about whether to support a charity, the accuracy 
of the expense data has not been measured. At the same time, however, 
IRS officials and watchdog groups have expressed concerns about 
potential or actual inaccuracy in Form 990 expense data. 

Because efficiency is a criterion that donors may use in selecting 
among charities, charities have an incentive to report their expenses 
in a manner that makes them appear to be efficient. IRS has discovered 
instances in which charity fundraising expenses have been 
underreported because charities have “netted” such expenses against 
the funds raised. According to IRS, fundraising expenses include fees 
paid to professional fundraisers as well as in-house expenses (e.g., 
salaries) for fundraising. 

For example, a charity might contract with a professional fundraiser 
to raise donations. The fundraiser might raise $250,000, charge the 
charity a fee of $150,000, and give the charity the remaining 
$100,000. When reporting to IRS, the charity “nets fundraising expenses”
by reporting the $100,000 as a direct public contribution and does not 
report the $150,000 retained by the professional fundraiser as a fee. 
Such reporting does not comply with IRS instructions, under which the 
charity should report the full amount raised ($250,000) as the direct 
public contribution and the fee retained by the fundraiser ($150,000) 
on line item 30 of the Form 990. 

As with netting of fundraising expenses, IRS has found that some 
charities have misreported professional fundraising fees as “other” 
expenses, but has not measured the extent to which charities do this. 
In these cases, a charity would report professional fundraising fees 
on line item 43 of the Form 990, along with other expenses, rather 
than on line item 30 for such fees.[Footnote 9] IRS requires charities 
to itemize expenses on 22 different line items on Form 990 and 
expressly prohibits reporting professional fundraising or other fees 
on line item 43 with “other” expenses that are not appropriate for the 
accompanying 21 line items. Available data do not show the extent to 
which charities may fail to properly itemize their expenses such as 
for professional fundraising, but “other” expenses represent a 
significant portion of all reported expenses. Our analysis showed that 
for 1994 through 1998, on average, 26 percent of all expenses were 
reported as “other” expenses, as shown in figure 2. 

Figure 2: Total Expenses Compared to Percent of Total Expenses 
Reported as “Other,” 1994-1998: 

[Refer to PDF for image: vertical bar graph] 

Approximate dollars in billions: 

Year: 1994; 
Total expenses: $530 billion; 
Total expenses reported as other: 26.2%. 

Year: 1995; 
Total expenses: $600 billion; 
Total expenses reported as other: 26.6%. 

Year: 1996; 
Total expenses: $620 billion; 
Total expenses reported as other: 26.2%. 

Year: 1997; 
Total expenses: $650 billion; 
Total expenses reported as other: 24.6%. 

Year: 1998; 
Total expenses: $660 billion; 
Total expenses reported as other: 25.2%. 

Source: Form 990; SOI, 1994-1998. 

[End of figure] 

Despite not knowing the extent of misreporting, IRS has been 
sufficiently concerned that it has taken steps to better ensure 
charities properly report their expenses, especially for fundraising. 
Regarding netting of fundraising fees, IRS clarified its reporting 
instructions in 2001 and publicized the changes. Regarding reporting 
fundraising (and “other” fees) on the designated Form 990 line item 
rather than on the “other” expense line item, IRS believed its 
instructions were clear, but has reiterated them in its Continuing 
Professional Educational text for fiscal year 2002 and in training for 
its examiners. IRS makes this text available to tax practitioners and 
the public to inform them about the proper application of tax laws and 
regulations. IRS is instructing its examiners during fiscal year 2002 
to check whether fundraising is being properly reported and to impose 
penalties where appropriate. IRS plans to convene a taskforce to 
consider what projects should be undertaken involving fundraising and 
Form 990 reporting, but the details have not yet been determined. 

Within the charitable community, various organizations have been 
concerned about the accuracy of charitable expense reporting, with 
concerns often focusing on fundraising expenses. A 1999 Urban 
Institute study of Form 990 expense data found that 59 percent of 
58,127 charities that received public donations either reported zero 
fundraising expenses or left this line item blank on the Form 990. 
Using the same criteria as the Urban Institute, our analysis of the 
Form 990 data from 1994 through 1998 found the number, on average, to 
be 64 percent, as shown in figure 3.[Footnote 10] 

Figure 3: Percent of Charitable Organizations Receiving Public 
Contributions and Reporting No Fundraising Expenses, 1994-1998: 

[Refer to PDF for image: vertical bar graph] 

Percentage reporting no fundraising expenses: 

Year: 1994: 65.8%; 
Year: 1995: 64.4%; 
Year: 1996: 63.4%; 
Year: 1997: 64.3%; 
Year: 1998: 62.6%. 

Source: SOI 1994-1998. 

[End of figure] 

Charity experts have noted that those receiving donations are likely 
to incur some fundraising expenses, depending on certain circumstances 
(e.g., size or area of operation). The Urban Institute found it 
perplexing that so many charities would report no fundraising 
expenses, but acknowledged that several factors could account for low 
fundraising expenses.[Footnote 11] For instance, it noted that the 
smaller the amount of funds raised, the less likely charities may be 
to incur fundraising expenses. However, the Urban Institute did not 
indicate the amount that could be raised without incurring fundraising 
expenses. Thus, it would not be surprising for some charities, such as 
small ones or newer ones, to have little or no fundraising expenses. 

The Urban Institute also notes that charities that raise revenues 
through “special events and activities” (Form 990, line item 9c) may 
legitimately report little or no fundraising expenses. When we 
accounted for those reporting special event expenses among those 
represented in figure 3, we found that, on average for 1994-1998, 34.8 
percent of all remaining charities that received contributions did not 
report fundraising expenses. 

In addition, various articles have discussed problems in charities’ 
reporting of fundraising expenses. For example, a May 2000 article in 
the Chronicle of Philanthropy discussed how some charities leave the 
“public in the dark” by not reporting fundraising expenses.[Footnote 
12] The article discussed how some charities in three states reported 
no fundraising expenses on the Form 990, although state records 
indicated that they had such expenses. 

Charities Have Discretion in Determining How to Charge or Allocate 
Expenses to Program Services: 

Charities have discretion in determining how to charge expenses to 
program services as well as allocating expenses among the Form 990 
functional categories for charitable program services, general 
management, and fundraising. The differences in the methods used can 
result in two charities with similar activities allocating their 
expenses differently among the functional expense categories on the 
Form 990. Figure 4 shows the three functional expense categories and 
the related lines for specific expenses. 

Figure 4: Functional Expense Categories and Related Lines for Specific 
Expenses: 

[Refer to PDF for image: excerpts from form] 

Charitable organizations are required to report expense totals for the 
Statement of Functional Expenses on Part II of the Form 990: 
Expenses: 
13. Program services (from line 44, column (B)): 
14. Management and general (from line 44, column (C)): 
15. Fundraising (from line 44, column (D)): 
16. Payments to affiliates (attach schedule): 
17. Total expenses (add lines 16 and 44, column (A)): 

Charitable organizations allocate (assign) expenses in three account 
groups (i.e., program services, management and general, and 
fundraising) by object classification (e.g., salaries, legal fees, 
travel). 

[End of figure] 

Many Types of Expenses Comprise Program Service Functional Expenses: 

Although the three expense categories differ, their boundaries 
overlap. Fundraising activities may be mixed with program services, 
especially when a charity provides education related to its charitable 
purpose in a fundraising solicitation. Similarly, general management 
expenses may be mixed with the delivery of program services and 
fundraising. Charity employees may, for instance, spend time managing 
the daily support of the charity, spend time participating in raising 
funds, and spend time providing program services. 

We analyzed the portions of total program service expenses (line item 
13 of Form 990) during 1994 through 1998 that came from (1) grants and 
specific assistance (line items 22 and 23) that can only be charged to 
program service expenses to meet the charitable purpose or (2) 
expenses such as salaries, travel, etc. (line items 24 through 43) 
that can be charged to the program service, fundraising, and general 
management categories. It is important to recognize that expenses such 
as salaries and travel can be charged to program services when they 
are incurred in connection with meeting the charitable purpose. Table 
1 shows the analysis of the types of expenses comprising program 
service expenses. 

Table 1: Line Items as a Percentage of Program Service Expense, Filing 
Years 1994-1998: 

Line item object classes: Grants and allocations; 
1994: 5.8%; 
1995: 5.3%; 
1996: 5.2%; 
1997: 5.8%; 
1998: 6.5%; 
5-year average: 5.7%. 

Line item object classes: Specific assistance to individuals; 
1994: 1.6%; 
1995: 0.7%; 
1996: 7.1%; 
1997: 8.8%; 
1998: 1.2%; 
5-year average: 3.9%. 

Line item object classes: Grants and specific assistance, subtotal; 
1994: 7.4%; 
1995: 6.0%; 
1996: 12.3%; 
1997: 14.6%; 
1998: 7.7%; 
5-year average: 9.6%. 

Line item object classes: Benefits to/for members; 
1994: 2.7%; 
1995: 6.9%; 
1996: 0.6%; 
1997: 0.7%; 
1998: 0.8%; 
5-year average: 2.3%. 

Line item object classes: Compensation to officers, directors; 
1994: 0.6%; 
1995: 0.7%; 
1996: 0.7%; 
1997: 0.7%; 
1998: 0.8%; 
5-year average: 0.7%. 

Line item object classes: Other salary & wages; 
1994: 34.5%; 
1995: 32.6%; 
1996: 32.6%; 
1997: 32.7%; 
1998: 36.4%; 
5-year average: 33.8%. 

Line item object classes: Pension contributions; 
1994: 1.1%; 
1995: 1.1%; 
1996: 1.1%; 
1997: 1.0%; 
1998: 1.1%; 
5-year average: 1.1%. 

Line item object classes: Other employee benefits; 
1994: 4.2%; 
1995: 3.9%; 
1996: 3.7%; 
1997: 3.6%; 
1998: 3.9%; 
5-year average: 3.9%. 

Line item object classes: Payroll taxes; 
1994: 2.3%; 
1995: 2.2%; 
1996: 2.2%; 
1997: 2.1%; 
1998: 2.3%; 
5-year average: 2.2%. 

Line item object classes: Compensation related, subtotal; 
1994: 45.5%; 
1995: 47.3%; 
1996: 41.0%; 
1997: 40.9%; 
1998: 45.2%; 
5-year average: 44.0%. 

Line item object classes: Professional fundraising fees;
1994: [A]; 
1995: [A]; 
1996: [A]; 
1997: 0.01%; 
1998: 0.02%; 
5-year average: 0.01%. 

Line item object classes: Supplies; 
1994: 8.3%; 
1995: 7.9%; 
1996: 8.2%; 
1997: 8.1%; 
1998: 8.9%; 
5-year average: 8.3%. 

Line item object classes: Occupancy; 
1994: 2.6%; 
1995: 2.5%; 
1996: 2.6%; 
1997: 2.6%; 
1998: 2.9%; 
5-year average: 2.6%. 

Line item object classes: Depreciation, depletion, etc. 
1994: 3.7%; 
1995: 3.8%; 
1996: 3.8%; 
1997: 3.8%; 
1998: 4.2%; 
5-year average: 3.8%. 

Line item object classes: Travel; 
1994: 0.8%; 
1995: 0.7%; 
1996: 0.8%; 
1997: 0.7%; 
1998: 0.8%; 
5-year average: 0.8%. 

Line item object classes: Miscellaneous other categories[B]; 
1994: 4.9%; 
1995: 4.7%; 
1996: 4.7%; 
1997: 4.6%; 
1998: 4.9%; 
5-year average: 4.8%. 

Line item object classes: Other expenses (line 43); 
1994: 26.8%; 
1995: 27.2%; 
1996: 26.7%; 
1997: 24.8%; 
1998: 25.5%; 
5-year average: 26.2%. 

Line item object classes: All other expenses, subtotal; 
1994: 47.1%; 
1995: 46.7%; 
1996: 46.7%; 
1997: 44.6%; 
1998: 47.2%; 
5-year average: 46.4%. 

Line item object classes: Total; 
1994: 100%; 
1995: 100%; 
1996: 100%; 
1997: 100%; 
1998: 100%; 
5-year average: 100%. 

Note: Totals may not add to 100 percent due to rounding. 

[A] Professional fundraising fees were allocable only to the 
fundraising expense column. 

[B] Includes accounting fees, legal fees, telephone, postage and 
shipping, equipment rental and maintenance, printing and publications, 
conferences, conventions and meetings, and interest. 

Source: IRS SOI data. 

[End of table] 

Expense Allocation Methods Affect Comparisons Among Charities: 

Charities can use different methods (which are not reported on the 
Form 990) for charging and allocating expenses. Such differences can 
affect comparisons across charities. Thus, charity watchdog groups, 
organizational donors, or others may draw inappropriate conclusions 
when comparing the expenses charged to program services or allocated 
across the three functional categories. Neither IRS nor the 
professional accounting accrediting bodies require or prohibit 
particular allocation methods. In general, any method for charging or 
allocating expenses should be reasonable, logical, and consistently 
applied given the circumstances and facts. Organizations that provide 
funds or grants to charities are likely to provide guidance or 
requirements for charging and allocating expenses and to require 
independent financial audits. 

Among the methods for allocating joint fundraising costs, the three 
methods mentioned routinely by accounting professionals and in 
accounting texts are the: (1) physical units method, (2) relative 
direct cost method, and (3) stand-alone joint-cost allocation method. 
Each method can produce a different financial “portrait,” and no one 
method is appropriate for all circumstances. 

The method used determines the allocation of expenses among 
fundraising, program services and general management. For example, 
suppose a charity contracts with an external fundraiser to conduct a 
mail solicitation in which the letter combines program service 
(education) and fundraising text over 100 lines. The fundraiser’s $1 
million fee covers expenses for identifying potential donors and 
creating and mailing the letter. The charity must devise a way to 
equitably allocate the fundraiser’s expenses. One way is to use the 
physical units method of allocation. The physical units method uses 
identifiable, measurable, and calculable physical aspects of 
fundraising instruments to allocate expenses. In this example, the 
physical aspects are the number of text lines in the solicitation 
letter. If 10 lines of text covered fundraising and 90 lines covered 
program services, an allocation based on counting lines would allow 
the charity to allocate $100,000 to fundraising and $900,000 to 
program services. 

However, this method of allocation may be inappropriate if most of the 
expenses incurred actually related to the use of the donor mailing 
list—the value of which relates more to fundraising than to program 
services. The stand-alone joint-cost-allocation method might provide a 
more reasonable allocation in this circumstance. If this method were 
used, and if $750,000 of the fundraiser’s fee covered the value of its 
mailing list, at least $750,000 of the $1 million in total costs would 
be for fundraising and no more than $250,000 would count for program 
services. Thus, the method used can materially influence the 
allocation of a charity’s expenses. 

In March 1998, the AICPA published Statement of Position 98-2 (SOP 98-
2) “Accounting for Costs of Activities of Not–for–Profit Organizations 
and State and Local Governmental Entities That Include Fundraising” to 
provide guidance on the allocation of joint activities, such as those 
when program services and fundraising are involved. SOP 98-2 was 
intended to provide consistent, clear, and detailed guidance for 
reporting joint activities. SOP 98-2 sets three criteria (purpose, 
audience, and content) that must be met to allocate such joint-cost 
expenses to the Form 990 program services or management and general 
categories, rather than to fundraising. The three SOP 98-2 criteria 
are: 

* Purpose: should show that fundraising activities will help meet a 
program service or general management purpose. 

* Audience: should show that donors are selected to meet a program 
service or a general management purpose rather than to contribute only 
funds. 

* Content: should show that the content of the joint activity supports 
the charity’s program service or general management purpose. 

According to AICPA, if any of these criteria are not met, then all 
expenses should be allocated to fundraising. All three criteria 
require a call for action in order to allocate expenses to program 
services. A call for action makes general requests for involvement 
with an activity or cause, regardless of whether the individual 
contributes funding to those requesting the involvement. Absent a call 
to action, SOP 98-2 recognizes the activity as fundraising, and no 
expenses should be allocated to program services. 

IRS added a checkbox to the 2001 Form 990 to indicate whether SOP 98-2 
had been used to account for joint costs. IRS noted that the purpose 
was to facilitate the understanding of those reading the Form 990. IRS 
also is asking for comments on whether the use of SOP 98-2 should be 
required for certain filers (such as those above a specified amount of 
assets) to ensure greater uniformity in expense allocations and better 
comparison of fundraising expenses across charities. According to an 
AICPA official, charitable organizations may use this guidance, 
regardless of their accounting method. 

Evaluating Charities Relies on More than Ratios on Spending Efficiency: 

Caution in relying on Form 990 expense data for public oversight of 
charities is also warranted because spending efficiency can vary for a 
number of reasons. Charity watchdog groups, GuideStar, the Urban 
Institute, and others have spoken against reliance on spending 
efficiency ratios as the sole measure of a charity’s worthiness. The 
expense data and related efficiency ratios (such as program service 
expenses compared with all expenses) do not provide much perspective 
on other attributes of charities, such as how well they accomplish 
their charitable purpose, regardless of the amounts spent. 

Charity watchdogs have evolved to help monitor charities and enhance 
public oversight. In general, within the resources they have, these 
watchdog groups use the Form 990 data and other available data to 
analyze aspects of selected charities. These watchdog groups analyze 
spending efficiency ratios, but note limitations that could mislead 
the public on which charities are and are not doing well. Spending 
efficiency fluctuates with factors such as the popularity of the 
cause, age of the charity, and type of charitable activities. For 
example, an established, well-known charity may spend more money on 
fundraising than a newer charity. A charity also may have wide swings 
in its spending for charitable purposes if, for instance, those 
purposes are affected by sudden changes from events such as natural 
disasters. Also, a charity saving funds to build a facility to serve 
its charitable purpose may have no program service expenses until 
adequate funds are raised to begin the project. 

When evaluating a charity, the public also considers how well a 
charity accomplishes its charitable purposes, which is not measured by 
spending data. However, measuring accomplishments and comparing 
charities on that basis is difficult to do according to the 
Independent Sector, the Urban Institute, and others (such as 
academicians). Given the wide diversity in the charity community, no 
standard rules have been devised to guide charities in reporting 
accomplishments. The Form 990 has a section that asks charities to 
report what was accomplished with the program service expenses; IRS’s 
instructions allow discretion on reporting those accomplishments. 

Other standards that the charity watchdog groups have suggested for 
evaluating charities include the manner in which the charity governs 
itself, raises funds, informs the public, accounts for its finances, 
prepares budgets and financial documents, and has independent audits 
or reviews. Each of these standards can be viewed as contributing 
information that can be useful for evaluating charities. 

Imbalances Between IRS’s Charity Oversight Workload and Resources 
Necessitate Better Planning to Improve Compliance and Resource 
Decisions: 

Determining the adequacy of IRS’s oversight of charities is difficult, 
in part, because IRS has little data on the compliance of charities, 
and because IRS generally has not established results-oriented goals 
for its oversight of charities against which to measure progress. 
Concerns also arise with the adequacy of oversight because IRS has not 
kept up with growth in the charitable sector. IRS staffing for 
overseeing tax-exempt organizations fell between 1996 and 2001 while 
at the same time the number of new applications for tax exemption and 
the number of Forms 990 filed increased. By shifting staff, IRS has 
continued to process new applications and, as a consequence, has 
generally decreased its examinations of existing charities. 

IRS has recognized that its oversight of charities and other tax-
exempt organizations is limited and is formulating plans to measure 
tax-exempt organizations’ compliance levels and improve its oversight 
activities. Because IRS does not have an accurate picture of charities’
 compliance and it is unclear how its plans would yield such data, IRS 
lacks key information for making decisions on how much charity 
oversight is needed, the amount of resources needed for the oversight, 
and how to improve its use of available resources. In addition, IRS’s 
plans for improving its oversight activities generally do not define 
what results it intends to achieve in overseeing charities. 

IRS Focuses on Reviewing Applications and Examining Annual Returns: 

IRS oversight of charities primarily consists of two activities. 
First, IRS reviews and approves applications filed by charities for 
the recognition of tax-exempt status. Second, IRS annually examines a 
small percentage of the annual returns filed by charities. Through 
these activities, IRS tries to ensure that charities merit the 
recognition of a tax-exempt status as well as the retention of it. 

In carrying out these two functions, IRS generally is not responsible 
for taking adverse actions or even suggesting improvements in a 
charity’s operations based on evidence about how well a charity spends 
its funds or meets its charitable purpose. Rather, IRS focuses on 
other issues related to the tax exemption for charities. For instance, 
in reviewing applications for recognition as tax-exempt charities, IRS 
focuses on whether applicants plan to undertake activities that meet 
the criteria for tax-exempt status and that adhere to standards such 
as restrictions on private benefits accruing to charity officials. 
Similarly, when examining charities’ Forms 990, IRS checks for 
compliance with specific requirements applicable to charities, such as 
meeting a recognized charitable purpose. On the basis of discussions 
with IRS and state officials, oversight of charities’ efficiency and 
effectiveness is more likely to be accomplished through the public’s 
decisions about which charities to support and through states’ efforts 
to ensure that charities do not abuse their charitable status. 

As for oversight of applications, IRS revenue agents review the 
applications of organizations seeking tax-exempt status as charities. 
If an application is approved, IRS provides a letter to the charity 
approving its tax-exempt status. Comparing fiscal years 1998 through 
2001, the number of applications for charity status submitted to IRS 
has increased from about 54,000 to about 59,000, or about 9 percent, 
as shown in table 2. Over all 4 years, the number of applications 
denied stayed below 100. (See appendix III for a description of the 
application process.) 

Table 2: Number of Charity Applications Received and Disposed, by 
Fiscal Year: 

Fiscal year: 1998; 
Applications received: 54,119; 
Types of disposals of applications: 
Approved: 36,743; 
Denied: 73; 
Did not submit fee: 1,473; 
Withdrawn by charity: 883; 
Did not submit all documents: 11,056. 

Fiscal year: 1999; 
Applications received: 50,724; 
Types of disposals of applications: 
Approved: 39,281; 
Denied: 39; 
Did not submit fee: 764; 
Withdrawn by charity: 890; 
Did not submit all documents: 8,433. 

Fiscal year: 2000; 
Applications received: 58,029; 
Types of disposals of applications: 
Approved: 45,233; 
Denied: 59; 
Did not submit fee: 390; 
Withdrawn by charity: 899; 
Did not submit all documents: 8,853. 

Fiscal year: 2001; 
Applications received: 58,938; 
Types of disposals of applications: 
Approved: 42,308; 
Denied: 58; 
Did not submit fee: 450; 
Withdrawn by charity: 894; 
Did not submit all documents: 9,204. 

Note: IRS did not have the data for fiscal years 1996 and 1997. 

Source: IRS data. 

[End of table] 

In examinations, IRS seeks to ensure that charities meet federal tax 
requirements. In examining a return, the revenue agent requests and 
reviews information from a charity to check the accuracy of items on 
the return and to verify that a charity is operating to meet a 
charitable purpose. As shown in table 3, comparing fiscal years 1996 
through 2001, the number of annual returns (Forms 990) increased from 
about 228,000 to about 286,000 (25 percent) while the number examined 
dropped from 1,450 to 1,237 (15 percent). Thus, IRS examined a smaller 
percentage of returns and charities—-dropping by 2001 to 0.43 percent 
and 0.29 percent, respectively. (See appendix IV for a description of 
the examination process.) 

Table 3: Number of Examinations and Examination Rates for Charity 
Returns, by Fiscal Year: 

Fiscal year: 1996; 
Number of annual returns filed: 228,013; 
Number of annual returns examined: 1,450; 
Examination rate (returns): 0.64; 
Number of charities examined: 896; 
Examination rate (charities): 0.39. 

Fiscal year: 1997; 
Number of annual returns filed: 231,161; 
Number of annual returns examined: 1,584; 
Examination rate (returns): 0.69; 
Number of charities examined: 946; 
Examination rate (charities): 0.41. 

Fiscal year: 1998; 
Number of annual returns filed: 260,885; 
Number of annual returns examined: 1,912; 
Examination rate (returns): 0.73; 
Number of charities examined: 1,238; 
Examination rate (charities): 0.48. 

Fiscal year: 1999; 
Number of annual returns filed: 235,333; 
Number of annual returns examined: 1,723; 
Examination rate (returns): 0.73; 
Number of charities examined: 1,294; 
Examination rate (charities): 0.55. 

Fiscal year: 2000; 
Number of annual returns filed: 273,649; 
Number of annual returns examined: 1,294; 
Examination rate (returns): 0.47; 
Number of charities examined: 875; 
Examination rate (charities): 0.32. 

Fiscal year: 2001; 
Number of annual returns filed: 285,733; 
Number of annual returns examined: 1,237; 
Examination rate (returns): 0.43; 
Number of charities examined: 835; 
Examination rate (charities): 0.29. 

Note: Because some examinations of larger charities involve Forms 990 
filed for more than 1 year, the number of returns examined exceeds the 
number of charities examined each year. 

Source: IRS examination data. 

[End of table] 

In addition, examinations are taking longer. (See appendix IV for the 
results.) For fiscal years 1996 through 2001, the time required to 
examine charity returns nearly tripled when a charity agreed to 
changes proposed by IRS and increased about seven times when a charity 
disagreed. IRS officials did not know the reasons for such increases 
in time and were concerned. Given the concern, IRS has started 
analyzing ways to better select the most noncompliant returns for 
examination. The date for completing the analysis was not set, as of 
March 2002. 

Multiple Priorities and Limited Resources Contribute to Fewer 
Examinations: 

At least three related reasons help explain the decline in the number 
of charity examinations. First, IRS has had to adjust the level of 
charity oversight given many other priorities involving all other 
types of taxpayers. Second, the resources devoted to oversight dropped 
for fiscal years 1996 through 2001. Last, IRS moved revenue agents 
from doing examinations to processing the increased application 
workload. 

IRS has many other priorities as the agency that collects the proper 
amount of revenue to fund the programs that Congress and the executive 
branch have approved. For example, to deal with millions of individual 
and business taxpayers, IRS has established four operating divisions 
organized around the type of taxpayer—Wage and Investment, Small 
Business/Self-Employed, Large and Mid-Size Business, and Tax-Exempt 
and Government Entities (TE/GE). TE/GE deals with charities, many 
other types of exempt organizations, pension plans, Indian tribal 
governments, and other types of government entities. Each of these 
activities competes for staffing and funding. Furthermore, although 
TE/GE has the major charity oversight role among federal agencies, 
[Footnote 13] its oversight is limited. 

The staffing devoted to IRS’s exempt organization function and 
oversight has declined in recent years. IRS was unable to provide the 
staffing levels for reviewing charity applications and examining the 
Form 990. However, from fiscal years 1996 through 2001, total staffing 
for the exempt function has fallen from 958 to 811, or about 15 
percent. For application and examination oversight of all exempt 
organizations, the staffing fell from 609 to 546, or about 10 percent. 
A 1997 IRS memorandum pointed out that the staffing level for the 
entire organization that is now TE/GE had been essentially flat since 
its creation in 1974 (2,075 in 1974 to 2,123 in 1997) while the 
workload in terms of the size of the sectors that it regulated had 
doubled. 

IRS also shifted revenue agents from doing examinations to help 
process the increasing application workload. Because all applications 
must be processed and oversight staff had not increased, IRS moved 
agents from doing examinations. In fiscal year 2001, IRS took steps to 
hire about 40 additional staff to help process applications, which 
would allow revenue agents to return to doing examinations. 

New IRS Approach to Improve Compliance and Oversight Will Not Cover 
All Charities and Does Not Define Desired Compliance Results: 

Given increased workload and declining resources, IRS officials are 
developing an approach to better gauge the extent and types of 
compliance issues for tax-exempt organizations and to improve their 
oversight strategies. However, the current approach would not provide 
information on compliance problems of the full charitable community. 
Nor does it define the overall results IRS hopes to achieve in a 
manner that would facilitate strategic investments of resources and 
that can be used to assess IRS’s overall progress in improving its 
oversight strategies. 

IRS’s new approach is to study segments of the tax-exempt community, 
that is, market segments, to better understand existing compliance 
issues.[Footnote 14] Through these studies, IRS intends to develop 
indicators of compliance for 35 selected market segments and analyze 
ways to address compliance problems. According to IRS, the results of 
the market segment studies are intended to help refine the selection 
criteria for identifying noncompliant returns for examination as well 
as help identify other strategies to improve compliance such as 
additional guidance, clearer instructions, or correspondence on 
apparent noncompliance. Understanding compliance problems and 
measuring compliance among the various types of charities also is 
intended to help determine where to focus resources. 

As of February 2002, about half of the selected segments dealt with a 
wide variety of tax-exempt organizations that were not charities and 
about half dealt with various types of charities such as those for 
hospitals, colleges, and churches.[Footnote 15] It was not clear how 
IRS would use the results to get a picture of compliance across all 
charities, even though charities account for most of the applications 
and Forms 990. Without an understanding of the extent and nature of 
compliance problems across all charities, IRS will have difficulty in 
making data-driven decisions about the strategies for improving 
oversight as well as the level of oversight and resources needed. 

IRS plans to start work on these market segments as resources and data 
allow. Due to resource limitations, IRS believes that at the present 
rate the completion of all planned studies will take until fiscal year 
2008. During fiscal year 2002, IRS plans to work on six segments. 
[Footnote 16] IRS officials said that they selected segments based on 
experience and judgment. 

As part of IRS’s overall performance management system, TE/GE has 
developed a plan to guide its operations. That plan covers TE/GE’s 
responsibilities, including those for charities. The plan specifies, 
for instance, the number of employees to be assigned to each activity, 
the number of applications and examinations IRS expects to process, 
and how long such activities take, and the satisfaction of tax-exempt 
organizations with IRS’s services and its employees. 

For fiscal years 2003 and 2004, TE/GE has proposed staffing increases 
in two initiatives for known concerns. Although the proposed increases 
do not focus on charities, their implementation might assist IRS’s 
charitable oversight. One initiative calls for adding 20 staff to work 
on improving the quality and quantity of IRS data and studying uses of 
non-IRS databases. The second initiative requests 30 additional staff 
to enhance IRS’s examination presence in the exempt organization 
community. IRS officials said both initiatives would require similar 
increases in staff during future years. 

Although TE/GE’s plan and initiatives provide an understanding of what 
IRS intends to do with its staff and other resources, IRS has not 
identified what longer-range results it intends to achieve for 
charities. The planning principles in the Government Performance and 
Results Act (GPRA) and incorporated into IRS’s Strategic Planning, 
Budgeting, and Performance Management process call for agencies to 
define the measurable results they are attempting to achieve, 
generally over several years. This approach is intended to ensure that 
agencies have thought through how the activities and initiatives they 
are undertaking are likely to add up to a meaningful result that their 
programs are intended to accomplish. The TE/GE plan does not, for 
instance, provide goals for improving the compliance levels of tax-
exempt organizations as a whole or for charities in particular. The 
plan also does not discuss the basis for IRS’s judgment that the 
proposed initiatives are the best ways to improve compliance. 

IRS officials said that longer-range planning could be useful. They 
noted, however, that their ability to undertake significant 
initiatives for charities must be considered in the context of IRS’s 
overall responsibilities. Furthermore, they said that establishing a 
link between their activities and changes in charities’ compliance is 
challenging and this makes planning to achieve certain types of 
results difficult. Many agencies face this challenge.[Footnote 17] 
However, GPRA’s and IRS’s planning requirements suggest that the 
process of focusing on intended results, while often challenging, 
promotes strategic and disciplined management decisions that will be 
more likely to be effective than planning that is not results-oriented. 

Although Federal and State Officials Generally Support More IRS 
Sharing of Data with States, Many Issues Must Be Considered: 

IRS data sharing with the states to facilitate state oversight of 
charities is limited in two ways. First, IRS does not have a process 
to proactively share data that it is allowed to provide to states, 
such as data on the denial or revocation of tax-exempt status. Second, 
federal law generally prohibits IRS from sharing data with states 
about its reviews of applications for recognition of charities and its 
examinations of existing charities. State officials believe that 
accessing IRS’s oversight data would help them allocate resources in 
overseeing charities. Because federal taxpayer data are subject to 
statutory confidentiality protections, a number of issues, such as 
security procedures to protect federal tax data, would need to be 
considered if data sharing were expanded. 

Many States Oversee Charities to Protect the Public: 

Many states oversee charities to protect the public. Although overlap 
exists, IRS and state oversight differs. IRS focuses on whether the 
charity meets tax-exempt requirements and complies with federal laws, 
such as those governing the use of funds for a charitable purpose 
rather than private gain. States have an interest in whether 
charitable fundraising is fraudulent and whether the charity is 
meeting the charitable purpose for which it was created. 

The majority of states oversee charities through their attorneys 
general and charity offices. State attorneys general usually have 
broad power to regulate charities in their states. These states 
monitor charities for compliance with statutory and common-law 
standards and have the option of correcting noncompliance through the 
courts. Furthermore, these states usually regulate the solicitation of 
funds for charitable purposes. Some states require professional 
fundraisers to register and file information on specific fundraising 
contracts. 

IRS Does Not or Cannot Share Much of Its Oversight Data on Charities 
with States: 

IRS does not have a process to proactively share oversight data with 
states as permitted by federal law and cannot share much of its data 
because of legal prohibitions. IRC Sections 6103 and 6104 govern the 
types of oversight data that IRS can share with states for purposes of 
overseeing charities. 

In general, to protect taxpayer confidentiality, Section 6103 prevents 
IRS from publicly disclosing tax return data for all types of 
taxpayers, unless explicitly allowed.[Footnote 18] For charities, this 
means IRS cannot share most data about examinations. The general 
restriction against disclosure stems primarily from a right to 
privacy. Congress only granted the explicit exceptions when it 
determined that the need for the disclosure of the data outweighed the 
right to privacy. Criminal and civil sanctions apply for the 
unauthorized disclosure or inspection of federal tax returns and 
return data. 

Although tax-exempt organizations also may assert a right to privacy 
for interactions with IRS, Congress has developed different disclosure 
rules and has been expanding the levels of public disclosure. The 
rationale for disclosure has been that the public supports tax-exempt 
organizations through direct donations and the tax benefits accruing 
from their tax-exempt status and, thus, has a strong interest in 
information about the organizations. Section 6104 exists to provide 
more disclosure about tax-exempt organizations. For charities, it 
provides some exceptions to Section 6103 prohibitions so that states 
can request access to certain IRS data, such as details on revocations 
of tax-exempt status, to support state oversight of charities. 

Table 4 shows the types of IRS oversight data that states can and 
cannot get. The second column indicates IRS data that are available to 
states, the third column indicates IRS data that state charity 
officials can request through Section 6104 under certain conditions, 
and the fourth column indicates IRS data that cannot be shared due to 
Section 6103 prohibitions. 

Table 4: Availability of IRS Application and Examination Data on 
Charities to States: 

Types of IRS data states might want to access[A]: Approved application; 
Available to states: [Check]; 
Available to state charity officials if designated[B]: [Empty]; 
Not available to state charity officials: [Empty]. 

Types of IRS data states might want to access[A]: Denied application; 
Available to states: [Empty]; 
Available to state charity officials if designated[B]: [Check]; 
Not available to state charity officials: [Empty]. 

Types of IRS data states might want to access[A]: Withdrawn 
application; 
Available to states: [Empty]; 
Available to state charity officials if designated[B]: [Empty]; 
Not available to state charity officials: [Check]. 

Types of IRS data states might want to access[A]: Pending/appealed 
application; 
Available to states: [Empty]; 
Available to state charity officials if designated[B]: [Empty]; 
Not available to state charity officials: [Check]. 

Types of IRS data states might want to access[A]: Notice of revocation; 
Available to states: [Check]; 
Available to state charity officials if designated[B]: [Empty]; 
Not available to state charity officials: [Empty]. 

Types of IRS data states might want to access[A]: Notice of deficiency; 
Available to states: [Empty]; 
Available to state charity officials if designated[B]: [Check][C]; 
Not available to state charity officials: [Empty]. 

Types of IRS data states might want to access[A]: Details on denials, 
revocations, or notices of deficiency; 
Available to states: [Empty]; 
Available to state charity officials if designated[B]: [Check][C]; 
Not available to state charity officials: [Empty]. 

Types of IRS data states might want to access[A]: Receipt of state 
referrals; 
Available to states: [Check]; 
Available to state charity officials if designated[B]: [Empty]; 
Not available to state charity officials: [Empty]. 

Types of IRS data states might want to access[A]: Actions on state 
referrals; 
Available to states: [Empty]; 
Available to state charity officials if designated[B]: [Empty]; 
Not available to state charity officials: [Check]. 

Types of IRS data states might want to access[A]: Ongoing examination 
data; 
Available to states: [Empty]; 
Available to state charity officials if designated[B]: [Empty]; 
Not available to state charity officials: [Check]. 

Types of IRS data states might want to access[A]: Closed examination 
files; 
Available to states: [Empty]; 
Available to state charity officials if designated[B]: [Empty]; 
Not available to state charity officials: [Check][D]. 

[A] IRS officials are researching whether states can gain access to 
data on intermediate sanctions against individuals at a charity due to 
excess benefits and IRS closing agreements with the charity. 

[B] For Section 6104(c), an appropriate state officer can receive this 
information. For example, a state attorney general, state tax officer, 
or any state official charged with overseeing organizations of the 
type described in Section 501(c)(3), if so designated. 

[C] Applies to a mailing of a notice of deficiency under Section 507 
and chapters 41 or 42. Section 507 applies to penalties on the 
termination of private foundations. Chapter 41 applies to charity 
lobbying expenditures and chapter 42 applies to charity-related excise 
taxes, such as for intermediate sanctions. 

[D] Can request access to closed files only for those resulting in a 
revocation or certain notices of deficiency and only if they can show 
they need the files and how they will use the files. 

Source: IRC Sections 6103 and 6104 and IRS officials. 

[End of table] 

IRS Does Not Have a Process to Regularly Share Data That States Can 
Obtain: 

As table 4 shows, the appropriate state officials can obtain details 
about the final denials of applications, final revocations of tax-
exempt status, and notices of a tax deficiency under Section 507, or 
Chapter 41 or 42. However, IRS does not have a process to regularly 
share such data. 

Under Section 6104, IRS cannot share these details with the 
appropriate state officials unless they formally request these details 
and disclose their intent to use the data to fulfill their official 
functions under state charity law. IRS is to ensure that each request 
is reasonable, relevant, and necessary before releasing the data. 
Appropriate state officials may ask IRS for details such as 
examination results, work papers, reports, filed statements, 
application documents, and other information on determinations. State 
charity officials can have access to such data if they prove they are 
an appropriate state official as evidenced by a letter from the state 
attorney general on the functions and authority of appropriate 
officials with enough facts for IRS to determine that they can access 
the data. 

State charity officials would like regular access to such data. NASCO 
officials—state officials in 38 states who oversee charities—said that 
quicker access to information on denied applications and revocations 
helps stop charities from continuing suspicious activity. If such data 
are not provided quickly, the charity can dispose of assets or change 
its operations. Knowing the details about the revocation can also help 
states track individuals who try to re-establish similar suspicious 
operations in other states. 

IRS and the state officials said that data on denials, revocations, 
and notices are worth sharing. However, from fiscal years 1996 through 
2001, few charity applications were denied compared to the over 50,000 
applications submitted annually (see table 2), and few examinations 
resulted in revocations or notices of deficiency compared to over 
1,000 examinations closed annually (see table 3), as shown in table 5. 

Table: 5: Number of Denied Charity Applications, Revoked Charities, 
and Notices of Tax Deficiencies Sent to Charities, Fiscal Years 1996-
2001: 

IRS actions on charities: Denied applications; 
Number of IRS actions per fiscal year: 
1996: [A]; 
1997: [A]; 
1998: 73; 
1999: 39; 
2000: 59; 
2001: 58. 

IRS actions on charities: Revoked charities; 
Number of IRS actions per fiscal year: 
1996: 16; 
1997: 12; 
1998: 24; 
1999: 8; 
2000: 27; 
2001: 9. 

IRS actions on charities: Notices of tax deficiency; 
Number of IRS actions per fiscal year: 
1996: [B]; 
1997: [B]; 
1998: [B]; 
1999: [B]; 
2000: [B]; 
2001: [B]. 

[A] Data not available. 

[B] IRS could not provide data on the number of notices of tax 
deficiency sent for taxes assessed under Section 507 as well as 
Chapters 41 and 42. However, the number of these notices would be less 
than the number of examinations that closed with a proposed assessment 
of any type of tax or a penalty. For fiscal years 1996 through 2001, 
about 140 examinations, on average, closed annually with some type of 
tax or penalty assessment against charities. 

Source: IRS data. 

[End of table] 

However, IRS lacked a proactive process to regularly inform state 
officials of steps to be taken to request the data that are available 
under Section 6104. NASCO officials said many states are not clear 
about the rules for making these requests and about the types of 
details that are available. Such requests used to be sent to the 
district office director. IRS’s reorganization has abolished this 
position, and IRS has not developed a new process due to its focus on 
other priorities related to its reorganization. 

IRS plans to develop a new process. IRS officials said in February 
2002 that they started compiling a list of state officials who can 
receive IRS data on charities. They said that a barrier has been 
having enough staff to develop the process and negotiate agreements 
with each state on requesting, transmitting, protecting, and 
overseeing use of the data. Afterwards, managing this data-sharing 
process could pose additional resource challenges, depending on how 
the process would work. Officials said that a proposed system could be 
ready to discuss with states during the spring of 2002. 

States Want Access to Protected IRS Data on Charity Applications and 
Examinations: 

Although IRS and the states have a common interest in overseeing 
charities, Section 6103 generally prohibits IRS from sharing data with 
state agencies about actions, such as examinations of charities. These 
prohibitions apply even to IRS examinations that result when a state 
agency refers concerns about specific charities to IRS. Neither can 
IRS disclose actions on pending or withdrawn applications. 

State officials who oversee charities believe that Section 6103 
hampers their efforts to identify charities that defraud the public or 
otherwise operate improperly. They offered only anecdotal information 
on the extent to which such charities exist, but they believed that 
even a few abusive charities should be pursued because the betrayal of 
public trust could adversely affect the support given to all charities. 

At the annual NASCO conference in October 2001, state charity 
officials offered favorable comments about IRS’s outreach and 
education efforts, but pointed to problems created by IRS not being 
able to share data on pending and closed examinations and on pending 
and withdrawn applications. State officials were particularly 
concerned about not being able to get feedback on IRS actions on a 
state referral because of Section 6103 prohibitions. IRS officials 
said that state referrals are productive to examine, but IRS only can 
confirm receipt of the referral and whether the tax exemption was 
revoked. Other concerns expressed by state charity officials with IRS 
not being allowed to share its oversight data follow. 

* States might waste resources investigating a charity that IRS is 
examining or has found to be compliant (at least in those areas that 
IRS examined). 

* States might be unaware of questionable charities for a long time, 
which allows those charities to continue operating before the states 
know to pursue them. 

* States might miss opportunities to build better cases against 
charities when they observe suspicious activities. 

State officials say that often times they cannot fully use their 
powers to protect the public because of the lack of readily available 
data. State officials said that when they learn of a suspicious 
activity, they need information quickly. The officials said that they 
could head off a suspicious activity by asserting their state powers, 
noting that usually the threat of action is enough. However, 
questionable charities tend to move from state to state. State 
officials cited a need to compare IRS application data with state 
charity registration information to quickly deal with registrants that 
have a questionable past. 

State charity officials saw an advantage in greater data sharing 
because IRS does not have the authority to correct the fraudulent or 
suspicious charitable activities that states can correct. IRS can deny 
or revoke the charity’s tax-exempt status. As a tax administrative 
agency, IRS is interested in the tax-exempt status of a charity and 
whether it should continue. IRS generally does not pursue charity-
related fraud. If others (such as states) have proved fraud, that 
proof can justify denial or revocation of a tax exemption. 

State charity officials provided examples of how expanded sharing of 
examination and application data would help the states. Having 
examination results would allow the states to better monitor the 
operations of specific charities, determine their compliance with 
state laws, and correct any noncompliance earlier. Having data about 
pending and withdrawn applications could help states to be aware of 
potential problems and be more proactive in protecting the public. 
According to state officials, during the months that an application is 
pending, a so-called charity may not be operating to serve charitable 
purposes, and the public may incorrectly assume that it is tax-exempt 
and that donations are tax deductible. 

Treasury officials noted, however, that sharing examination data could 
be misleading. For example, the examination may involve issues 
unrelated to the organization’s tax-exempt status. In addition, 
sharing data about pending applications could result in disclosure of 
taxpayer information that is entitled to the confidentiality 
protections of Section 6103 if the taxpayer is not ultimately 
determined to be tax-exempt. 

Sharing IRS Oversight Data on Charities Requires Consideration of 
Various Issues: 

IRS and Treasury officials said that while they see value in the 
principle of sharing data with states, certain issues need to be 
considered in determining the scope of data sharing and the protection 
that should govern such sharing. In addition, the officials noted that 
both the IRS and states would incur various costs and burdens that 
need to be balanced in judging which data should be shared, what 
benefits would be obtained, and which means of sharing data would be 
the most appropriate. The officials said that they were formulating a 
position on legislative proposals to expand access, with appropriate 
taxpayer protections. Treasury officials said they supported a 
provision included in draft legislation (H.R. 3991, Taxpayer 
Protection and IRS Accountability Act of 2002) that would permit IRS 
to share more data with state officials to assist them in 
administering state laws regulating charitable organizations. Issues 
raised by IRS regarding any legislative proposals included: 

* Any disclosure of IRS data raises the issues of how the data are 
used and who uses the data. Understanding these issues is needed to 
make informed judgments about how best to share the data and to 
protect against improper disclosures. 

* Granting access to pending applications and examination data raises 
more challenges compared to those for final application and 
examination data. These challenges relate in part to concerns about 
privacy and due process rights. To the extent IRS shares data on 
issues for which it has not completed its work, use of the data by 
states would need to recognize this significant limitation. 
Influencing this issue is the fact that the interests of IRS as a tax 
administrator do not fully converge with the interests of state 
charity officials who are not tax officials. 

* The proper legal vehicle for expanding access to IRS’s application 
and examination data would need to be considered. Two basic legal 
provisions are Section 6103 (which prevents disclosure) and Section 
6104 (which enhances disclosure). Other legislative provisions might 
be worth considering, depending on the types of data that state 
charity officials want to access and their intended uses. 

* The legal vehicle chosen would also affect the types and rigors of 
the controls created to protect the data from improper disclosure and 
misuse. For example, Section 6103 imposes rigorous requirements on the 
receipt, storage, and use of the data in all forms (e.g., paper versus 
electronic) to protect IRS data as well as imposes various training 
and oversight requirements to ensure conformance to the protections. 
The controls and protections under Section 6104 generally are 
considered to be less rigorous. The level of protection that should be 
provided for data shared with states is an important issue. 

Conclusions: 
Considering the previously mentioned issues, IRS and states would need 
to be aware of the resources required to develop and implement 
agreements on how the data are to be used, who can use the data, and 
how the data are to be transmitted, maintained, and protected. In some 
cases, the resources in terms of staffing, training, space, and 
computer capabilities could be significant. 

With assets approaching $1.2 trillion and annual revenues approaching 
$720 billion, charities represent a substantial presence in American 
society. The approximately 250,000 active charities range from very 
small, local efforts to very large, sophisticated hospitals and 
universities. The public—-including the donors, media, and watchdog 
groups—IRS, and the states oversee charities. In this oversight 
framework, IRS has a limited role in considering how well charities 
are spending funds or accomplishing charitable purposes. Instead, the 
framework envisions a “free market” in which charities compete for 
donations, in part, based on such spending or accomplishments. Key to 
the proper functioning of this marketplace is the availability of 
reliable data, such as Form 990 data, that donors can use to make 
informed choices about which charities merit their contributions. 

However, due to suspected but unmeasured inaccuracy in some charities’ 
reporting of their expenses and to the range of discretion that 
charities have in charging and allocating expenses, Form 990 expense 
data alone are not adequate for public oversight of charities and 
should be used with caution. Recently, IRS officials have taken steps 
to address incidents of inaccurate expense reporting and have sought 
comments on one set of guidance for allocating expenses. 

IRS’s investment in reviewing charity applications and examining 
charity returns has not kept pace with the growth in the number of 
applications and returns. More informed decisions about the resources 
to devote to this investment could be made if IRS had a better 
understanding of the type and extent of compliance problems in the 
charitable community as well as a clear plan for how IRS would use its 
resources to achieve certain results, such as specific improvements in 
the compliance of charities. Neither of these is currently available, 
even though IRS has initiatives to increase its staffing for all 
exempt organizations. IRS’s plan for improving compliance will not 
provide data on the extent of the compliance problems and the level of 
oversight needed across the charitable community. Nor does the plan 
identify results-oriented goals and strategies, resources needed to 
accomplish such goals, and measures to gauge its progress toward goal 
accomplishment. 

However, given the size of the charitable community, it is unrealistic 
to expect that IRS would ever review more than a minor portion of 
charities. Furthermore, certain issues related to charities, such as 
the extent to which their fundraising activities may be misleading, 
can be addressed by state officials. Thus, helping to make state 
oversight of charities as effective as possible would enhance 
oversight of the charity community. State officials who oversee 
charities believe data that IRS can provide, but that often does not 
flow to them, as well as certain data that IRS is prohibited from 
sharing due to federal protections for taxpayers’ confidentiality, 
would make their oversight more effective. IRS and Treasury officials 
recently have started to discuss whether and how to share more data 
with the states. However, the timing and likely outcomes of these 
discussions is not yet clear. Also, the specific types of data that 
would be useful, the best means of sharing that data, the resources 
needed, and the taxpayer protections that would apply to the data, 
need to be worked out between federal and state officials. 
Furthermore, any proposal to change the law that restricts disclosure 
of certain IRS data to the states would require Congress and Treasury 
to make policy decisions about the balance between the privacy rights 
of charities and the public’s interest in more disclosure. 

Recommendations: 

To improve oversight by the public, IRS, and the states, we recommend 
that the commissioner of Internal Revenue: 

* ensures (either through the planned market segment studies or other 
means) that IRS obtains reliable data on compliance issues (including 
expense reporting) for the full charity community; 

* develops results-oriented goals, strategies (including levels of 
staffing and other resources to accomplish the goals), and measures to 
gauge progress in accomplishing those goals when overseeing the 
charity community; and; 

* develops, in consultation with state charity officials, a procedure 
to regularly share IRS data with states as allowed by federal tax law. 

In addition, we recommend that IRS, in concert with the Department of 
the Treasury and state charity officials, identify the specific types 
of IRS data that may be useful for enhancing state charity officials’ 
oversight of charities, the appropriate mechanisms for sharing the 
data, the resources needed, and the types and levels of protections to 
be provided to prevent improper disclosure and misuse. IRS and 
Treasury should continue drafting specific legislation to expand state 
access to selected IRS oversight data and ensure adequate levels of 
protection for any data that would be shared. 

Agency Comments and Our Evaluation: 

We obtained comments on a draft of this report from IRS. (See appendix 
VI.) IRS agreed with the findings in the report and said that the 
agency would assist in tax administration related to charities and 
identified actions underway or planned to address our recommendations. 

We support IRS’s timely actions on our recommendations and believe IRS’
s actions are generally responsive to our recommendations. As IRS 
moves forward with its plans, however, we encourage the commissioner 
of Internal Revenue to ensure that the actions IRS takes will cover 
all aspects of our recommendations. For instance, although IRS’s 
comments indicate that IRS will develop goals and measures for its 
oversight of charities, the comments do not mention identifying the 
levels of staffing and other resources needed to accomplish such goals. 

Although generally agreeing with our findings and indicating that 
actions were planned or being taken in relation to our 
recommendations, IRS had certain reservations about the report. First, 
IRS said that our draft report implied that IRS was not looking at the 
extent to which charities are properly reporting expenses. Also, 
according to IRS, the agency has established a task force to develop 
examination projects for reporting accuracy and that examiners have 
been instructed to review this issue. Our draft report did recognize 
these actions. However, the task force had not yet begun to develop 
projects at the time we did our work, and examiners look at only a 
very small portion of charities annually. Thus, neither of these 
actions indicated that IRS would be obtaining reliable overall 
measures of how accurately charities report their expense data. We did 
modify our Results in Brief discussion to more explicitly recognize 
that IRS is beginning to consider how to assess charities’ expense 
reporting. 

IRS also said that the draft report did not sufficiently recognize the 
breadth of IRS’s responsibilities related to tax-exempt organizations. 
In the draft, we recognized IRS’s other responsibilities both in 
providing statistics on the portion that charities represent of all 
tax-exempt organizations and by explicitly noting the range of 
responsibilities that fall under TE/GE and that those responsibilities 
compete for staffing and funding with IRS’s efforts to oversee 
charities. IRS’s letter provided some additional data demonstrating 
the breadth of IRS’s responsibilities. 

Finally, IRS did not believe that our draft report provided sufficient 
recognition of the strategic planning process followed by TE/GE. IRS 
was, in part, concerned that the draft report indicated it was not 
clear that IRS’s current plans would yield an accurate picture of 
charities’ compliance. IRS said TE/GE’s long-term plan to do market 
segment studies will provide reliable information on the compliance 
level of various segments of the charitable community. Our draft 
report described IRS’s strategic planning efforts related to its 
oversight of charities and thus did recognize that some planning has 
been done. However, as shown in the comments, those plans do not yet 
include such things as results-oriented goals or performance measures 
to assess IRS’s progress. Furthermore, although we believe the market 
segment studies should provide useful information on charities’ 
compliance, as discussed earlier, we did not see sufficient evidence 
to conclude that reliable data on charities’ expense reporting would 
be generated. In addition, at the time of our report, IRS was 
requesting public comments on whether it should define additional 
market segments to study, thus raising uncertainty over whether the 
currently planned work would cover all charities to yield adequate 
data on their compliance issues. 

The Department of the Treasury supports the overall goal of increasing 
the information IRS can share with state officials who oversee 
charities. (See appendix VII.) Treasury also recognized that 
appropriate safeguards must be in place to protect the confidentiality 
of taxpayer information. Treasury officials said that they intend to 
pursue developing appropriate legislation to expand state access to 
IRS’s oversight data. Treasury’s plans are consistent with our 
recommendations. 

As arranged with your office, unless you publicly announce its 
contents earlier, we plan no further distribution of this report until 
30 days after the date of this report. We will then send copies of 
this report to the secretary of the Treasury; the commissioner of 
Internal Revenue; the director, Office of Management and Budget; and 
other interested parties. We will also make copies available to others 
on request. The report is also available on GAO’s home page at 
[hyperlink, http://www.gao.gov]. 

This report was prepared under the direction of Tom Short. Other major 
contributors were Rodney Hobbs, Daniel Mesler, Demian Moore, and 
Oliver Walker. If you have any questions about this report, please 
contact Tom Short or me at (202) 512-9110. 

Signed by: 

Michael Brostek: 
Director, Tax Issues: 

[End of section] 

Appendix I: Description of Form 990 Reporting Requirements: 

Tax-exempt organizations recognized by the Internal Revenue Service 
(IRS) are required to annually file Form 990 or Form 990-EZ (Return of 
Organization Exempt From Income Tax) if their annual gross receipts 
are normally more than $25,000. Organizations that have less than 
$100,000 in gross receipts and total end of year assets of less than 
$250,000 may use Form 990-EZ. This appendix describes the Form 990 and 
the information requested and provides a copy of the Form 990. 

What is the Form 990? 

The Form 990 is used primarily as an IRS information return and a 
public information document. The Form 990 relies on self-reported 
information from filers. Most of the 27 types of exempt organizations 
that fall under Section 501(c)[Footnote 19] use this form along with 
Section 527 political entities and Section 4947 (a)(1) nonexempt 
charitable trusts. 

What Law Governs Use of the Form 990? 

Section 6033(a)(1) of the Internal Revenue Code (IRC) grants the 
secretary of the Treasury the power to use any forms or regulations to 
obtain financial information from 501(c)(3) organizations, such as 
gross income, receipts, and disbursements. In addition, this section 
requires all 501(c) organizations to file an annual information 
return. Form 990 is due by the 15th day of the 5th month of the 
organization’s accounting cycle, after the close of the taxable year. 

How is the Form 990 Used? 

The Form 990 and any additional schedules can facilitate the public’s 
ability to scrutinize the activities of tax-exempt entities. For many 
years, Section 6104 (b) permitted an interested person to request a 
copy of Form 990 from IRS. However, Congress created Section 6104 
(d)(1)(B) to allow interested persons to obtain the Form 990 from the 
tax-exempt organizations. Furthermore, IRS and state regulatory bodies 
use the financial information listed on the Form 990 to help monitor 
activities of charities, including their spending.[Footnote 20] The 
states have had significant input in developing the Form 990 and are 
working with IRS to implement refinements. 

How Has the Form 990 Changed Over the Years? 

The first Form 990 covered tax-year 1941. This 2-page form included 
only three yes/no questions, an income statement, and a balance sheet, 
although some line items required attached schedules. By 1947, the 
form (including instructions) had reached 4 pages, although some 
portions applied only to certain types of organizations. The required 
financial information was more extensive and incorporated a line item 
on the income statement for the total compensation of all officers and 
a $3,000 reporting threshold for contributions made to the 
organization. IRS also included a checkbox for affiliated 
organizations that file group returns. By 2001, the Form 990 had 6 
pages (10 parts with 105 line items), 2 schedules (A and B) covering 
13 pages, and a 45-page instruction book. Figure 5 shows the 6 pages 
comprising the Form 990. 

Figure 5: Form 990: 

[Refer to PDF for image: Form 990} 

[End of figure] 

Appendix II: Analysis of Form 990 Data on Expenses Reported by 
Charities: 

The tables in this appendix describe charities by expenses, revenues, 
assets, joint-cost reporting, and direct assistance payments. The data 
are from Parts I and II of the Form 990 (excluding Forms 990-EZ and 
990-PF). Data for tables in this appendix represent all Form 990 
filers for filing years 1994-1998. IRS’s Statistics of Income (SOI) 
Division provided data for filing years 1994-1998. SOI data represent 
a weighted sample based on a stratified random sample of all returns 
filed by charities in a filing year. Filing year 1998 and 1999 data 
were purchased from the Urban Institute. Urban Institute data 
represent the actual population of charity filers. Except for the 
section on joint-cost reporting and for 1999 totals reported in table 
7, for consistency, we used SOI data exclusively for analyzing filing 
years 1994-1998. 

Methodology and Statistical Variations for SOI Data: 

SOI provides data on charities by selecting a sample of each year’s 
Form 990 data and keypunching the sample data into a database. Filing 
year 1998 was the most recent year for which SOI data were available 
when we did our work. Data are classified into strata defined by 
amount of total assets. The sampling rate by stratum ranges from 100 
percent for organizations with assets of $10 million[Footnote 21] or 
more to 0.45 percent for the smallest asset class in both 1994 and 
1995. From these samples, SOI calculates a weighted total number of 
Form 990 filers for each filing year. 

Because the SOI data are based on samples, coefficients of variation 
should be taken into account. Sampling sizes and the corresponding 
coefficients of variation for selected yearly aggregate categories are 
presented in table 6. Because coefficients of variation are associated 
only with aggregate data, and because weighting factors are associated 
with asset data only, we do not present data other than that which are 
available at the aggregate level and by asset category. 

Table 6: Sample Size and Coefficients of Variation, by Filing Year: 

Year: 1994; 
Sample size: 10,788; 
Weighted charity population: 136,627; 
Coefficient of variation: 
Total charities: 1.61%; 
Total revenues: 0.73%; 
Total expenses: 0.78%; 
Total assets: 1.20%. 

Year: 1995; 
Sample size: 11,553; 
Weighted charity population: 142,790; 
Coefficient of variation: 
Total charities: 1.60%; 
Total revenues: 1.50%; 
Total expenses: 1.63%; 
Total assets: 1.29%. 

Year: 1996; 
Sample size: 12,474; 
Weighted charity population: 149,902; 
Coefficient of variation: 
Total charities: 1.57%; 
Total revenues: 1.43%; 
Total expenses: 1.57%; 
Total assets: 1.46%. 

Year: 1997; 
Sample size: 13,058; 
Weighted charity population: 155,330; 
Coefficient of variation: 
Total charities: 1.09%; 
Total revenues: 0.48%; 
Total expenses: 0.55%; 
Total assets: 0.06%. 

Year: 1998; 
Sample size: 13,954; 
Weighted charity population: 162,559; 
Coefficient of variation: 
Total charities: 1.05%; 
Total revenues: 0.42%; 
Total expenses: 0.47%; 
Total assets: 0.07%. 

Source: IRS SOI Division. 

[End of table] 

Total Charities, Revenues, Expenses, and Assets: 

Financial category totals for individual filers include revenues, 
expenses, and assets. The yearly aggregate totals for these categories 
are presented in table 7. Each financial category provides information 
about the resources or operations of charities. Revenue amounts help 
describe how successful a charity is in raising funds. Asset amounts 
describe the resources owned by charities that support its mission. 
Total expenses, in relation to total revenues, help show whether the 
charity is generating surpluses, deficits, or breaking even from its 
operations during the period. 

Table 7: Number of Charities and Reported Amounts of Revenues, Assets, 
and Expenses, by Filing Year: 

Dollars in millions: 

Year: 1994 
Total number of charities filing: 136,627 
Total revenues: $587,428; 
Total assets: $991,605; 
Total expenses: $546,649. 

Year: 1995 
Total number of charities filing: 142,790 
Total revenues: $661,584; 
Total assets: $1,141,409; 
Total expenses: $602,985. 

Year: 1996 
Total number of charities filing: 149,902 
Total revenues: $702,291; 
Total assets: $1,291,492; 
Total expenses: $636,065. 

Year: 1997 
Total number of charities filing: 155,330 
Total revenues: $752,565; 
Total assets: $1,437,156; 
Total expenses: $675,233. 

Year: 1998 
Total number of charities filing: 162,559 
Total revenues: $749,890; 
Total assets: $1,349,649; 
Total expenses: $682,558. 

Year: 1999 
Total number of charities filing: 163,414 
Total revenues: $719,251; 
Total assets: $1,215,218; 
Total expenses: $655,028. 

Source: Tabulation of data from Form 990: SOI, 1994-98 and Urban 
Institute, 1999. 

[End of table] 

Functional Expenses: 

Total expenses found on line item 17 of the Form 990 are comprised of 
three “functional” expense categories and “payments to affiliates.” 
[Footnote 22] The three types of functional expenses are reported in 
separate columns of Form 990 Part II as Program Services, General 
Management and Fundraising. Twenty-two specific object class expenses 
(line items 22-43) further break down these categories. “Other expenses”
 (line item 43) is for reporting expenses not captured by line items 
22-42. IRS instructions prohibit reporting professional fundraising 
fees, accounting fees, or legal fees on line item 43, and require 
other expenses to be itemized on line item 43. Tables 8 and 9 describe 
the three functional expense categories and the “other” expense 
category. 

Table 8: Total Expenses, Total Functional Expense Amounts, and Total 
Expenses Reported as “Other,” by Filing Year: 

Dollars in millions: 

Year: 1994; 
Total expenses: $546,649; 
Program services: $471,332; 
General management: $68,715; 
Fundraising: $5,283; 
“Other”: $142,746. 

Year: 1995; 
Total expenses: $602,985; 
Program services: $522,785; 
General management: $73,145; 
Fundraising: $5,519; 
“Other”: $159,950. 

Year: 1996; 
Total expenses: $636,065; 
Program services: $549,857; 
General management: $77,299; 
Fundraising: $6,037; 
“Other”: $165,920. 

Year: 1997; 
Total expenses: $675,233; 
Program services: $584,286; 
General management: $81,135; 
Fundraising: $6,581; 
“Other”: $165,604. 

Year: 1998; 
Total expenses: $682,558; 
Program services: $583,030; 
General management: $87,248; 
Fundraising: $7,499; 
“Other”: $171,026. 

Note: “Total expenses” are reported on line item17 and on line item 
44, column A of Form 990 and are the sum of the three functional 
expense category totals. Functional expense category totals are 
reported on Form 990 line item 44, Columns B-D, and are the sum of 
line items 22-43. “Other” expenses are reported on line 43 of Part II. 

Source: Tabulation of data from Form 990: SOI, 1994-98. 

[End of table] 

Table 9: Total Functional and Total “Other” Expenses as a Percentage 
of Total Expenses, by Filing Year: 

Year: 1994; 
Program services: 86.4%; 
General management: 12.6%; 
Fundraising: 1.0%; 
“Other”: 26.2%. 

Year: 1995; 
Program services: 86.9%; 
General management: 12.2%; 
Fundraising: 0.9%; 
“Other”: 26.6%. 

Year: 1996; 
Program services: 86.8%; 
General management: 12.2%; 
Fundraising: 1.0%; 
“Other”: 26.2%. 

Year: 1997; 
Program services: 87.0%; 
General management: 12.1%; 
Fundraising: 1.0%; 
“Other”: 24.6%. 

Year: 1998; 
Program services: 86.0%; 
General management: 12.9%; 
Fundraising: 1.1%; 
“Other”: 25.2%. 

Year: Average; 
Program services: 86.6%; 
General management: 12.4%; 
Fundraising: 1.0%; 
“Other”: 25.8%. 

Source: Tabulation of data from Form 990: SOI, 1994-98. 

[End of table] 

Object Class Expenses: 

Functional expenses in Part II are further broken down by 22 specific 
object classes, including one class for “other” expenses. Each object 
class, except for—grants and allocations, specific assistance to 
individuals, and benefits paid to or for members—may be allocated 
across the three functional expense categories. Table 10 shows these 
expenses. 

Table 10: Representation of Line Item as a Percentage of Functional 
Category Total: 

Line item: 22; 
Object class: Grants and Allocations; 
5-Year Average, Filing Years 1994-98: 
Program service: 5.7%; 
General management: [A]; 
Fundraising: [A]. 

Line item: 23; 
Object class: Specific Assistance to Individuals; 
5-Year Average, Filing Years 1994-98: 
Program service: 3.9%; 
General management: [A]; 
Fundraising: [A]. 

Direct Assistance, subtotal: 
5-Year Average, Filing Years 1994-98: 
Program service: 9.6%; 
General management: [A]; 
Fundraising: [A]. 

Line item: 24; 
Object class: Benefits to/for members; 
5-Year Average, Filing Years 1994-98: 
Program service: 2.3%; 
General management: [A]; 
Fundraising: [A]. 

Line item: 25; 
Object class: Compensation to officers, directors; 
5-Year Average, Filing Years 1994-98: 
Program service: 0.7%; 
General management: 4.4%; 
Fundraising: 3.9%. 

Line item: 26; 
Object class: Other salary & wages; 
5-Year Average, Filing Years 1994-98: 
Program service: 33.8%; 
General management: 35.1%; 
Fundraising: 32.9%. 

Line item: 27; 
Object class: Pension contributions; 
5-Year Average, Filing Years 1994-98: 
Program service: 1.1%; 
General management: 1.6%; 
Fundraising: 1.3%. 

Line item: 28; 
Object class: Other employee benefits; 
5-Year Average, Filing Years 1994-98: 
Program service: 3.9%; 
General management: 5.1%; 
Fundraising: 3.6%. 

Line item: 29; 
Object class: Payroll taxes; 
5-Year Average, Filing Years 1994-98: 
Program service: 2.2%; 
General management: 2.9%; 
Fundraising: 2.4%. 

Compensation Related, subtotal: 
5-Year Average, Filing Years 1994-98: 
Program service: 44.0%; 
General management: 48.9%; 
Fundraising: 44.2%. 

Line item: 30; 
Object class: Professional Fundraising fees; 
5-Year Average, Filing Years 1994-98: 
Program service: [B]; 
General management: [B]; 
Fundraising: 6.1%. 

Line item: 33; 
Object class: Supplies; 
5-Year Average, Filing Years 1994-98: 
Program service: 8.3%; 
General management: 5.3%; 
Fundraising: 3.4%. 

Line item: 36; 
Object class: Occupancy; 
5-Year Average, Filing Years 1994-98: 
Program service: 2.6%; 
General management: 4.2%; 
Fundraising: 2.3%. 

Line item: 38; 
Object class: Printing and Publications; 
5-Year Average, Filing Years 1994-98: 
Program service: [B]; 
General management: [B]; 
Fundraising: 7.2%. 

Line item: 39; 
Object class: Travel; 
5-Year Average, Filing Years 1994-98: 
Program service: [B]; 
General management: [B]; 
Fundraising: 2.5%. 

Line item: 42; 
Object class: Depreciation, depletion, etc. 
5-Year Average, Filing Years 1994-98: 
Program service: 3.8%; 
General management: 6.2%; 
Fundraising: 1.6%. 

Miscellaneous categories[C]: 
5-Year Average, Filing Years 1994-98: 
Program service: 4.8%; 
General management: 11.5%; 
Fundraising: 9.2%. 

Line items 30-42, and miscellaneous subtotal: 
5-Year Average, Filing Years 1994-98: 
Program service: 20.3%; 
General management: 28.2%; 
Fundraising: 32.1%. 

Line item: 43; 
Object class: “Other” expenses; 
5-Year Average, Filing Years 1994-98: 
Program service: 26.2%; 
General management: 22.9%; 
Fundraising: 23.7%. 

Line item: 44; 
Total; 
5-Year Average, Filing Years 1994-98: 
Program service: 100%; 
General management: 100%; 
Fundraising: 100%. 

Note: Totals may not add to 100 due to rounding. 

[A] These categories are only allocable as program services expenses. 

[B] Less than 1 percent of total functional category expenses are 
represented. 

[C] “Miscellaneous categories” includes the remaining Form 990 object 
class items not listed above: accounting fees, legal fees, telephone, 
postage and shipping, equipment rental, conferences, and interest. 

Source: Tabulation of data from Form 990: SOI, 1994-98. 

[End of table] 

Charity Assistance Expenses: 

“Assistance” describes the amount paid out by a charity in support of 
its charitable purpose.[Footnote 23] We define assistance as the sum 
of line items 22 (grants and allocations)[Footnote 24] and 23 
(specific assistance to individuals), which can only be allocated to 
the program service expense category. Table 11 describes assistance 
paid out by charities in 1994-1998. 

Table 11: Assistance From Charities, by Filing Year: 

Dollars in millions: 

Year: 1994; 
Grants and allocations: $27,217; 
Specific assistance to individuals: $7,629; 
Total assistance: $34,845; 
Assistance as a percentage of total program service expenses: 7.4%; 
Assistance as a percentage of total expenses: 6.4%. 

Year: 1995; 
Grants and allocations: $27,755; 
Specific assistance to individuals: $3,619; 
Total assistance: $31,375; 
Assistance as a percentage of total program service expenses: 6.0%; 
Assistance as a percentage of total expenses: 5.2%. 

Year: 1996; 
Grants and allocations: $28,633; 
Specific assistance to individuals: $38,900; 
Total assistance: $67,533; 
Assistance as a percentage of total program service expenses: 12.3%; 
Assistance as a percentage of total expenses: 10.7%. 

Year: 1997; 
Grants and allocations: $34,044; 
Specific assistance to individuals: $51,124; 
Total assistance: $85,168; 
Assistance as a percentage of total program service expenses: 14.6%; 
Assistance as a percentage of total expenses: 12.7%. 

Year: 1998; 
Grants and allocations: $37,741; 
Specific assistance to individuals: $6,681; 
Total assistance: $44,421; 
Assistance as a percentage of total program service expenses: 7.6%; 
Assistance as a percentage of total expenses: 6.6%. 

Source: Tabulation of data from Form 990: SOI, 1994-98. 

[End of table] 

Description of Charities by NTEE Code: 

The National Taxonomy of Exempt Entities (NTEE)[Footnote 25] 
classification system was developed by the National Center for 
Charitable Statistics (NCCS). IRS uses NTEE codes to categorize 
charities by 26 major group (A-Z) classifications that are aggregated 
into 10 broad categories. Because of the difficulties noted above with 
analyzing the data at a more precise level, we do not present expense, 
revenue, or asset data on charities at the NTEE level. Tables 12 and 
13 describe the NTEE categories. 

Table 12: NTEE Categories: 

Broad category: I. Arts, culture, and humanities; 
Major group(s): A. 

Broad category: II. Education; 
Major group(s): B. 

Broad category: III. Environment and animals; 
Major group(s): C, D. 

Broad category: IV. Health; 
Major group(s): E, F, G, H. 

Broad category: V. Human services; 
Major group(s): I, J, K, L, M, N, O, P. 

Broad category: VI. International, foreign affairs; 
Major group(s): Q. 

Broad category: VII. Public, societal benefit; 
Major group(s): R, S, T, U, V, W. 

Broad category: VIII. Religion related; 
Major group(s): X. 

Broad category: IX. Mutual/membership benefit; 
Major group(s): Y. 

Broad category: X. Unknown, unclassified; 
Major group(s): Z. 

Source: National Center for Charitable Statistics. 

[End of table] 

Table 13: Description of NTEE Major Group Categories: 

NTEE core code (major group): A; 
Description: Arts, culture, and humanities. 

NTEE core code (major group): B; 
Description: Education. 

NTEE core code (major group): C; 
Description: Environmental quality, protection, and beautification. 

NTEE core code (major group): D; 
Description: Animals. 

NTEE core code (major group): E; 
Description: Health. 

NTEE core code (major group): F; 
Description: Mental health, crisis intervention. 

NTEE core code (major group): G; 
Description: Diseases, disorders, and medical disciplines. 

NTEE core code (major group): H; 
Description: Medical research. 

NTEE core code (major group): I; 
Description: Crime, legal. 

NTEE core code (major group): J; 
Description: Employment. 

NTEE core code (major group): K; 
Description: Food, agriculture, and nutrition. 

NTEE core code (major group): L; 
Description: Housing, shelter. 

NTEE core code (major group): M; 
Description: Public safety, disaster preparedness, and relief. 

NTEE core code (major group): N; 
Description: Recreation, sports. 

NTEE core code (major group): O; 
Description: Youth development. 

NTEE core code (major group): P; 
Description: Human services. 

NTEE core code (major group): Q; 
Description: International, foreign affairs, and national security. 

NTEE core code (major group): R; 
Description: Civil rights, social action, and advocacy. 

NTEE core code (major group): S; 
Description: Community improvement, capacity building. 

NTEE core code (major group): T; 
Description: Philanthropy, voluntarism, and grantmaking. 

NTEE core code (major group): U; 
Description: Science and technology research. 

NTEE core code (major group): V; 
Description: Social science research. 

NTEE core code (major group): W; 
Description: Public, society benefit. 

NTEE core code (major group): X; 
Description: Religion, spiritual development. 

NTEE core code (major group): Y; 
Description: Mutual, membership benefit. 

NTEE core code (major group): Z; 
Description: Unknown. 

Source: National Center for Charitable Statistics. 

[End of table] 

Description of Charities by Asset Category: 

Table 14 presents descriptive data on assets and expenses by size of 
charity, which are defined by the amount of reported assets.[Footnote 
26] Note that in all years, the largest category includes less than 5 
percent of all organizations, but accounts for more than 70 percent of 
all expenses and more than 80 percent of all assets. 

Table 14: Overview of Charities by Asset Category, by Filing Year: 

Year: 1994: 

Asset category (millions of dollars segments): Less than 1; 
Number of charities: 95,773; 
Percent of total charities: 70.1%; 
Percent of total assets: 2.4%; 
Percent of total expenses: 6.1%. 

Asset category (millions of dollars segments): 1–5; 
Number of charities: 26,188; 
Percent of total charities: 19.2%; 
Percent of total assets: 6.0%; 
Percent of total expenses: 9.8%. 

Asset category (millions of dollars segments): 5–10; 
Number of charities: 5,676; 
Percent of total charities: 4.2%; 
Percent of total assets: 4.0%; 
Percent of total expenses: 5.0%. 

Asset category (millions of dollars segments): 10–20; 
Number of charities: 3,404; 
Percent of total charities: 2.5%; 
Percent of total assets: 4.8%; 
Percent of total expenses: 5.6%. 

Asset category (millions of dollars segments): 20+; 
Number of charities: 5,585; 
Percent of total charities: 4.1%; 
Percent of total assets: 82.7%; 
Percent of total expenses: 73.5%. 

1994 Total: 
Number of charities: 136,626; 
Percent of total charities: 100.0%; 
Percent of total assets: 100.0%; 
Percent of total expenses: 100.0%. 

Year: 1995: 

Asset category (millions of dollars segments): Less than 1; 
Number of charities: 99,324; 
Percent of total charities: 69.6%; 
Percent of total assets: 2.1%; 
Percent of total expenses: 5.9%. 

Asset category (millions of dollars segments): 1–5; 
Number of charities: 27,768; 
Percent of total charities: 19.5%; 
Percent of total assets: 5.5%; 
Percent of total expenses: 10.5%. 

Asset category (millions of dollars segments): 5–10; 
Number of charities: 6,026; 
Percent of total charities: 4.2%; 
Percent of total assets: 3.7%; 
Percent of total expenses: 4.8%. 

Asset category (millions of dollars segments): 10–20; 
Number of charities: 3,646 
Percent of total charities: 2.6%; 
Percent of total assets: 4.5%; 
Percent of total expenses: 5.4%. 

Asset category (millions of dollars segments): 20+; 
Number of charities: 6,026; 
Percent of total charities: 4.2%; 
Percent of total assets: 84.1%; 
Percent of total expenses: 73.5%. 

1995 Total: 
Number of charities: 142,790; 
Percent of total charities: 100.0%; 
Percent of total assets: 100.0%; 
Percent of total expenses: 100.0%. 

Year: 1996: 

Asset category (millions of dollars segments): Less than 1; 
Number of charities: 103,025; 
Percent of total charities: 68.7%; 
Percent of total assets: 2.0%; 
Percent of total expenses: 5.9%. 

Asset category (millions of dollars segments): 1–5; 
Number of charities: 29,599; 
Percent of total charities: 19.8%; 
Percent of total assets: 5.3%; 
Percent of total expenses: 10.3%. 

Asset category (millions of dollars segments): 5–10; 
Number of charities: 6,575; 
Percent of total charities: 4.4%; 
Percent of total assets: 3.5%; 
Percent of total expenses: 4.8%. 

Asset category (millions of dollars segments): 10–20; 
Number of charities: 4,142; 
Percent of total charities: 2.8%; 
Percent of total assets: 4.5%; 
Percent of total expenses: 5.7%. 

Asset category (millions of dollars segments): 20+; 
Number of charities: 6,561; 
Percent of total charities: 4.4%; 
Percent of total assets: 84.7%; 
Percent of total expenses: 73.4%. 

1996 Total: 
Number of charities: 149,902; 
Percent of total charities: 100.0%; 
Percent of total assets: 100.0%; 
Percent of total expenses: 100.0%. 

Year: 1997: 

Asset category (millions of dollars segments): Less than 1; 
Number of charities: 105,256 
Percent of total charities: 67.8 
Percent of total assets: 1.9 
Percent of total expenses: 5.8%. 

Asset category (millions of dollars segments): 1–5; 
Number of charities: 31,523 
Percent of total charities: 20.3 
Percent of total assets: 5.0 
Percent of total expenses: 9.1%. 

Asset category (millions of dollars segments): 5–10; 
Number of charities: 7,114 
Percent of total charities: 4.6 
Percent of total assets: 3.5 
Percent of total expenses: 5.1%. 

Asset category (millions of dollars segments): 10–20; 
Number of charities: 4,361 
Percent of total charities: 2.8 
Percent of total assets: 4.3 
Percent of total expenses: 5.6%. 

Asset category (millions of dollars segments): 20+; 
Number of charities: 7,076 
Percent of total charities: 4.6 
Percent of total assets: 85.4 
Percent of total expenses: 74.5%. 

1997 Total: 
Number of charities: 155,330 
Percent of total charities: 100.0 
Percent of total assets: 100.0 
Percent of total expenses: 100.0%. 

Year: 1998: 

Asset category (millions of dollars segments): Less than 1; 
Number of charities: 109,091 
Percent of total charities: 67.1 
Percent of total assets: 2.1 
Percent of total expenses: 5.9%. 

Asset category (millions of dollars segments): 1–5; 
Number of charities: 33,370 
Percent of total charities: 20.5 
Percent of total assets: 5.6 
Percent of total expenses: 9.2%. 

Asset category (millions of dollars segments): 5–10; 
Number of charities: 7,803 
Percent of total charities: 4.8 
Percent of total assets: 4.1 
Percent of total expenses: 5.5%. 

Asset category (millions of dollars segments): 10–20; 
Number of charities: 4,694 
Percent of total charities: 2.9 
Percent of total assets: 4.8 
Percent of total expenses: 6.0%. 

Asset category (millions of dollars segments): 20+; 
Number of charities: 7,601 
Percent of total charities: 4.7 
Percent of total assets: 83.3 
73.5%. 

Total: 
Number of charities: 162,559 
Percent of total charities: 100.0 
Percent of total assets: 100.0 
Percent of total expenses: 100.0%. 

Note: Totals may not add to 100 due to rounding. 

Source: Tabulation of data from Form 990: SOI. 

[End of table] 

Joint-Cost Reporting, Part II of Form 990" 

IRS recognizes that charities may include a non-fundraising purpose in 
its solicitation materials (usually an educational component) and 
directs charities to disaggregate the expenses of a combined 
fundraising and education solicitation through joint-cost reporting. 
IRS forbids reporting of fundraising expenses as program service 
expenses. Charities that included in program service expenses (Column 
B—Part II, Form 990) any joint-costs from a combined educational 
campaign and fundraising solicitation must disclose in a separate 
section how the total joint-costs of all such combined activities were 
reported in Part II. The disaggregation of joint-cost expenses is by 
functional expense category—program services, management and general, 
and fundraising—and not by amount allocated to educational versus 
fundraising purposes. Since joint-cost reporting can refer to a 
combined educational and fundraising campaign, all charities reporting 
joint-costs would be expected to also report some fundraising 
expenses. That is not the case, as noted in the last column of table 
15. In 1998 and 1999, respectively, 7.7 percent and 8.9 percent of 
charities reporting joint-costs did not report any fundraising 
expenses. 

Table 15: Joint-Cost Reporting, by Filing Year: 

Form 990, Part II, Reporting of Joint-Costs: 

Year: 1998; 
Number of charities: 153,763; 
Number of charities reporting joint-costs: 920; 
Percent reporting joint-costs: 0.6%; 
Percent reporting fundraising expenses that reported joint-costs: 1.7%; 
Percent reporting joint-costs that reported fundraising expenses: 
92.3%. 

Year: 1999; 
Number of charities: 163,369; 
Number of charities reporting joint-costs: 975; 
Percent reporting joint-costs: 0.6%; 
Percent reporting fundraising expenses that reported joint-costs: 1.7%; 
Percent reporting joint-costs that reported fundraising expenses: 
91.1%. 

Source: The Urban Institute. 

[End of table] 

Table 16: Joint-Cost Allocation by Functional Expense Category, by 
Filing Year: 

Dollars in millions: 

Year: 1998; 
Total joint-cost amount: $1,283; 
Percent allocated program services: 60.8%; 
Percent allocated to management and general: 9.7%; 
Percent allocated to fundraising: 29.4%. 

Year: 1999; 
Total joint-cost amount: $1,096; 
Percent allocated program services: 56.0%; 
Percent allocated to management and general: 5.1%; 
Percent allocated to fundraising: 38.9%. 

Source: The Urban Institute. 

[End of table] 

[End of section] 

Appendix III: The Internal Revenue Service’s Application Process 

Any organization that is able to satisfy the requirements defined by 
Congress in Section 501(a) of the Internal Revenue Code (IRC) is 
entitled to exemption from taxation. To obtain recognition of its tax-
exempt status, a charity must apply to the Internal Revenue Service 
(IRS).[Footnote 27] This appendix describes the steps in the 
application process for charities to be recognized as tax-exempt 
organizations. 

What are the Steps to Apply for Tax-Exempt Recognition as a Charity? 

The steps necessary to obtain recognition of exemption from taxation 
as a charity involve the submission of written information to IRS. 
First, the entity makes a decision to meet a charitable purpose as a 
charitable tax-exempt organization, under the guidelines in Section 
501(c)(3) of the IRC. According to the Treasury regulations that 
underlie section 501(c)(3), “charitable” purposes include: 

* relief of the poor, the distressed, or the underprivileged; 

* advancement of education or science; 

* advancement of religion; 

* erection or maintenance of public buildings, monuments, or works; 

* lessening the burdens of government; lessening of neighborhood 
tensions; 

* elimination of prejudice and discrimination; 

* defense of human and civil rights secured by law; and; 

* combating community deterioration and juvenile delinquency. 

After deciding on its charitable purpose or purposes, an entity must 
submit its request for recognition by completing forms for recognition 
of exemption from taxation.[Footnote 28] All charitable organizations 
are required to complete the forms for recognition with three 
exceptions.[Footnote 29] The forms are: 

* Form 1023 (Application for Recognition of Exemption from Taxation). 

* Form 8718 (User Fee for Exempt-Organization Determination Letter 
Request). 

* Form SS-4 (Application for Employer Identification Number). 

* Form 872-C, which is used for organizations wanting an advanced 
ruling. 

In addition to the application forms, the organization is required to 
submit the following documents: 

* Organizational documents containing dissolution and limiting 
clauses,[Footnote 30] which limit the organization’s purposes to one 
or more of the exempt purposes in Section 501(c)(3). 

* A conformed copy of the organization’s articles of incorporation. 

* Four years of financial statement information (projected or actual 
income and expenses).[Footnote 31] 

* The signature of an organizational officer or trustee, who is 
authorized to sign or another person authorized by the power of 
attorney to sign and send the forms. 

* The appropriate application fee ($150 fee for organizations with 
gross receipts of less than $10,000 and $500 for organizations with 
higher gross receipts and for those seeking group exemptions). To help 
applicants complete the application forms, the IRS suggests the 
following texts as guides: 

* Publication 557 (Tax-Exempt Status for Your Organization). 

* Publication 598 (Tax on Unrelated Business Income of Exempt 
Organizations). 

* Publication 578 (Tax Information for Private Foundations and 
Foundation Managers). 

Proper preparation of an application for recognition of tax-exempt 
status involves more than responding to the questions. An applicant 
must fully describe the activities in which it expects to engage, 
including the standards, criteria, or other means for carrying out the 
activities, the sources of receipts, and the nature of expenditures. A 
mere restatement of purposes or a statement that proposed activities 
will further the organization’s purposes does not satisfy this 
requirement. 

Which IRS Employees Review Applications? 

The Exempt Organizations Rulings and Agreements function is in charge 
of reviewing applications for exemption from taxation. The primary 
determinations office is located in Cincinnati, Ohio. In addition, 
staff in six field offices do determinations work.[Footnote 32] These 
staff are determination specialists, most of whom are revenue agents, 
and as of January 2002 accounted for 207 full-time equivalent 
positions. Revenue agents review applications in order to approve or 
deny recognition of exemption from taxation, also known as “making a 
determination.” The Cincinnati office has 112 revenue agents among 10 
determination groups. The other 95 revenue agents are divided among 
the six field offices. The Washington, D.C., office has 50 tax law 
specialists who also do determinations work.[Footnote 33] 

How is the Work Assigned? 

Once applications are received at the Cincinnati office, a decision is 
made on where the applications should be sent. Depending on the 
information contained in the application or other circumstances, the 
application will be: (1) processed by the Cincinnati office (e.g., 
applications for group rulings, foreign organizations, and cases to be 
expedited); (2) sent to any of six field offices; or (3) sent to the 
national office in Washington, D.C., (e.g., when published precedents 
are lacking). 

Applications are assigned to offices on the basis of a formula that 
assumes agents will close, on average, five applications per week. 
Before using the formula method to assign work, IRS assigned cases 
based on the number of agents in each office. The Cincinnati office 
assigned cases to other offices after estimating how much work could 
be done in Ohio. It stopped this practice because it could not control 
the backlog that occurred in other offices. Now, the office’s goal is 
to process all determinations in Cincinnati, except those that need to 
go elsewhere. 

What does a Revenue Agent do when He or She Receives a Charity 
Application? 

A revenue agent reviews the application materials submitted by the 
organization to ascertain if the purpose or purposes match those 
allowed for charities (also known as a screening). All of the 
submitted documents should enable the revenue agent to conclude that 
the organization satisfied or failed to satisfy the particular IRC 
requirements for charities. IRS, generally supported by the courts, 
usually will refuse to recognize an organization’s tax-exempt status 
unless it submitted sufficient information on its operations and 
finances. 

How do Revenue Agents make Determinations for Charity Applications? 

Generally, revenue agents use the relevant tax law as the basis for 
approving or denying a charity application. Agents compare the 
application material to the applicable IRC section to check for 
conformity. Discussions with other agents and managers are also 
incorporated.[Footnote 34] During a determination screening, the 
agents use the following tools: 

* Title 26, Section 501 and other relevant sections of the Internal 
Revenue Code. 

* Determination Letter Program Procedures (Section 7.4.4 of the 
Internal Revenue Manual). 

* The Handbook on Exempt Organizations. 

* The Exempt Organizations Continuing Professional Education (CPE) 
material. 

* Various revenue rulings and revenue procedures. 

What Happens after a Determination Is Made? 

A revenue agent, with the concurrence of the manager, can quickly 
determine that the application meets all of IRS’s criteria and can 
close the application on its merit. The application can be processed 
more rapidly if the articles of incorporation (or articles of 
organization) include a provision insuring permanent dedication of 
assets for exempt purposes. Closures on merit can take as little as 10 
days, if all information needed is provided during the initial 
submission of the application materials. 

If the documentation does not allow the revenue agent to close the 
application on its merits, it will receive a further review. This 
usually occurs when: (1) an application is incomplete, (2) the budget 
or financial information is inconsistent, or (3) the agent cannot 
conclude that the organization satisfied IRC requirements for 
charities. While under further review, the revenue agent is required 
to request additional information from the applicant. When requesting 
information, the agent should “correctly determine the appropriate 
scope and depth of information required for making a proper 
determination.” 

Here are examples of the ways IRS closes determination applications 
submitted by charities: 

* Approved; 

* Disapproved; 

* Withdrawn by applicant; 

* Fee not remitted. 

If the exemption is granted, IRS issues a favorable determination 
letter (Letter 1045) to the charity. If the determination is a 
proposed denial of the tax exemption for any reason (e.g., the 
organization failed to establish the basis for the exemption), the 
revenue agent is required to notify the applicant of the proposed 
adverse action as well as thoroughly explain the consequences and 
their appeal rights. The organization can submit additional 
information to explain any discrepancies related to the adverse 
action. The agent is to carefully review any new information and 
reconsider the proposed denial. After any denial is finalized, IRS is 
required to notify the appropriate state regulatory agency of the 
applicant’s denial (including failure to establish the exemption). 

Can a Charity Change Its Purpose once a Favorable Determinations Letter 
Is Sent? 

After a favorable determination letter is sent, a charity can 
undertake additional activities that are consistent with section 
501(c)(3) even if it did not mention them in its application. Each 
letter includes a paragraph stating that the charity should notify IRS 
of substantial changes in its operations. The purpose is to allow IRS 
to assess whether the changes affect exemption, private foundation 
status, unrelated business income tax, excise taxes, etc., and if so, 
whether IRS needs to begin an examination. 

According to an IRS official, IRS would like to be informed of the new 
activities, however, the law does not require charities to notify IRS 
of the changes. If a charity does not fully and accurately disclose 
its activities in the application or does not inform IRS of changes, 
the charity cannot rely on its determination letter to protect itself 
in the event of an IRS examination. If IRS determines in an 
examination that the new activities jeopardize exemption, revocation 
of exemption could be retroactive to the date the new activities were 
undertaken. In contrast, if activities upon which a revocation is 
based were disclosed to IRS, the charity may qualify for relief under 
IRC section 7805(b), and any revocation or adverse action will be 
prospective only. However, if it wants IRS approval in advance of its 
change to protect itself against a possible retroactive adverse 
action, it can request a private letter ruling from the national 
office in accordance with Revenue Procedure 2001-4. 

How Long does the Determination Process Take? 

Organizations are notified that the determinations process may take up 
to 120 days. IRS has indicated that the average time to approve an 
application is currently 91 days. Delays and backlogs can occur for 
reasons such as: 

* an application was incomplete or inaccurate; 

* taxpayers raised new issues or submitted additional evidence after 
the proposed determination; and; 

* a determination letter contained a misspelling of the organization’s 
name or an irrelevant addendum. 

In situations involving disaster relief, emergency hardship programs, 
or other situations where time is of essence, IRS’s procedures permit 
charitable relief organizations to request expedited handling when it 
applies or during the review of its application. The revenue agent is 
to fully consider the request, grant it if appropriate, and inform the 
applicant of the decision. The expedited request and the agent’s 
response should be documented in appropriate work papers. IRS has had 
expedited request procedures since 1994. 

The relief organizations created to address the September 11th 
tragedies received expedited application processing. From September 
11, 2001, to March 20, 2002, IRS approved 262 applications for 
disaster relief organizations under expedited processing. Although the 
requirements for exemption were not waived, the average time for 
processing took approximately 7 days. IRS is planning follow-up 
reviews of all of these organizations and charities where necessary to 
determine if they are complying with the requirements that govern tax-
exempt charities. 

How does IRS Measure the Quality of Decisions and Adherence to 
Procedures? 

To measure the quality of the reviews of applications, IRS uses the 
Tax Exempt Quality Measurement System. This measurement is based on a 
sample of determination cases that are closed. It is not used to 
evaluate the quality of the employee’s performance. Rather, the 
purpose is to measure and improve quality in making determinations on 
applications. An offshoot of the quality review process is to educate 
IRS staff involved in the determinations process by highlighting 
weaknesses that should be corrected. 

The six quality standards for determination cases deal with: 

* Completeness of the application prior to closing. 

* Timely processing. 

* Technical issues. 

* Work papers support conclusion. 

* Case administration. 

* Customer relations/professionalism. 

[End of section] 

Appendix IV: IRS’s Process for Examining Forms 990 Filed by Tax-Exempt 
Organizations: 

The following describes IRS’s processes for examining returns filed by 
exempt organizations, including charities. The discussion follows 
IRS’s processes from selecting returns through reviewing the results 
of the examinations. In April 2000, the centralized examination 
management concept was adopted, and examination-related activities 
were centralized in Dallas to improve consistency, coordination, and 
use of resources. 

Identifying and Selecting Which Returns to Examine: 

IRS uses keypunched information to begin the process of identifying 
returns for examination. All returns (Forms 990) are sent to the Ogden 
Service Center for processing. When returns are received, Ogden staff 
keypunch about 20 percent of the line items, such as the tax year, 
identifying information, and various other data such as program 
service revenue, contributions, and fundraising expenses. The 
keypunched information is transferred electronically to the Exempt 
Organizations Business Master File and, if a return is selected for 
examination, to the Audit Information Management System (AIMS), which 
is used to track the status of examinations. 

At the conclusion of the keypunching process, the return information 
is available to be queried by another automated system—the Returns 
Information and Classification System (RICS). RICS allows for searches 
of returns on the basis of a variety of criteria, including known 
compliance problems and the size, location, and type of exempt 
organization such as charities. IRS uses a variety of ways to select 
returns for examination, but relies primarily on two methods:[Footnote 
35] analysis of automated IRS data on RICS and referrals from outside 
the examination group.[Footnote 36] 

IRS uses RICS to analyze the automated data. RICS applies the criteria 
selected by the Planning and Program Group to identify returns and 
line items for potential examination. For example, RICS could be used 
to identify returns in which charities are reporting political 
expenditures, allocating expenses to reflect unrelated business 
income, reporting compensation and wages, but not filing Form 941, and 
not filing Form 990-T as required. The Classification Unit is 
responsible for pulling the returns that meet the criteria, and RICS 
is used to select a random sample of returns. 

Returns identified by RICS are considered to be general casework, 
which includes 12 conditions identified as “likely to have issues” 
that will lead to a change in the tax computation or even revocation 
of a charity’s tax-exempt status. Examination of these returns is 
intended to be “limited scope” addressing only the issue identified 
for which the return was selected. However, according to the Manager, 
EO Classification, revenue agents review the return to check for 
consistency with the basic exemption requirement for the charity. 

Another method used by IRS to select returns for examination is using 
a referral, that has the highest priority among returns to be 
examined. IRS receives referrals from parties inside and outside IRS, 
including the general public, corporations, and private and public 
sector employees. All referrals are sent to Dallas, where IRS staff 
input information on each referral into a database that includes the 
name of the exempt organization, its address, employer identification 
number, name of informant, and a sequential number. The database 
includes a paragraph summarizing the potential for an examination and 
the reason the referral-maker believes an examination is warranted. 

Returns Classification Specialists work referrals on a first-in, first-
out basis and decide whether to send the referral for examination. 
Specialists use their knowledge of the law and judgment to determine 
whether the information referred provides a basis for “a reasonable 
belief of noncompliance.” Afterwards, the database is updated to note 
whether the referral is sent for examination. 

Referrals that are viewed as “sensitive” require a second review. 
Sensitive referrals involve churches or media attention; are received 
from a Member of Congress, the White House, or from IRS in Washington, 
D.C.; or are otherwise considered as political or sensitive. Beginning 
in 1999, the second review was required to be done by a three-person 
committee, which decides whether to initiate an examination. 

IRS also receives two other types of referrals. Future year referrals 
are received from determinations specialists (who review applications 
for tax-exempt status) and who can request an examination in 2 or 3 
years on charities recently granted tax-exempt status. The purpose of 
these examinations is to determine whether actual charitable 
activities conform to what was intended when the tax-exempt 
application was approved. For these referrals, the database is updated 
to reflect the year the future return is to be selected for 
examination. If a return has not yet been filed, the examination is 
deferred until the return is filed and the future year portion of the 
referral database is so noted. In essence, the future year record acts 
as a suspense file, and referrals are later reviewed to determine if 
they should be sent to examination or given another suspense date. 

The other type of referral is a request for collateral examination. 
All these referrals are received from the Small Business/Self-Employed 
Division (SB/SE). SB/SE requests these examinations of tax-exempt 
organizations in connection with its examinations of small businesses 
that are related to tax-exempt organizations. 

Initiating the Examination: 

To initiate an examination, such as when a group manager (who manages 
groups of revenue agents) determines that more examination work is 
needed, a request is sent by e-mail for a specific number of returns 
at specified revenue agent grade levels. Group managers decide how to 
distribute the requested number of returns by the specified grade 
levels in priority order on first-in, first-out basis. 

For returns selected by RICS, an IRS employee orders the related 
returns from the Ogden Service Center, which usually takes 6 to 9 
weeks to arrive. All examination cases are entered on the automated 
system EOICS (Exempt Organizations Inventory Control System) that is 
used to track their status. 

Doing the Examination: 

The examination is conducted to ensure compliance with the provisions 
of the IRC relating to qualification, reporting and disclosure, and 
the excise and income taxes related to tax-exempt organizations. A 
revenue agent starts by contacting an organization to request 
information to check compliance for specific issues or lines on the 
return (Form 990). The agent is to compare that information for those 
issues to the return as well as to verify whether the organization is 
operating within its stated purpose. 

The number of return issues being examined can vary. Examinations vary 
in scope, depending on the type of issues, adequacy of the 
organization’s books and records, existence of effective internal 
controls, and size of the entity. Normally, revenue agents are 
expected to pursue the examination to the point at which they can 
resolve the specific issues that led to the examination and reasonably 
conclude that all items necessary for a proper determination of tax-
exempt status have been considered. In general, when agents have 
completed examinations, the completed case files are provided to their 
group managers for review before the cases are closed. 

Reviewing the Quality of the Examination: 

In addition to the group manager’s review of the examination, IRS has 
a separate group dedicated to reviewing the quality of examinations of 
exempt organizations such as charities. Reviewers are independent of 
the examination group and are experienced revenue agents. A reviewer 
is responsible for measuring and reporting on the quality of the 
examination and efforts to improve the work of the examination 
function. Examinations can be reviewed in two ways—special or 
mandatory review. 

Special Review: 

In special reviews, the computer selects closed examinations randomly, 
so the reviews represent a statistically valid sample. The reviewer 
completes a check sheet that asks 57 questions about each closed 
examination. Most of the questions are to be answered yes or no, with 
yes being the preferred answer. However, some questions may not be 
applicable to each review. The questions address the examination 
quality standards and include topics such as the power of attorney 
requirements, the scope of the examination, and application of the 
law. The checklist also asks the reviewer to make an overall judgment 
on whether the action taken by the revenue agent was appropriate in 
meeting the examination quality standards. 

Mandatory Review: 

In contrast to special reviews, mandatory reviews are done while the 
examination is still open. Examinations that are required to be 
reviewed under mandatory review include those in which: (1) the exempt 
organization disagrees with a revenue agent’s decisions; (2) the group 
manager asks for the review to determine whether the actions taken by 
the agent were correct and appropriate; (3) the agent proposed 
revoking or modifying the tax-exempt status of a charity; (4) a final 
revocation for certain other tax-exempt organizations is made; and (5) 
technical advice[Footnote 37] was obtained. 

Like special reviews, the purpose of a mandatory review is to ensure 
the quality of cases and to provide quality assurance. Mandatory 
reviewers use the checklist used by special reviewers to review an 
examination. In addition, mandatory reviewers are to review whether 
the work papers adequately document the examination. Since the 
examinations are open, mandatory reviewers can send them back to the 
examination group for additional work. If this is done, a memorandum 
is prepared that discusses the results of the review. The group is to 
decide if it agrees and to notify mandatory reviewers of the decision. 
More broadly, trends are monitored and if a theme is identified, a 
memorandum could be sent to the examination group on the findings or 
concerns. 

Data on Examinations: 

Table 17 provides data on the number of staff available to do 
examinations. 

Table 17: Number of Exempt Organizations Field Technical Staff and 
Total Staff, by Fiscal Year in FTEs: 

Fiscal year: 1996 
Number of field examination staff: 439; 
Number of all staff: 958. 

Fiscal year: 1997 
Number of field examination staff: 411; 
Number of all staff: 924. 

Fiscal year: 1998 
Number of field examination staff: 395; 
Number of all staff: 891. 

Fiscal year: 1999 
Number of field examination staff: 390; 
Number of all staff: 895. 

Fiscal year: 2000 
Number of field examination staff: 324; 
Number of all staff: 801. 

Fiscal year: 2001 
Number of field examination staff: 294; 
Number of all staff: 811. 

Note: The number of field staff examination staff is calculated from 
technical time reported on examinations. Total EO staff is estimated 
through FY 2000; actual per the Automated Financial System in 2001. 

Source: IRS official. 

[End of table] 

We also reviewed the number of examination hours charged by IRS staff, 
as shown in table 18. 

Table 18: Average Hours Per Charity Examination by Type of Closure, 
All Examinations, by Fiscal Year 

Type of Closure: Agreed examination hours; 
1996: 132.7; 
1997: 182.9; 
1998: 525.2; 
1999: 378.1; 
2000: 332.4; 
2001: 461.8. 

Type of Closure: Unagreed examination hours; 
1996: 81.3; 
1997: 107.6; 
1998: 121.1; 
1999: 141.8; 
2000: 189.3; 
2001: 420.4. 

Type of Closure: No change examination hours; 
1996: 44.0; 
1997: 53.6; 
1998: 52.9; 
1999: 45.4; 
2000: 59.1; 
2001: 57.3. 

Type of Closure: All examination hours; 
1996: 53.5; 
1997: 69.5; 
1998: 114.3; 
1999: 74.2; 
2000: 103.4; 
2001: 89.9. 

Source: IRS AIMS. 

[End of table] 

Because Coordinated Examination Program (CEP) audits may run over 
several years and take more time, IRS officials suggested that we 
compare CEP and non-CEP examination hours for charities. Table 19 
shows average hours for non-CEP examinations. 

Table 19: Average Hours Per Charity Examination by Type of Closure, 
Non-CEP Examinations, by Fiscal Year: 

Type of Closure: Agreed examination hours; 
1996: 106.1; 
1997: 177.1; 
1998: 349.6; 
1999: 323.3; 
2000: 169.2; 
2001: 112.4. 

Type of Closure: Unagreed examination hours; 
1996: 81.3; 
1997: 107.6; 
1998: 106.0; 
1999: 82.4; 
2000: 189.3; 
2001: 315.0. 

Type of Closure: No change examination hours; 
1996: 40.3; 
1997: 51.8; 
1998: 48.8; 
1999: 42.9; 
2000: 49.9; 
2001: 55.3. 

Type of Closure: All examination hours; 
1996: 47.5; 
1997: 66.1; 
1998: 84.4; 
1999: 63.1; 
2000: 67.2; 
2001: 62.5. 

Source: IRS AIMS. 

[End of tab;e] 

Table 20 shows the examination hours per charity return reported for 
CEP examinations. 

Table 20: Average Hours Per Charity Examination by Type of Closure, 
CEP Examinations, by Fiscal Year: 

Agreed examination hours: 
1996: 254.2; 
1997: 213.4; 
1998: 1,525.6; 
1999: 707.2; 
2000: 644.9; 
2001: 994.1. 

Unagreed examination hours: 
1996: [A]; 
1997: [A]; 
1998: 1,027.0; 
1999: 616.5; 
2000: [A]; 
2001: 841.8. 

No change examination hours: 
1996: 116.8; 
1997: 110.0; 
1998: 239.2; 
1999: 281.0; 
2000: 468.3; 
2001: 110.8. 

All examination hours: 
1996: 152.4; 
1997: 148.5; 
1998: 899.5; 
1999: 526.8; 
2000: 598.0; 
2001: 501.3. 

[A] Data not available. 

Source: IRS AIMS. 

[End of table] 

Revocations: 

IRS can revoke tax-exempt status for all charities. A revocation 
basically removes the tax-exempt charter for operating. The 
organization would have to reapply as a tax-exempt organization and 
start the process over. Table 21 shows the number and reasons for 
revocations for fiscal years 1996 through 2001. 

Page 67 GAO-02-526 Oversight of Charities 

Table 21: Primary Reasons for Revocations by Fiscal Year, 1996-2001: 

Delinquent filing of EO return: 
FY 1996: 1; 
FY 1997: 1; 
FY 1998: 1; 
FY 1999: [Empty]; 
FY 2000: [Empty]; 
FY 2001: [Empty]. 

Discontinued operations: 
FY 1996: [Empty]; 
FY 1997: [Empty]; 
FY 1998: 2; 
FY 1999: [Empty]; 
FY 2000: 1; 
FY 2001: [Empty]. 

Inadequate records: 
FY 1996: 1; 
FY 1997: [Empty]; 
FY 1998: 2; 
FY 1999: [Empty]; 
FY 2000: 2; 
FY 2001: [Empty]. 

Inurements: 
FY 1996: 6; 
FY 1997: 5; 
FY 1998: 2; 
FY 1999: 1; 
FY 2000: 1; 
FY 2001: 1. 

Non[Empty]; exempt activities: 
FY 1996: 2; 
FY 1997: [Empty]; 
FY 1998: 1; 
FY 1999: 1; 
FY 2000: 11; 
FY 2001: 1. 

Operating in a commercial manner: 
FY 1996: 1; 
FY 1997: 0; 
FY 1998: 1; 
FY 1999: 1; 
FY 2000: [Empty]; 
FY 2001: [Empty]. 

Met operational test: 
FY 1996: 3; 
FY 1997: 3; 
FY 1998: 3; 
FY 1999: 1; 
FY 2000: 2; 
FY 2001: [Empty]. 

Private vs. public: 
FY 1996: 2; 
FY 1997: 1; 
FY 1998: 3; 
FY 1999: [Empty]; 
FY 2000: [Empty]; 
FY 2001: [Empty]. 

Private use: 
FY 1996: [Empty]; 
FY 1997: [Empty]; 
FY 1998: [Empty]; 
FY 1999: [Empty]; 
FY 2000: 3; 
FY 2001: [Empty]. 

Others[A]: 
FY 1996: [Empty]; 
FY 1997: 2; 
FY 1998: 9; 
FY 1999: 4; 
FY 2000: 7; 
FY 2001: 7. 

Total: 
FY 1996: 16; 
FY 1997: 12; 
FY 1998: 24; 
FY 1999: 8; 
FY 2000: 27; 
FY 2001: 9. 

[A] Others includes revocations for problems associated with 
grassroots lobbying and unrelated trade or business activities. 

Source: IRS AIMS. 

[End of table] 

Appendix V: Overview of Selected Federal Agencies that Can Oversee 
Charities: 

To determine the extent to which other federal agencies oversee 
charities and if IRS coordinates its oversight of charities with those 
agencies, we contacted officials at the Federal Trade Commission 
(FTC), Federal Emergency Management Agency (FEMA), Federal Bureau of 
Investigation (FBI), United States Postal Inspection Service (USPIS), 
and Office of Personnel Management (OPM).[Footnote 38] This is not an 
exhaustive analysis of all federal agencies that work with charities. 

Charities are not specifically under the oversight authority of any 
single federal agency. In addition, no agencies we spoke with reported 
ongoing coordination with IRS to identify fraudulent charities or to 
oversee general charity operations.[Footnote 39] In most cases, IRS 
would only be contacted if its expertise as a tax authority were 
needed in an investigation, or to verify an organization’s tax-exempt 
status. The following summaries describe the charity oversight 
activities of the various federal agencies. 

FBI: 

Within its Economic Crimes Unit, the FBI’s goal is to reduce the 
amount of economic loss by national and international telemarketing 
fraud throughout the United States. Additionally, the mission of the 
FBI’s Governmental Fraud Program is to oversee the nationwide 
investigation of allegations of fraud related to federal government 
procurement, contracts, and federally-funded programs. According to 
FBI officials, the FBI does not have a charity-specific investigation 
classification. An investigation may involve a charity, but it would 
likely be due to telemarketing fraud or mail fraud. Since the 
tragedies of September 11th, the FBI has been scrutinizing some 
charities for fraudulent activities related to terrorism. An FBI 
official said the FBI would contact IRS if their tax expertise were 
needed. 

FEMA: 

FEMA’s mission is to reduce loss of life and property and protect 
critical infrastructure from all types of hazards through a 
comprehensive, risk-based, emergency management program of mitigation, 
preparedness, response, and recovery. FEMA coordinates its disaster 
relief work through the National Voluntary Organizations Active in 
Disaster (NVOAD) organization. NVOAD members are 501(c)(3) 
organizations that are experienced in disaster relief work. FEMA 
sometimes works with larger, well-established organizations that are 
not NVOAD members, such as the United Way. According to a FEMA 
official, FEMA does not work with IRS to assess charities, but IRS has 
held two training sessions for FEMA on accounting for disaster 
donations. In addition, FEMA has neither made referrals to IRS nor 
received specific information from IRS about fraudulent charities. 

FTC: 

FTC enforces federal antitrust and consumer protection laws.[Footnote 
40] FTC attempts to stop actions that threaten consumers’ 
opportunities to exercise informed choices. Recently, within the USA 
Patriot Act of 2001, under Section 1011, “Crimes Against Charitable 
Americans,” FTC’s authority regarding telemarketing and consumer fraud 
abuse was broadened.[Footnote 41] FTC also is a member of an online 
watchdog site, Consumer Sentinel,[Footnote 42] which tracks in a 
database consumer complaints and investigations relating to fraud. FTC 
often acts on referrals from state attorneys general, but does not 
coordinate its enforcement activities with IRS except for occasional 
work on criminal investigations. 

USPIS: 

The USPIS is responsible for combating mail fraud.[Footnote 43] Thus, 
fundraising solicitations conducted via the mail are under its 
authority. USPIS also participates in Consumer Sentinel. USPIS does 
not coordinate investigations of charities with IRS unless an 
organizations’ tax-exempt status is being questioned, or if the tax 
expertise of IRS is needed. A USPIS official said they would welcome 
referrals from IRS, as IRS is the appropriate agency to take the lead 
on charity issues. 

OPM: 

OPM oversees the annual Combined Federal Campaign (CFC). Charities are 
selected for CFC through an application process. Selection criteria 
may be found at 5 CFR, Part 950, or, [hyperlink, 
www.opm.gov/cfc/html/regs.htm[. The criteria include: 

* Submitting annual audits and annual reports and having a responsible 
governing board with no conflicts of interest. Audits are only 
required if the revenue dollar level was over a certain level. 

* Fundraising and administrative costs should be no more than 25 
percent of total costs, or be “reasonable” with documentation that 
suggests appropriate justification. 

* Less than 80 percent of their funding must come from government 
sources. 

National and international applicants are approved by OPM. At the 
local level, the Local Federal Coordinating Committee makes the 
approvals. OPM’s inspector general conducts risk-based audits of 
regional CFCs to check that funds are being collected and disbursed 
according to CFC guidelines and according to the intent of donors. 
According to officials at the office of inspector general, OPM neither 
audits charities directly nor works with IRS to identify fraudulent 
charities. 

[End of section] 

Appendix VI: Comments from the Internal Revenue Service: 

Department of the Treasury: 
Internal Revenue Service: 
Commissioner: 
Washington, D.C. 20224: 

April 22, 2002: 

Mr. Michael Brostek: 
Director, Tax Issues: 
United States General Accounting Office: 
Washington, D.C. 20548: 

Dear Mr. Brostek: 

I reviewed your draft report on oversight of charities by the public, 
the Internal Revenue Service, and the states' attorneys general and 
charity offices. I agree with the general findings of the draft 
report, and believe they provide useful observations that will assist 
us in the tax administration of charities. Our comments on the draft 
report and to your recommendations follow. 

Accuracy of Form 990 Data: 

The GAO is correct in recognizing our role is limited to tax 
administration, and that regulating the efficiency and effectiveness 
of charities is outside our current responsibilities under the 
Internal Revenue Code. However, we do have a responsibility to the 
public to ensure accuracy in Form 990 data. Your report identifies 
many of the steps we have taken to improve reporting by exempt 
organizations. These include: 

* Clarifying the instructions for Form 990. 

* Incorporating educational materials in the 2002 Exempt Organizations 
Continuing Professional Education text (we also produced two video 
training conferences on this topic, and invited state regulators to 
participate). 

* Issuing instructions to examiners to check whether charities are 
properly reporting fundraising expenses, and to impose penalties if 
they are not. 

* Adding a checkbox to Form 990 for charities to indicate whether they 
are following the American Institute of Certified Public Accountants' 
Standard Operating Procedure (SOP) 98-2. 

* Asking for public comment on whether we should mandate the use of 
SOP 98-2 for certain filers. 

* Convening a taskforce to consider other examination and education 
projects in the fundraising area. 

Your report correctly concludes we do not know the extent of 
misreporting by charities. However, we believe our current examination 
activity, the actions outlined above, and the electronic filing 
project now underway will help improve the accuracy of reporting by 
charities. Your report also implies in its "Results in Brief" section 
that we are not looking at the extent to which charities are properly 
reporting expenses. We have established a task force to develop 
examination projects for reporting accuracy (as indicated in our 
published Implementing Guidelines for this year). We have instructed 
our examiners to review this issue as part of ongoing examinations. 
Taken together, we believe these steps will improve our understanding 
of the extent of misreporting. 

Imbalances Between IRS's Charity Oversight Workload and Resources: 

Your report recognizes the exempt organizations provisions of the 
Internal Revenue Code are difficult to administer and present 
significant challenges. It also recognizes our resource constraints. 
Competing priorities require us to make difficult choices. We have two 
concerns with this portion of the report: first, we regulate a much 
wider group of tax-exempt organizations than charities; second, our 
strategic planning process is not sufficiently reflected in the report. 

We understand the GAO's review was limited to charities, and this 
segment is indeed the largest portion of the tax-exempt community. 
However, we operate within considerable resource constraints, and have 
competing priorities in our administration of this area. Tax-exempt 
organizations other than charities demand a good deal of our time and 
energy. For example, we recently diverted resources from the 
regulation of charities to create guidance and prepare for new 
reporting requirements enacted by the Congress under section 527 of 
the Internal Revenue Code. Similarly, the report, at Table 2, shows 
only our determination letter requests from charities. This 
underreports our determination workload. Our total workload includes 
requests from non-charities, amendments, terminations, foundation 
follow-ups, and other items. All workload items totaled over 86,000 in 
2001, while Table 2 presents a figure of nearly 59,000. 

Our second concern relates to our long term planning efforts for 
charities, and, in particular, to the GAO's statements that we have 
not established "results-oriented goals for its oversight of charities 
against which to measure progress," and that we do not have an 
"accurate picture of charities' compliance." The report also questions 
whether our current plans will yield such data. We know we lack a 
complete measure of the compliance level of the various segments of 
our regulated community. However, we believe we have established a 
long-term plan that will provide this information. 

The Exempt Organizations (EO) office follows the IRS Strategic 
Planning process. Under this process, which has been significantly 
revised in recent years by my office, EO establishes a Strategy and 
Program Plan (SPP) that provides a roadmap for EO to execute its 
strategies and programs over the next two fiscal years. As mentioned 
in the report, a key strategy embedded in our SPP is the market 
segment approach that we intend to use to assess compliance. We do not 
believe charities are a homogenous population. Rather, under the 
market segment approach, we recognize the EO community is comprised of 
many different kinds of organizations with many different 
characteristics and needs. For example, small volunteer organizations 
have very different issues and needs than large non-profit hospital 
systems. We have preliminarily identified 35 segments, many of which 
contain organizations we recognize as charities. 

We will study each identified segment and will collect information 
outlining the demographics and other characteristics of the 
organizations in that segment. We believe these studies will help us 
determine the overall compliance level of these organizations and 
identify specific areas of noncompliance. The studies will also 
provide us with compliance risk assessments and will allow us to 
determine what strategies are necessary for each segment. Our 
compliance strategies may range from an educational program to more 
traditional examinations in the area. As noted in the report, we began 
the process last year and have six studies underway. 

We have not yet determined a specific compliance percentage that 
indicates whether charities as a whole are or are not "sufficiently 
compliant". However, we believe we have taken the first step, which is 
to measure current compliance levels. The market segment approach is 
key to succeeding in this effort. As the process matures, we will be 
better able to develop objective measures and goals of the type you 
suggested in the report. We have considered this issue carefully and 
believe our approach is sound. 

Federal and State Information Sharing: 

Our role is to administer the Federal tax law to ensure that exempt 
organizations comply with the laws enacted by the Congress. As the 
report notes, civil and criminal enforcement against fundraising 
misrepresentation is the role of state charity officials. That said, 
it is clear information exists that can and should, under present law, 
be shared with state officials. We are working closely with these 
officials, within the confines of current law, to develop new 
procedures to facilitate and improve coordination with the states. 

The report notes the Department of the Treasury and state officials 
are working on expanding the information available to the states. The 
IRS commends the GAO for the discussion in the report of the competing 
interests and rights in this area (e.g., due process and privacy). The 
report also correctly notes that any new information sharing 
procedures, whether expanding information sharing or otherwise, will 
have resource implications both for the IRS and the states. 
Significant changes in the type of data exchanged are only possible 
through legislation. We note that recent legislation (H.R. 3991) that 
included a provision supported by the Department of the Treasury 
expanding information sharing with state charity officials failed to 
pass the House of Representatives. While this bill has not become law, 
we will continue working with Congress and the states for possible 
solutions. 

Response to Recommendations: 

Recommendation: The Commissioner should ensure (either through the 
planned market segment studies or other means) that the IRS obtains 
reliable data on compliance issues (including expense reporting) for 
the full charity community. 

Response: The IRS has established a task force that will develop and 
implement projects intended to improve data collection and compliance 
in the fundraising area. We will also continue the market segment 
approach. 

Recommendation: The Commissioner should develop result-oriented goals, 
strategies (including levels of staffing and other resources to 
accomplish the goals), and measures to gauge progress in accomplishing 
those goals when overseeing the charity community. 

Response: The IRS has a long-term plan to determine and address 
compliance levels through its market segment approach. 

Recommendation: The Commissioner should develop, in consultation with 
state charity officials, a procedure to regularly share IRS data with 
states as allowed by federal tax law. 

Response: We are currently developing such a procedure and will 
consult with state charity officials prior to its completion and 
implementation. 

Recommendation: The IRS, in concert with the Department of the 
Treasury and state charity officials, should identify the specific 
types of data that may be useful for enhancing state charity 
officials' oversight of charities, the appropriate mechanisms for 
sharing the data, the resources needed, and the types and levels of 
protections to be provided to prevent improper disclosure and misuse. 

Response: The IRS has assisted Treasury and the Committee on Ways and 
Means in drafting legislation that would implement this recommendation. 

I appreciate your input on this important program. Please contact 
Steven T. Miller, Director of Exempt Organizations, Tax Exempt and 
Government Entities Division at (202) 283-2300 if you have any 
questions. 

Sincerely, 

Signed by: 

Bob Wenzel, for: 
Charles 0. Rossotti:     

[End of section] 

Appendix VII: Comments from the Department of the Treasury: 

Department of the Treasury: 
Assistant Secretary: 
Washington, D.C.
        
April 23, 2002: 

Mr. Michael Brostek: 
Director, Tax Issues: 
United States General Accounting Office: 
Washington, DC 20548: 

Dear Mr. Brostek: 

Recently, you forwarded for comment your draft report entitled Tax-
Exempt Organizations: Improvements Possible in Public, IRS and State 
Oversight of Charities. One of the recommendations of the report is 
that the Internal Revenue Service continue to assist the Department of 
the Treasury in drafting a specific legislative proposal that would 
expand state access to selected IRS oversight data, subject to 
appropriate safeguards. 

Treasury supports the overall goal of increasing the information the 
IRS is permitted to share with state officials who are charged with 
responsibility for overseeing charities, within certain parameters. 
Any legislation that permits disclosure of pending application data or 
examination data, for example, must balance the interests of state 
charity officials and concerns regarding taxpayer privacy and the 
impact on federal tax administration. In addition, disclosures of 
otherwise confidential taxpayer information must be subject to 
safeguards, consistent with section 6103 of the Internal Revenue Code. 

The approach taken in section 410 of the Taxpayer Protection and IRS 
Accountability Act of 2002 (H.R. 3991) addressed many of these 
concerns. We look forward to continuing to work with the Congress, the 
IRS, and state charity officials to develop similar legislation in the 
future. 

Sincerely, 

Signed by: 

Pamela F. Olson: 
Acting Assistant Secretary (Tax Policy): 

[End of section] 

Footnotes: 

1. Charities, recognized by Internal Revenue Code (IRC) Section 
501(c)(3), are exempt from paying income taxes on the funds collected 
for charitable purposes. Charitable purposes include serving the poor 
and distressed; advancing religious, educational, and scientific 
endeavors; protecting various human and civil rights; and addressing 
various societal problems. 

2. Also known as “management and general,” the term “general management”
refers to expenses for salaries, rent, professional fees, and other 
management functions that are not directly allocated to program 
services or fundraising. 

3. IRS Form 990 is the return charities report their financial data 
annually and other activities. Our analysis did not include 990-EZ or 
990-PF filers. 

4. Because IRS has not identified how many of these organizations have 
ceased to be active, these numbers are likely to be overstated. The 
Treasury Inspector General for Tax Administration has recommended that 
IRS take steps to improve such data. 

5. Forms include Form 990-T, Exempt Organizations Business Income Tax 
Return, which reports taxable business income unrelated to a 
charitable purpose; Form 1120-POL, U.S. Income Tax Return for Certain 
Political Organizations, which reports net investment income of more 
than $100 and spending to influence an election; and Form 4720, Return 
of Certain Excise Taxes on Charities and Other Persons, which reports 
excess lobbying expenses. 

6. SOI collects its data through stratified random samples of all 
Forms 990 filed for a year. As a result, the weighted data estimates 
developed from the samples are subject to sampling errors that affect 
their precision. Appendix II discusses these data estimates and the 
sampling issues. 

7. Program services means activities that provide goods and services 
to beneficiaries or members to fulfill the charitable purposes. 
Fundraising means activities associated with soliciting funds. General 
management includes salaries, travel, professional fees, and other 
expenses. 

8. These percentages vary somewhat when analyzing only part of the 
charity universe. For example, when analyzing only charities that 
reported fundraising expenses, the percentages change to 85 percent 
for program service, 13 percent for general management, and 3 percent 
for fundraising. Note that, due to rounding, the total does not add to 
100 percent. 

9. The Urban Institute and GuideStar also have reported on problems 
they have found with some charities misreporting fundraising expenses 
on Forms 990. GuideStar maintains, for public use, a database of 
nonprofit organizations and charities, their financial details, and 
their purposes and programs. 

10. We did similar analyses for all charities, regardless of whether 
they received public donations. From 1994 to 1998, 69 percent of all 
charities reported either no fundraising expenses or left this line 
item blank (line item 15) on the Form 990. We further analyzed how 
many charities reported no fees paid to professional fundraisers on 
the Form 990 from 1994 through 1998. On average, over 93 percent of 
all charities reported either no fees paid to professional fundraisers 
or left this line item blank (line item 30) on the Form 990. 

11. The Urban Institute also has discussed how the amount of 
fundraising reported can be skewed when supporting charities raise 
funds for affiliates. In such cases, IRS instructions state that the 
supporting charity should report these expenses as fundraising. 

12. “Charities Zero Sum Game: By Claiming No Fundraising Costs, 
Groups Keeps the Public in the Dark”, Chronicle of Philanthropy, May 
18, 2000. 

13. Appendix V discusses the limited oversight roles provided by other 
selected agencies such as the Federal Trade Commission and United 
States Postal Inspection Service. 

14. Market segments involve homogeneous groups of tax-exempt 
organizations. IRS also plans to start 9 compliance projects in 2002 
to address known areas of noncompliance such as unrelated business 
income. 

15. The other charity segments include organizations involving amateur 
athletics, childcare, community trusts, economic development, 
education, grant making, health maintenance, low-incoming housing, 
nursing homes, private foundations, religious organizations, schools, 
science and research, social service, charitable support, charitable 
trusts, and veterans. 

16. These include social clubs, labor organizations, business leagues, 
community trusts, social service organizations, and religious 
organizations that are not churches. 

17. See General Accounting Office, Managing for Results: Using GPRA to 
Assist Oversight and Decisionmaking, [hyperlink, 
http://www.gao.gov/products/GAO-01-872T], (Washington, D.C.: June 19, 
2001) and Managing for Results: Federal Managers’ Views Show Need for 
Ensuring Top Leadership Skills, [hyperlink, 
http://www.gao.gov/products/GAO-01-127], (Washington, D.C.: Oct. 20, 
2000). 

18. For example, IRS can share such data with states for administering 
state tax programs, enforcing child support programs, verifying 
eligibility/benefits for public assistance, and investigating criminal 
activities. 

19. Except black lung benefit trusts or private foundations. Private 
foundations file the Form 990-PF. 

20. The Form 990 is also filed with some state tax/revenue agencies. 

21. In 1997, SOI increased the lower bound of the 100 percent sample 
rate to $30 million. 

22. For each of the 5 years analyzed, fewer than 5 percent of all 
charities reported any payments to affiliates. For 1994-1998, “
payments to affiliates” does not exceed .70 percent of total expenses 
in any year. 

23. Line item 24, “Benefits paid to or for members” is also allocable 
only to program services. Since this amount represents assistance paid 
to members or dependents of members of the charity, we did not include 
it in our description of assistance. 

24. Line item 22 is further broken out by “cash” and “noncash” 
amounts, which SOI does not report separately. 

25. To see the entire classification taxonomy, visit [hyperlink, 
http://nccs.urban.org/ntee-cc/index.htm]. 

26. We did not purchase detailed asset data from the Urban Institute. 

27. In addition, other types of tax-exempt organizations are required 
to file for recognition of exemption (e.g., employee benefit 
organizations). 

28. Nine pages of instructions and 28 pages of forms. 

29. Exceptions include churches, church-affiliated entities, or any 
organization that is not a private foundation with less than $5,000 in 
gross receipts per year. 

30. Dissolution clauses define how the organization’s assets will be 
distributed if the organization ceases its operational activities. 
Limiting clauses define the operational activities to which the 
organization may engage. 

31. If the organization has not yet begun operations, or has operated 
for less than 1 year, a proposed budget for 2 full accounting periods 
and a current statement of assets and liabilities will be acceptable. 

32. Brooklyn, NY; Baltimore, Md; Atlanta, Ga; Monterey Park, Calif.; 
Denver, Colo.; and Dallas, Tex. 

33. Forty-one tax law specialists do determination reviews, 4 tax law 
specialists perform group reviews, and 5 reviewers perform second-
level reviews. 

34. Manager involvement in the determination can be appropriate at any 
time in the application process. 

35. Other methods used to select returns include the Coordinated 
Examination Program, where a team of experienced auditors examines 
returns filed by large exempt organizations and national guidelines 
that identify certain types of organizations or activities that may 
warrant examination. 

36. Although this discussion focuses on charities, IRS also uses RICS 
and referrals to select returns for examination for other types of 
exempt organizations. 

37. Technical advice is provided by the Washington, D.C. office on 
legal issues normally at the request of the examining office and 
sometimes at the request of the taxpayer. 

38. OPM oversees the annual Combined Federal Campaign, which is the 
“solicitation of employees in the Federal workplace on the behalf of 
charitable organizations.” 

39. IRS does receive and track referrals regarding charities. In 
fiscal year 2001, IRS received 13 referrals from other federal 
agencies, the White House, or a Member of Congress out of 1,096 
referrals received. 

40. The “consumer protection” statute is Section 5(a) of the FTC Act, 
which states, inter alia, that “unfair or deceptive acts or practices 
in or affecting commerce are declared unlawful” (15 U.S.C. Sec. 
45(a)(1)). “Unfair” practices are defined to mean those that “cause or 
[are] likely to cause substantial injury to consumers which is not 
reasonably avoidable by consumers themselves and not outweighed by 
countervailing benefits to consumers or to competition” (15 U.S.C. 
Sec. 45(n)). [hyperlink, http://www.ftc.gov/ogc/auth4.htm] 

41. FTC officials said they did not yet have an opinion on how the 
Patriot Act would affect their oversight activities regarding 
charities. See Public Law 107-56. 

42. The database is restricted to members, which are primarily law-
enforcement agencies. Visit the site at [hyperlink, 
http://www.consumer.gov/sentinel/]. 

43. See the Mail Fraud Statute at 18 U.S.C. Sec. 1341. 

[End of section] 

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