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entitled 'Tax-Exempt Organizations: Better Compliance Indicators and 
Data, and More Collaboration with State Regulators Would Strengthen 
Oversight of Charitable Organizations' which was released on December 
16, 2014. 

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United States Government Accountability Office: 
GAO: 

Report to the Ranking Member, Committee on Homeland Security and 
Governmental Affairs, U.S. Senate: 

December 2014: 

Tax-Exempt Organizations: 

Better Compliance Indicators and Data, and More Collaboration with 
State Regulators Would Strengthen Oversight of Charitable 
Organizations: 

GAO-15-164: 

GAO Highlights: 

Highlights of GAO-15-164, a report to the Ranking Member, Committee on 
Homeland Security and Governmental Affairs, U.S. Senate. 

Why GAO Did This Study: 

IRS oversight of charitable organizations helps to ensure they abide 
by the purposes that justify their tax exemption and protects the 
sector from potential abuses and loss of confidence by the donor 
community. In recent years, reductions in IRS’s budget have raised
concerns about the adequacy of IRS oversight. 

GAO was asked to review IRS oversight of charitable organizations. In 
this report, GAO (1) describes the charitable organization sector, (2) 
describes IRS oversight activities, (3) determines how IRS assesses 
its oversight efforts, and (4) determines how IRS collaborates with
state charity regulators and U.S. Attorneys to identify and prosecute
organizations suspected of engaging in fraudulent (or other criminal) 
activity. 

GAO reviewed and analyzed IRS data, strategic planning and performance
documents, and documented improvement efforts. We also interviewed IRS 
and Department of Justice officials, state charity regulators, and 
subject matter specialists. GAO compared IRS’s practices to federal
guidance on performance management. 

What GAO Found: 

[Figure: photo collage] 

Source: PhotoDisc, Ingram (photos). GAO-15-164. 

[End of figure] 

Charitable organizations play a major role in our economy and provide 
critical services and resources to families and individuals in need. 
Although charitable organizations vary considerably in size and 
purpose, in 2011 the largest number of organizations was in the human 
services sector, providing services such as employment and housing 
assistance. The highest concentration of assets was in the health and 
education sectors, which include hospitals and universities. In 
addition to being concentrated in a few sectors, a large proportion of 
all assets were controlled by a relatively small number of charitable 
organizations-—less than 3 percent hold more than 80 percent of the 
assets. 

Over the past several years, as the Internal Revenue Service (IRS) 
budget has declined, the number of full-time equivalents (FTEs) within 
its Exempt Organizations (EO) division has fallen, leading to a steady 
decrease in the number of charitable organizations examined. In 2011, 
the examination rate was 0.81 percent; in 2013, it fell to 0.71 
percent. This rate is lower than the exam rate for other types of 
taxpayers, such as individuals (1.0 percent) and corporations (1.4 
percent). 

EO is grappling with several challenges that complicate oversight 
efforts. While EO has some compliance information, such as how often 
exams result in change of tax exempt status, it does not have 
quantitative measures of compliance for the charitable sector as a 
whole, for specific segments of the sector (such as universities and 
hospitals) or for particular aspects of noncompliance (such as 
personal inurement or political activity). Because EO does not have 
these measures and does not know the current level of compliance, it 
cannot set quantitative, results-oriented goals for increasing 
compliance or assess to what extent its actions are affecting 
compliance. 

Statutory requirements for safeguarding taxpayer data limit both IRS’s 
ability to share data and state regulators’ ability to use it. A lack 
of clarity about how state regulators are allowed to use IRS data to 
build cases against suspect charitable organizations further impedes 
regulators’ ability to leverage IRS’s examination work. 

The e-filing rate for tax-exempt organizations is significantly lower 
than for other taxpayers. This lower rate means there is less 
digitized data available for data analytics and higher labor costs for 
IRS. Expanded e-filing may result in more accurate and complete data 
becoming available in a timelier manner, which in turn, would allow 
IRS to more easily identify areas of noncompliance. 

What GAO Recommends: 

GAO recommends IRS 1) develop compliance goals and additional
performance measures that can be used to assess the impact of 
enforcement activities on compliance and 2) clearly communicate with 
state charity regulators how they are allowed to use IRS information 
related to examinations of charitable organizations. GAO also 
recommends that Congress consider expanding the mandate for 501(c)(3)
organizations to electronically file their tax returns to cover a 
greater share of filed returns. In written comments, IRS agreed with 
GAO’s recommendations. 

View GAO-15-164. For more information, contact James R.McTigue, Jr. at 
(202) 512-9110 or mctiguej@gao.gov. 

[End of section 

Contents: 

Letter: 

Background: 

Charitable Organizations Comprise a Major Part of Our Economy and Vary 
Considerably in Size and Purpose: 

EO Receives Indications of Noncompliance from a Variety of Sources, 
but Declining Resources Complicate Efforts to Effectively Oversee 
Charitable Organizations: 

The Impact of EO Compliance Efforts on Charitable Organizations Is 
Unknown, Due to Lack of Key Performance Measures and Goals and Lack of 
Complete Data: 

Uncertainty about How Taxpayer Data Can Be Shared and Used Limits 
Collaboration between IRS and State Charity Regulators: 

Conclusions: 

Matter for Congressional Consideration: 

Recommendations: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Tax Benefits and Requirements for Different Types of Tax 
Exempt Organizations: 

Appendix III: Additional Tables: 

Appendix IV: Comments from the Internal Revenue Service: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Information Returns Filed by 501(c)(3) Tax-Exempt 
Organizations: 

Table 2: Source of Charitable Organization Examinations Initiated, 
Fiscal Year 2013: 

Table 3: Number of FTEs in IRS Exempt Organization Division by 
Function, Fiscal Years 2010-2013: 

Table 4: Examination Rate of Charitable Organizations, Fiscal Years 
2011-2013: 

Table 5: Number of Charitable Organization Examinations Closed and 
Results, Fiscal Years 2011-2013: 

Table 6: Number of Charitable Organization Filers by Mission Category, 
Tax Year 2011: 

Table 7: Reported Amounts of Assets, Revenues, and Expenses of 
Charitable Organizations by Mission Category, Tax Year 2011: 

Table 8: Reported Amounts of Assets, Revenues, and Expenses of 
Charitable Organizations, Tax Year 2011: 

Table 9: Charitable Organization Expenses by Mission Category, Tax 
Year 2011: 

Figures: 

Figure 1: The Universe of Nonprofit Organizations: 

Figure 2: Number of Tax-Exempt and Charitable Organizations That Were 
Recognized As Tax-Exempt from IRS, Fiscal Years 2003-2013: 

Figure 3: Number of Charitable Organization Filers by Mission 
Category, Tax Year 2011: 

Figure 4: Percentage of Charitable Organization Filers and Assets by 
Asset Category, Tax Year 2011: 

Figure 5: Sources of Charitable Organization Examinations in 2013: 

Figure 6: Number of Charitable Organization Returns with Revocations 
and the Reasons, Fiscal Years 2011-2013: 

Abbreviations: 

ACT: Advisory Committee on Tax Exempt and Government Entities: 

DOJ: Department of Justice: 

EO: Exempt Organizations: 

FTE: full-time equivalent: 

GDP: gross domestic product: 

GPRA: Government Performance and Results Act of 1993: 

IRC: Internal Revenue Code: 

IRS: Internal Revenue Service: 

MOU: memorandum of understanding: 

NAAG: National Association of Attorneys General: 

NASCO: National Association of State Charity Officials: 

NRP: National Research Program: 

PPA: Pension Protection Act of 2006: 

RICS: Return Inventory Classification System: 

SOI: Statistics of Income: 

TIGTA: Treasury Inspector General for Tax Administration: 

Treasury: Department of the Treasury: 

[End of section] 

United States Government Accountability Office: 
GAO:
441 G St. N.W. 
Washington, DC 20548: 

December 17, 2014: 

The Honorable Tom Coburn, M.D. 
Ranking Member: 
Committee on Homeland Security and Governmental Affairs: 
United States Senate: 

Dear Dr. Coburn: 

The breadth and diversity of the tax-exempt sector, which encompasses 
over 1.6 million entities, including 501(c)(3) charitable 
organizations, allows it to address a wide range of needs, including 
comfort to the aging, and food, shelter and other services for 
families and individuals in need.[Footnote 1] Moreover, the tax-exempt 
sector represents an estimated 5 percent of gross domestic product and 
is concentrated in two key sectors of the economy, with the largest 
assets in healthcare and education. The Internal Revenue Service 
(IRS), along with the states, has a vital role in overseeing the tax-
exempt sector. IRS oversight can help ensure that exempt entities 
abide by the purposes that justify their tax exemption. IRS can also 
help protect the sector from potential abuses and loss of confidence 
by the donor community that could result from the abusive activities 
of a small minority of charitable organizations. 

IRS--which oversees charitable organizations' compliance with the tax 
code--has experienced budget cuts over the past several years. As we 
previously reported, the IRS budget has declined by about $900 million 
since fiscal year 2010 and funding is below fiscal year 2009 levels. 
[Footnote 2] Staffing has also declined by about 10,000 full-time 
equivalents (FTE) since fiscal year 2010, and performance has been 
uneven. Questions about the impact of budget cuts on IRS's operations 
have raised concerns about the adequacy of oversight of charitable 
organizations. 

You asked us to review a number of issues related to the IRS oversight 
of charitable organizations. This report (1) describes what is known 
about the number, type, size, and other characteristics of charitable 
organizations; (2) describes IRS oversight activities for charitable 
organizations; (3) determines how IRS assesses its oversight efforts 
of charitable organizations to ensure they are meeting their 
charitable purposes; and (4) determines how IRS collaborates with 
state charity regulators and U.S. Attorneys to identify and prosecute 
organizations suspected of engaging in fraudulent or other criminal 
activity. 

To address the first objective, we reviewed IRS documentation and 
analyzed data from IRS's Statistics of Income (SOI) samples of tax-
exempt organization information returns for tax year 2011, the most 
recent year available.[Footnote 3] We used data from the charitable 
organizations that filed Forms 990 and 990-EZ (which provide 
information on the filing organization's mission, programs, and 
finances). We do not report data on private foundations (which are 
charitable organizations that file Form 990-PF) or report data on Form 
990-N filers, because the data for these organizations is less 
complete and has other limitations. In addition, our data excludes 
certain religious organizations, which qualify as 501(c)(3) 
organizations, but are not required to file a return. The SOI samples 
were based on returns as filed, and did not reflect IRS audit results. 
The data that we report are estimates based on the SOI sample; 
statements about sampling errors are reported in appendix III. 

For the second objective, we reviewed IRS documentation and obtained 
IRS data on IRS oversight activities including referrals and 
examinations performed on charitable organizations, and reviewed data 
on charitable organizations that had their tax-exempt statuses revoked 
for fiscal years 2011 through 2013. We also interviewed IRS officials 
about their oversight activities. 

To assess the reliability of the data we analyzed, we reviewed IRS 
documentation and interviewed agency officials familiar with the data. 
We determined that these data were sufficiently reliable for the 
purposes of this report. 

For the third objective, we reviewed relevant strategic and 
performance documents and interviewed IRS planning officials and 
division managers to determine the extent to which managers overseeing 
the tax-exempt sector do the following: set performance goals, develop 
measures to monitor their progress toward meeting goals, and use data 
both to identify challenges and their causes, and to develop 
strategies to address those challenges. We reviewed past 
recommendations made by the Treasury Inspector General for Tax 
Administration (TIGTA) and the National Taxpayer Advocate related to 
performance management and interviewed IRS managers about how they 
addressed the issues discussed in those reports. For criteria, we 
compared IRS information on performance measures and decision making 
to Standards for Internal Control in the Federal Government and 
federal guidance on performance management.[Footnote 4] We also 
applied the criteria concerning the administration, compliance burden, 
and transparency that characterize a good tax system, as developed in 
our guide for evaluating tax reform proposals.[Footnote 5] 

To determine how IRS collaborates with state charity regulators and 
U.S. Attorneys, we reviewed various IRS documents and interviewed IRS 
and Department of Justice (DOJ) officials, and representatives from 
National Association of State Charity Officials (NASCO). For criteria, 
we identified different approaches for sharing information and 
collaboration, based on our audit findings, as well as our past 
recommendations and recommendations made by the Advisory Committee on 
Tax Exempt and Government Entities (ACT).[Footnote 6] 

To provide additional context for all three objectives, we interviewed 
IRS officials, DOJ officials, state charity regulators, subject matter 
specialists, and stakeholder groups representing different types of 
exempt-organizations and private watchdog organizations that oversee 
charities about the following: the adequacy of IRS oversight of 
charitable organizations, the challenges IRS faces providing effective 
oversight, and strategies to address those challenges. 

We conducted this performance audit from June 2014 to December 2014 in 
accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe 
that the evidence obtained provides a reasonable basis for our 
findings and conclusions based on our audit objectives. More detailed 
information on our scope and methodology appears in appendix I. 

Background: 

Section 501 of the Internal Revenue Code (IRC) provides for tax 
exemption for certain corporations, trusts, and other organizations. 
Section 501(c) establishes 29 categories of tax-exempt organizations, 
ranging from cemeteries to professional football leagues--see appendix 
II for complete list of different types of tax-exempt-organizations, 
as well as more detailed information on the tax treatment for these 
organizations. The largest number of such organizations falls under 
section 501(c)(3), which recognizes charitable organizations. 
Generally, while charitable organizations pay no income taxes on 
contributions received, these entities can be taxed on income 
generated from business activities that are unrelated to their 
charitable purposes. These charitable organizations and related 
parties may be subject to several additional IRS penalties and fines 
for certain actions, such as not filing a required tax return. 
Generally, taxpayers who itemize their deductions may deduct the 
amount of any contribution to charitable organizations from their 
taxable income. 

The IRC requires that an organization adhere to certain accepted 
charitable, religious, educational, scientific, or literary purposes 
to qualify for 501(c)(3) tax-exempt status.[Footnote 7] The IRC also 
prohibits charitable organizations from undertaking certain 
activities: no earnings of the organization may benefit individual or 
private shareholders, no substantial attempt may be made to spread 
propaganda or influence legislation, and no effort may be made to 
campaign for or against a candidate for public office.[Footnote 8] In 
order to receive 501(c)(3) tax-exempt status, an organization must 
submit a Form 1023 or Form 1023-EZ and organizing documents to IRS to 
describe its charitable purpose and financial data.[Footnote 9] The 
organizing documents can include articles of incorporation or by-laws 
governing the activities and charitable purpose of the entity. 
Submitting an application is one of the first interactions a tax-
exempt organization will have with IRS.[Footnote 10] The organization 
will then receive a determination letter from IRS which informs the 
organization whether its application for tax-exempt status has been 
approved or denied. Alternatively, the organization may be told the 
IRS is in need of additional information in order to make a 
determination. 

If an organization is successful in receiving tax-exempt status, it 
will continue to interact with IRS on an annual basis by submitting an 
information return or an electronic notice.[Footnote 11] The form 
contains information on the organization's mission, programs, finances 
and governance structure which helps IRS to determine whether the 
organization is meeting its charitable purpose and therefore is 
eligible for tax-exempt status. Certain organizations that have gross 
receipts of $50,000 per year or less may submit the Form 990-N--an 
abbreviated electronic version of the Form 990 return, often called 
the e-Postcard. The Form 990-EZ is less abbreviated, though still more 
streamlined than the Form 990, and may be used by certain entities 
with gross receipts under $200,000 and assets under $500,000. Private 
foundations complete the 990-PF.[Footnote 12] 

Table 1: Information Returns Filed by 501(c)(3) Tax-Exempt 
Organizations: 

Form: 990; 
Description: The Form 990 is an information return submitted to IRS by 
organizations exempt from income tax. This form includes information 
on an entity's mission, programs, finances, and corporate governance 
structure. Organizations that are required to submit the Form 990 must 
submit this form annually; 
Threshold: Gross receipts greater than or equal to $200,000 or total 
assets greater than or equal to $500,000. 

Form: 990-EZ; 
Description: A streamlined version of the Form 990, which may be used 
by entities with gross receipts under $200,000 and assets under 
$500,000. Organizations eligible to file a Form 990-EZ may choose to 
file the Form 990; 
Threshold: Gross receipts less than $200,000 and total assets less 
than $500,000. 

Form: 990-N; 
Description: Also called the e-Postcard, this is an abbreviated 
version of the Form 990 for entities with gross receipts of $50,000 
per year or less. This form is submitted electronically. Organizations 
eligible to file a Form 990-N may choose to file the Forms 990-EZ or 
990; 
Threshold: Gross receipts normally less than or equal to $50,000. 

Form: 990-PF; 
Description: This Form 990 is used by private foundations regardless 
of their financial status. Private foundations may not use other 
versions of the Form 990; 
Threshold: Regardless of financial status. 

Source: GAO analysis of IRS forms. GAO-15-164. 

[End of table] 

IRS oversees charitable organizations through its Exempt Organizations 
(EO) Business Division (a part of IRS's Tax Exempt and Government 
Entities Division). EO's oversight relies primarily on two sets of 
activities: a front-end review of applications and a back-end review 
of a relatively small number of information and tax returns. At the 
front end, the EO Rulings and Agreements office reviews all 
applications for tax-exempt status. At the back end, EO Examinations 
analyzes the operations and finances of a small percentage of exempt 
organizations through examinations (audits). Exam agents propose tax 
assessments or changes to exempt status when necessary, as well as 
advise organizations about how to comply with the law in the future. 
Through these activities, IRS tries to ensure that charities merit the 
recognition of a tax-exempt status as well as the retention of it. 
[Footnote 13] 

IRS and state charity regulators both play a key role providing 
oversight of charitable organizations.[Footnote 14] IRS's oversight 
interests are in ensuring that tax-exempt organizations comply with 
federal tax law. State charity regulators have a broader oversight 
interest which includes the application of state trust, non-profit 
corporation, consumer protection, and charitable solicitation laws. 
Although these federal and state regulators have distinct oversight 
interests, these interests are closely related and at times, 
overlapping. Both IRS and state charity regulators seek to prevent 
excess compensation, private inurement, conflicts of interest, and 
other abusive practices by charitable organizations. IRS also 
collaborates with U.S. Attorneys at the DOJ to identify and prosecute 
criminal tax violations. Although EO does not collaborate directly 
with DOJ, criminal investigations may be initiated within IRS at the 
recommendation of an IRS revenue agent who has detected potential 
criminal activity. Investigations may also be initiated at the advice 
of a U.S. Attorney's office, a law enforcement agency, or the public. 
IRS criminal investigations are led by an IRS special agent. If 
substantial evidence is found for a criminal case, then--after 
multiple rounds of supervisory review--the investigation may be 
referred to the DOJ Tax Division or the relevant U.S. Attorney's 
office. If DOJ or the U.S. Attorney accepts the investigation for 
prosecution, the case is then handled by the prosecutors.[Footnote 15] 

Charitable Organizations Comprise a Major Part of Our Economy and Vary 
Considerably in Size and Purpose: 

Charitable organizations comprise a significant part of our economy in 
terms of their share of the gross domestic product (GDP) and their 
importance in services vital to the well being of citizens. Available 
estimates indicate that tax-exempt organizations serving households 
generate about 5 percent of U.S. GDP.[Footnote 16] The federal 
government increasingly relies on these organizations to deliver 
critical services: in 2012, government agencies paid an estimated $137 
billion to nonprofit organizations in grants and contracts for 
services.[Footnote 17] Also, for fiscal year 2013, the Department of 
the Treasury (Treasury) estimated the tax expenditure for deductions 
for contributions to charitable organizations totaled over $48 
billion.[Footnote 18] 

As shown in figure 1, the total population of nonprofit organizations 
can be broken down by tax-exempt status and by the requirement to file 
returns.[Footnote 19] In 2012, an estimated 2.3 million nonprofit 
organizations operated in the United States, including organizations 
that have not applied for tax-exempt status with IRS.[Footnote 20] Of 
nonprofits in 2011, 1.63 million had been recognized as tax-exempt by 
IRS and 1.08 million of them were 501(c)(3) charitable organizations. 
[Footnote 21] An estimated 274,000 of these charitable organizations 
filed returns--around 189,000 filed Form 990 and 85,000 filed Form 990-
EZ. 

Figure 1: The Universe of Nonprofit Organizations: 

[Refer to PDF for image: illustration using concentric circles] 

Estimated 2.3 million nonprofit organizations[A]. 

1.63 million recognized tax-exempt organizations[B]. 

1.08 million 501(c)(3) charitable organizations[C]. 

Estimated 274,000 charitable organizations filed a Form 990 or 990-
EZ[D]. 

Source: GAO analysis. GAO-15-164. 

[A] This is an estimate of the total number of nonprofit organizations 
in the United States, including those that have not applied for or 
received tax-exempt status from IRS. This data is from Urban 
Institute's The Nonprofit Almanac 2012. The almanac did not have 2011 
data for the universe of estimated nonprofit organizations, but we 
would not expect the number to vary greatly between 2011 and 2012. 

[B] This includes all organizations that have been recognized as tax-
exempt by IRS. The data is from the IRS Data Book 2011.[Footnote 22] 

[C] This includes all organizations that are tax-exempt 501(c)(3) 
charitable organizations. The data is from the IRS Data Book 2011. 

[D] This is an estimate of all 501(c)(3) charitable organizations that 
filed Forms 990 or 990-EZ. This figure excludes other types of tax-
exempt entities that may have filled these forms. This also excludes 
501(c)(3) charitable organizations that filed Forms 990-N or 990-PF, 
or a different type of return. This is a GAO analysis of SOI data for 
tax year 2011. 

[End of figure] 

As shown in figure 2, the number of charitable organizations that were 
recognized as tax-exempt by IRS increased from more than 960,000 in 
2003 to more than 1.28 million in 2010 (a 33 percent increase) but 
declined to 1.05 million in 2013 (a 18 percent decrease from 2010). 
After 2010, this decline was primarily due to the Pension Protection 
Act of 2006 (PPA), which mandated that any organization--large or 
small--that failed to file a required return or notice for three 
consecutive years would automatically lose its federal tax 
exemption.[Footnote 23] Since PPA's passage, more than 570,000 
organizations have lost their tax-exempt status through the automatic 
revocation process.[Footnote 24] The net effect on the number of 
charitable organizations (when new applicants and reinstated 
revocations are included) is an average decline of about 200,000 from 
the peak in 2010. 

Figure 2: Number of Tax-Exempt and Charitable Organizations That Were 
Recognized As Tax-Exempt from IRS, Fiscal Years 2003-2013: 

[Refer to PDF for image: multiple line graph] 

Number in millions: 

Fiscal year: 2003; 
Tax-exempt organizations: 1.64; 
Charitable organizations: 0.96. 

Fiscal year: 2004; 
Tax-exempt organizations: 1.68; 
Charitable organizations: 1.01. 

Fiscal year: 2005; 
Tax-exempt organizations: 1.71; 
Charitable organizations: 1.05. 

Fiscal year: 2006; 
Tax-exempt organizations: 1.73; 
Charitable organizations: 1.06. 

Fiscal year: 2007; 
Tax-exempt organizations: 1.79; 
Charitable organizations: 1.13. 

Fiscal year: 2008; 
Tax-exempt organizations: 1.86; 
Charitable organizations: 1.19. 

Fiscal year: 2009; 
Tax-exempt organizations: 1.91; 
Charitable organizations: 1.24. 

Fiscal year: 2010; 
Tax-exempt organizations: 1.96; 
Charitable organizations: 1.28. 

Fiscal year: 2011; 
Tax-exempt organizations: 1.63; 
Charitable organizations: 1.08. 

Fiscal year: 2012; 
Tax-exempt organizations: 1.62; 
Charitable organizations: 1.08. 

Fiscal year: 2013; 
Tax-exempt organizations: 1.60; 
Charitable organizations: 1.05. 

Source: IRS Data Books. GAO-15-164. 

Note: Includes private foundations. For fiscal year 2013, cooperative 
hospital service organizations, cooperative service organizations of 
operating educational organizations, child care organizations, and 
charitable risk pools were reported with section 501(c)(3) charitable 
organizations. 

[End of figure] 

Although Charitable Organizations Vary in Size and Purpose, a Small 
Number Concentrated in the Health and Education Sectors Control Most 
Assets: 

Charitable organizations, excluding private foundations, represent a 
diverse array of mission areas and range greatly in asset size, the 
amount of revenue they raise, and their expenses. As shown in figure 
3, the largest number of charitable organizations filing Forms 990 and 
990-EZ were in the human services sector. However, the health and 
education sectors had the largest amount of assets. 

Figure 3: Number of Charitable Organization Filers by Mission 
Category, Tax Year 2011: 

[Refer to PDF for image: Interactive graphic] 

Directions: Mouseover total asset bars from each mission area category 
for additional financial information. 

Sources: GAO analysis of SOI data from IRS Form 990 and IRS Form 990-
EZ; PhotoDisc (images). GAO-15-164. 

Note: Statements about sampling errors are reported in appendix III. 

[End of figure] 

The human services sector represents 38 percent of the total 
population of charitable organizations that file Form 990 or 990-EZ 
returns, followed by the education sector at 18 percent and the health 
sector at 13 percent. For more information by mission category, see 
appendix III. All three sectors cover a diverse range of programs and 
serve different segments of the population. The human services sector 
includes activities related to employment, housing and shelter, and 
youth development. Education includes elementary, secondary, 
vocational, and technical schools and universities. Health includes 
hospitals, mental health and crisis intervention, and medical research. 

The assets of charitable organizations that file Forms 990 or 990-EZ 
returns are concentrated in the health and education sectors, which 
held about 75 percent of the total assets--more than $2 trillion--
while the human services sector held almost $324 billion (or about 11 
percent) of the total. In addition to being concentrated in a few 
sectors, a large proportion of total assets were controlled by a 
relatively small number of charitable organizations. Of the charitable 
organizations that file a Form 990 or Form 990-EZ, less than 3 percent 
held more than 80 percent of the assets, as shown in figure 4. 
[Footnote 25] These organizations were primarily from the health and 
education sectors. Over 59 percent of charitable organizations that 
file Forms 990 or 990-EZ returns (with less than $500,000 in assets) 
held less than 1 percent of all assets. 

Figure 4: Percentage of Charitable Organization Filers and Assets by 
Asset Category, Tax Year 2011: 

[Refer to PDF for image: horizontal bar graph] 

Under $100,000: 
Filers: 33.9%; 
Assets: 0.1%. 

$100,000 under $500,000: 
Filers: 25.2%; 
Assets: 0.6%. 

$500,000 under $1,000,000: 
Filers: 10.3%; 
Assets: 0.7%. 

$1,000,000 under $10,000,000: 
Filers: 22.8%; 
Assets: 6.8%. 

$10,000,000 under $50,000,000: 
Filers: 5.4%; 
Assets: 10.4%. 

$50,000,000 or more: 
Filers: 2.4%; 
Assets: 81.4%. 

Source: GAO analysis of SOI data from Forms 990 and 990-EZ. GAO-15-164. 

Note: Statements about sampling errors are reported in appendix III. 

[End of figure] 

Most of the expenses of charitable organizations that filed Form 990 
were for program services, which are mainly activities that further 
the organization's tax-exempt purposes. Total expenses of charitable 
organizations are broken down on the Form 990 into program service 
expenses, management and general expenses, and fundraising expenses. 
[Footnote 26] About eighty-seven percent of Form 990 charitable 
organization expenses in 2011 were for program services, about 12 
percent for general management, and about 1 percent for fundraising. 
As we noted in our 2002 report, charitable organizations have 
discretion in determining how to charge and allocate expenses for 
program services, general management, and fundraising.[Footnote 27] 
The differences in methods can result in charities with similar 
activities allocating expenses differently among expense categories. 
This complicates interpretation of these data. For more information on 
expenses, see appendix III. 

EO Receives Indications of Noncompliance from a Variety of Sources, 
but Declining Resources Complicate Efforts to Effectively Oversee 
Charitable Organizations: 

EO Receives Indications of Noncompliance from a Variety of Sources: 

Through its examinations, IRS can analyze the operations and finances 
of tax-exempt organizations and propose tax assessments or changes to 
exempt status when necessary. In general, IRS attempts to select 
entities that it believes are likely to have violated requirements, 
such as unauthorized use of an organization's assets, or engaging in 
political activity. On the basis of these examinations, IRS can accept 
the Form 990 as filed or can change the status of the entity, impose 
excise taxes for certain types of violations, or revoke the tax-exempt 
status if the violations are serious enough. It can also assess taxes 
if an entity has not fully paid employment taxes or taxes on unrelated 
business income. IRS can also advise organizations on complying with 
the law in the future. This can include sending written advisories to 
organizations advising them of specific issues that need to be 
addressed. 

IRS receives indications of noncompliance from a variety of sources 
that can lead to examinations, as shown in figure 5. 

Figure 5: Sources of Charitable Organization Examinations in 2013: 

[Refer to PDF for image: illustration] 

Exempt Organizations (EO) Examinations: 

Claims: Certain refund claims or requests for abatement that require 
review. 

Analytics: 
Queries used to identify potential noncompliance based on exempt 
organizations’ Form 990s. 

Projects: 
Staff-initiated projects approved by an Executive Steering Committee 
addressing compliance concerns. 

Compliance checks: 
Letters and questionnaires sent to exempt organizations based on data 
analytics, samples, or items in returns. 

Review of Operations: 
IRS review of internal information, websites, and public documents 
to ensure that tax-exempt organizations are acting consistently with 
their exempt purpose. 

Document matching: 
Reviews of payor/employer records that do not match information 
returns, part of IRS’s Combined Annual Wage Reporting Program. 

Referrals: 
Referrals allege potential noncompliance with the tax law, which EO 
receives from the general public, members of Congress, federal and 
state government agencies, as well as from other parts of the IRS. 

Source: GAO analysis of IRS documents. GAO-15-164. 

[End of figure] 

EO initiated 8,413 exams of tax-exempt organization returns in 2013 
and 4,495 of these (or about 53 percent) were exams of charitable 
organizations. As shown in table 2, the largest source for these exams 
(41 percent) was the category that includes the IRS National Research 
Program project. EO participated in an IRS National Research Program 
project on employment taxes in 2013, which contributed to an unusually 
high number of exams during that year. 

The next largest source (22 percent) was Form 990 data analytics. In 
2008, IRS redesigned the Form 990 for the purposes of promoting 
compliance and increasing transparency. The redesigned form requires 
filing organizations to supply more in-depth information than previous 
versions. For example, the form includes new questions on governance, 
compensation, activities, relationships with related organizations, 
international activities, fundraising, non-cash contributions, and 
other compliance areas. A team of EO specialists developed data-mining 
queries (based on the redesigned form) to identify suspected 
inaccuracies or anomalies. For example, with the new Form 990, EO can 
search for whether an organization reports that it has a mortgage and 
receives rental income--suggesting that it has unrelated business 
income. If the organization does not file a Form 990-T, Exempt 
Organization Business Income Tax Return to report any unrelated 
business income, IRS is more likely to select the organization for 
examination. As of April 2014, EO had developed a list of over 150 
condition codes based on return line entries to identify potential 
noncompliance issues. 

Of the charitable organization examinations initiated in fiscal year 
2013, 632 (or 14 percent) were the result of referrals (including news 
items)--communication EO receives from internal and external sources 
alleging potential noncompliance with the tax law. EO managers told us 
referrals are prioritized so that those involving a serious breach of 
public trust or abuse--such as financial investigations or allegations 
of terrorism--are to be examined right away. On the other hand, high 
profile referrals--referrals resulting from a media exposé or 
involving a well-known organization--are not necessarily high 
priority, and may not be examined right away. The two most common 
sources of referrals for all tax-exempt organizations in 2013 were the 
general public, with about 81 percent of the 6,940 total referrals, 
and other IRS functional areas, with about 12 percent of the total. 
The specific potential violations most commonly alleged were that 
income or assets were being used for private benefit, the organization 
was involved in a political campaign; or the organization failed to 
report employment, income, or excise tax liability properly.[Footnote 
28] 

Table 2: Source of Charitable Organization Examinations Initiated, 
Fiscal Year 2013: 

Source: IRS National Research Program project on employment taxes and 
other[A]; 
Number of examinations initiated: 1,851; 
Percent of examinations initiated: 41.2%. 

Source: Form 990 data analytics; 
Number of examinations initiated: 994; 
Percent of examinations initiated: 22.1%. 

Source: Document matching; 
Number of examinations initiated: 444; 
Percent of examinations initiated: 9.9%. 

Source: Referral received from outside IRS; 
Number of examinations initiated: 361; 
Percent of examinations initiated: 8.0%. 

Source: Referral received from inside IRS; 
Number of examinations initiated: 255; 
Percent of examinations initiated: 5.7%. 

Source: Review of Operations; 
Number of examinations initiated: 178; 
Percent of examinations initiated: 4.0%. 

Source: Refund claims or requests for abatement; 
Number of examinations initiated: 145; 
Percent of examinations initiated: 3.2%. 

Source: Compliance checks - letters; 
Number of examinations initiated: 131; 
Percent of examinations initiated: 2.9%. 

Source: Compliance checks - questionnaires; 
Number of examinations initiated: 120; 
Percent of examinations initiated: 2.7%. 

Source: News items[B]; 
Number of examinations initiated: 16; 
Percent of examinations initiated: 0.4%. 

Source: Total; 
Number of examinations initiated: 4,495; 
Percent of examinations initiated: 100.0%. 

Source: IRS's Return Inventory Classification System. GAO-15-164. 

[A] Includes instances where a return was added during an examination--
either the same return from a different year or a different return. 

[B] Includes referrals IRS received in the form of submitted news 
clippings; does not include referrals received from members of the 
media, which IRS groups with referrals received from the general 
public. 

[End of table] 

Limited Resources Contribute to Fewer Examinations: 

With IRS budget cuts, the number of EO FTEs has declined over the past 
several years, leading to a steady decrease in the number of 
organizations examined. The total number of FTEs in the EO division 
decreased from 889 to 842 (about 5 percent) and the number of FTEs 
doing examinations declined from 529 to 493 (about 7 percent) between 
fiscal years 2010 and 2013, as shown in table 3. 

Table 3: Number of FTEs in IRS Exempt Organization Division by 
Function, Fiscal Years 2010-2013: 

Fiscal year: 2010; 
Rulings and Agreements: 341; 
Examinations[A]: 529; 
Customer Education and Outreach: 9; 
Director's Office/Program Management[B]: 10; 
Total: 889. 

Fiscal year: 2011; 
Rulings and Agreements: 328; 
Examinations[A]: 534; 
Customer Education and Outreach: 12; 
Director's Office/Program Management[B]: 12; 
Total: 886. 

Fiscal year: 2012; 
Rulings and Agreements: 319; 
Examinations[A]: 516; 
Customer Education and Outreach: 11; 
Director's Office/Program Management[B]: 12; 
Total: 858. 

Fiscal year: 2013; 
Rulings and Agreements: 326; 
Examinations[A]: 493; 
Customer Education and Outreach: 11; 
Director's Office/Program Management[B]: 12; 
Total: 842. 

Source: IRS officials. GAO-15-164. 

[A] Not all employees perform examinations. 

[B] Supports the Director, EO and all of EO's functional areas, tracks 
EO's budget, monitors hiring and promotions, measures and reports EO's 
performance and performance goals internally, and helps ensure that EO 
is responsive to the needs of the headquarters Tax-Exempt and 
Government Entities Division, and the Commissioner. 

[End of table] 

IRS examines only a small percentage of charitable organizations that 
file returns, including private foundations, as shown in table 4. 
[Footnote 29] EO examination rates were lower, relative to other IRS 
divisions. For charitable organizations, the examination rate was 
about 0.7 percent in 2013, while for individual and corporate tax 
returns it was 1 percent and 1.4 percent, respectively.[Footnote 30] A 
comparison of tables 3 and 4 also shows that the number of employees 
performing exams has declined while the number of returns filed has 
increased. From fiscal year 2011 to 2013, the exam rate decreased from 
.81 percent to .71 percent (by about 12 percent). 

Table 4: Examination Rate of Charitable Organizations, Fiscal Years 
2011-2013: 

Fiscal year: 2011; 
Returns filed in previous year: 725,888; 
Returns examined in fiscal year: 5,888; 
Examination rate: 0.81%. 

Fiscal year: 2012; 
Returns filed in previous year: 753,985; 
Returns examined in fiscal year: 5,864; 
Examination rate: 0.78%. 

Fiscal year: 2013; 
Returns filed in previous year: 763,149; 
Returns examined in fiscal year: 5,426; 
Examination rate: 0.71%. 

Source: IRS's Return Inventory Classification System and IRS 
officials. GAO-15-164. 

[End of table] 

As shown in table 5, examinations may result in no change to the 
amount of taxes owed or the tax-exempt status, the assessment of taxes 
or penalties, or the revocation of tax-exempt status. The no-change 
rate over the past three years has been between 30 and 34 percent. 
According to EO officials, IRS uses change and no-change rates as one 
indicator of how well it is targeting exams. Therefore higher no-
change rates indicate that IRS is spending resources examining 
compliant entities. The 30 percent no-change rate for charitable 
organizations is relatively high when compared to the rate for some 
other filers. For example, in 2013, the no-change rate for all 
examinations of individual tax returns ranged from 9 to 12 percent, 
depending on the type of exam that was conducted. 

An organization may be subject to a tax assessment or penalty charges 
for filing a late return, for failure to provide required document, or 
for late payment of taxes. IRS can also revoke tax-exempt status when 
charitable organizations (or individuals responsible for the 
organization) violate certain rules. The organization would have to 
reapply as a tax-exempt organization and start the process over. 
Revocations may result when an organization is found to be engaging in 
non-exempt activities, operating in a commercial manner, or allowing 
inurement of net earnings or assets of the organization to benefit an 
officer, director, or a key employee who has a personal or private 
interest in the activities of the organization. This type of 
enforcement action happens infrequently. 

An exam may also identify issues--such as a proposed expansion of an 
unrelated business income producing activity, or a failure to properly 
report required information, such as special fundraising activities or 
officer compensation. If enlarged, these issues could jeopardize the 
tax-exempt status of the organization. However, there is no change in 
the tax-exempt status of the organization. Instead, the examiner will 
issue a closing letter with a written advisory addendum to the 
organization identifying the non-compliance issues found during the 
examination which, if corrected, would bring the organization into 
compliance. 

Table 5: Number of Charitable Organization Examinations Closed and 
Results, Fiscal Years 2011-2013: 

Fiscal year: 2011; 
Number of return closures: 5,888; 
Percent of return closures with no-change[A]: 30%; 
Percent of return closures with written advisory: 14%; 
Percent of return closures with agreed tax or penalty: 15%; 
Percent of return closures with agreed termination[B]: 1%; 
Percent of return closures with revocation: 4%; 
Delinquent return secured/related return secured: 19%; 
Other[C]: 16%; 
Total results: 100%. 

Fiscal year: 2012; 
Number of return closures: 5,864; 
Percent of return closures with no-change[A]: 34%; 
Percent of return closures with written advisory: 11%; 
Percent of return closures with agreed tax or penalty: 23%; 
Percent of return closures with agreed termination[B]: 1%; 
Percent of return closures with revocation: 2%; 
Delinquent return secured/related return secured: 18%; 
Other[C]: 12%; 
Total results: 100%. 

Fiscal year: 2013; 
Number of return closures: 5,426; 
Percent of return closures with no-change[A]: 30%; 
Percent of return closures with written advisory: 16%; 
Percent of return closures with agreed tax or penalty: 27%; 
Percent of return closures with agreed termination[B]: 1%; 
Percent of return closures with revocation: 3%; 
Delinquent return secured/related return secured: 14%; 
Other[C]: 10%; 
Total results: 100%. 

Source: GAO Analysis of IRS data from IRS Return Inventory 
Classification System. GAO-15-164. 

Note: Percentages do not total to 100 due to rounding. 

[A] Does not include written advisories, as those are considered a 
change. 

[B] IRS cannot initiate the termination of an organization. 
Termination occurs when a tax-exempt organization notifies IRS that it 
has ended its operations, either through shutting down, transferring 
its assets, or merging with another tax-exempt organization. 

[C] Includes results such as those unagreed by the taxpayer, or 
changes by IRS to a taxpayer's related return, such as a prior-year 
return. 

[End of table] 

As figure 6 shows, the number of charitable organization returns with 
revocations declined from 2011 to 2013. Generally, the most often-
cited reason for the revocation was that the charitable organization 
was not operating for a charitable purpose. The exception was in 2011, 
where the failure to file returns and other records was slightly 
higher. Operating for the benefit of private interests was another 
reason for a revocation.[Footnote 31] 

Figure 6: Number of Charitable Organization Returns with Revocations 
and the Reasons, Fiscal Years 2011-2013: 

[Refer to PDF for image: vertical bar graph] 

Fiscal year 2011; 
Not operating for tax-exempt purposes: 115; 
Failed to file tax returns, render statements, or maintain records: 
123; 
Inurement or private benefits: 20. 

Fiscal year 2012; 
Not operating for tax-exempt purposes: 58; 
Failed to file tax returns, render statements, or maintain records: 31; 
Inurement or private benefits: 34. 

Fiscal year 2013; 
Not operating for tax-exempt purposes: 72; 
Failed to file tax returns, render statements, or maintain records: 40; 
Inurement or private benefits: 37. 

Source: GAO analysis of data provided by IRS officials. GAO-15-164. 

Note: These revocations are from examinations and do not include 
automatic revocations based on failure to file for three consecutive 
years. 

[End of figure] 

The Impact of EO Compliance Efforts on Charitable Organizations Is 
Unknown, Due to Lack of Key Performance Measures and Goals and Lack of 
Complete Data: 

The EO Business Division has faced challenges over the past several 
years from declining budgets and staffing and from the complexity and 
the sensitivity of their workload, which includes regulating the 
political activity of tax-exempt organizations. EO's ability to 
address these challenges has been hindered by a lack of performance 
measures that EO management could use to fully assess and communicate 
how effective their efforts have been. EO managers have introduced 
some timeliness measures that may lead to efficiency gains by helping 
them track their inventory of applications, referrals, and exam cases 
and identify bottlenecks as they occur. However, EO managers lack 
compliance goals and measures for assessing their progress in ensuring 
that charitable organizations are conforming to their charitable 
purpose and other aspects of the tax law. EO is developing a new 
approach to identify and select organizations for examination. EO also 
introduced a streamlined application form for smaller organizations 
seeking tax-exempt status that may reduce administrative burden. 
However, the limited amount of information that will be available 
about these organizations raises questions about how IRS will identify 
noncompliance issues for this particular segment of charitable 
organizations. In addition, a lack of timely, accurate digitized data 
from the Form 990 further complicates oversight efforts. 

Lack of Quantitative, Results-Oriented Goals and Measures for 
Improving Compliance Limits Ability to Assess Effectiveness of EO 
Oversight: 

EO has developed measures and goals to track its output of application 
reviews and examinations, but these do not measure impact on 
compliance. EO managers develop an annual work plan, which lists the 
research projects and exams they plan to initiate over the course of 
the year. The work plan includes goals for the number of cases they 
plan to start and close within the year, and the estimated number of 
staff days for each project. EO management uses a quarterly dashboard 
to track their progress against the workload goals, as set forth in 
their annual work plan. However, these performance goals and measures 
do not show the impact of EO efforts on compliance. These are measures 
that are useful for monitoring processes within EO, but they do not 
measure outcomes--such as improvements in the compliance rate for the 
charitable organization sector. Developing outcome-oriented goals and 
establishing measures to assess the actual results of EO activities 
(compared to their intended purpose) can help EO improve performance 
and determine whether programs have produced desired results. 

EO Examinations managers use the examination change rate as a measure 
of compliance. The change rate is measured as the percentage of exams 
that result in a written advisory, a change in the amount of taxes, 
penalties, or fines an organization owes, or a change in the 
organization's tax-exempt status. This change rate that EO reports 
from exams may be a useful indicator of how accurately EO is selecting 
charitable organizations for exam but it has limitations as a 
compliance measure. EO does not use a random sample of organizations 
to estimate the change rate for the charitable sector as a whole and--
except in the case of certain projects described below--it does not 
estimate the rate by type of charitable organization or by compliance 
issue. Change rates based on nonrandom exam selection procedures 
cannot be used to enhance compliance by focusing enforcement efforts 
on areas with the highest risk of noncompliance. In addition, EO's 
change rate is ambiguous as a measure of compliance because while it 
includes the number of written advisories that EO managers send 
following an exam, EO managers do not track the percentage of 
organizations that received a written advisory in the past and 
continued to be noncompliant.[Footnote 32] 

In addition to lacking some key compliance measures, EO managers do 
not set specific, measurable goals related to improving the compliance 
levels of tax-exempt organizations, either as a whole or for 
charitable organizations in particular. One reason it is difficult to 
set compliance goals, according to IRS and EO officials, is that IRS 
has not completed a study for charitable organizations that 
establishes a compliance baseline. In order to track progress toward a 
compliance goal, generally-accepted evaluation standards require 
establishing a baseline for compliance measures and recording how 
these measures change over time. 

A possible source for such a baseline is IRS's National Research 
Program (NRP) but the cost of establishing a baseline may be large. 
The NRP examines a sample of tax returns to estimate rates of 
noncompliance for all taxpayers and for different types of taxpayers 
and tax issues. According to IRS and Exempt Organizations officials, 
it would be useful to have a research program like the NRP identify 
compliance baselines for EO. More compliance data on the EO sector 
would allow EO examiners to better select organizations for exam and 
would potentially reduce the no-change rate. However, these officials 
also point out that such a project requires a considerable investment 
of resources. They also say undertaking such a large-scale long-term 
project may not be feasible, given the resource constraints faced by 
IRS. 

Another possible source of baseline data is the projects initiated by 
the EO Examinations Unit. EO Examinations sponsors new research 
projects each year to help identify non-compliance (which can include 
estimating a change rate) by types of operations, by segments of the 
charitable sector, or around a particular issue or item from the Form 
990. A project can begin when EO decides that potential for 
noncompliance exists for a certain issue based on data analytic 
queries, referrals, or some other source (as described above). A 
random sample of organizations in that segment is selected for review. 
EO managers said they generally judge a project to be successful if it 
achieves a change rate of 80 percent or higher. For example, if 80 
percent or more of the returns examined as part of the review result 
in a change in the amount of taxes, penalties, or fines the 
organization owes, a change in the organization's tax-exempt status, 
or a significant change in the organization's operations, EO managers 
may then decide to incorporate the original query as part of their 
regular examination selection criteria. 

However, EO does not use the results of the projects as baselines to 
assess whether the strategies adopted as a result of the projects have 
improved compliance among the segments of the tax-exempt sector that 
were studied in the projects. EO managers see these projects as a way 
to gather information they can use to develop strategies to address 
emerging issues, measure overall levels of compliance, and address 
areas of known non-compliance. But the impact on compliance remains 
unclear, because EO does not consistently follow up to measure the 
project impact in subsequent years or policy changes made as a result 
of the project. Even when a full research project using a 
representative sample is not justified given EO's resource 
limitations, other approaches may still provide useful information 
about compliance. For example, tracking the frequency in exams of 
issues that were identified in the project, while not an adequate 
compliance measure due to the nonrandom exam selection procedures, 
could provide insight into whether the issues are still a reason for 
concern. 

An example of how establishing a baseline could have helped EO measure 
the effect on compliance of policy changes is EO's project that 
reviewed charitable organizations providing consumer credit 
counseling. The project examined over 200 organizations and IRS 
revoked, terminated, or proposed revoking the exemptions of around 60 
percent of these organizations for abuses such as failure to provide 
education, operating as a commercial business, or serving the private 
interest of directors, officers, and related entities. According to 
the 2011 Exempt Organizations Annual Report, this project helped to 
stimulate legislative changes in 2006, including new tax rules 
governing exempt credit counseling organizations.[Footnote 33] 

However, IRS has not evaluated the effect of changes in the law that 
came about as a result of the project on subsequent compliance by 
charitable organizations that provide credit counseling. Because the 
project examined over 200 of the credit counseling organizations, 
including the 63 largest, it may have had sufficient coverage of this 
part of the charitable sector to provide a baseline for assessing the 
effect of the legislative changes on compliance. According to EO 
officials, they decided not to open a large volume of new credit 
counseling cases after the initial project was completed because the 
initial project still had cases in the appeals process and the 
relevant sections of the 2006 legislation had phase-in provisions 
under which the provision took full effect for tax years after January 
1, 2011. However, EO currently has no plans to undertake such a study 
in the future. 

EO officials told us that they intend to change their source-based 
approach to selecting and conducting exams starting in 2015, in order 
to make better use of limited resources. They said they intend to rely 
more on data mining queries based on the redesigned Form 990 to detect 
high-risk areas of noncompliance and to prioritize enforcement 
efforts. This approach may also better conform to strategies IRS lays 
out in their strategic plan for 2014-2017, which calls for IRS to 
develop improved research-driven methods and tools to detect and 
combat noncompliance and improve resource allocation.[Footnote 34] As 
an example, EO officials also report they will prioritize case 
selection according to criteria that give more weight to more 
consequential outcomes. A data mining query generating a lot of 
revocations would take priority over a query that may only generate 
written advisories. They hope their new approach will allow them to 
better select cases for exam and to measure their effectiveness. 
However, this new approach is still in early stages of development and 
they are starting to implement it in FY 2015. Also, without compliance 
goals, related performance measures, and more complete indicators of 
compliance, it will be difficult to assess the effectiveness of the 
new strategy. 

Developing measures of compliance and determining the impact of 
projects and exams on compliance is challenging. As we've discussed in 
past reports, IRS researchers have found it difficult to determine the 
extent to which its enforcement actions deter noncompliance or its 
services improve compliance among taxpayers who want to 
comply.[Footnote 35] The challenges to determining impact include 
collecting reliable compliance data, developing reasonable assumptions 
about taxpayer behavior, and accounting for factors outside of IRS's 
actions that can affect taxpayer compliance, such as changes in the 
tax law. Nevertheless, even if IRS (or in this case, EO) is unable to 
empirically estimate the extent to which its actions directly affected 
compliance rates, periodic measurements of compliance levels can 
indicate the extent to which compliance is improving or declining and 
can provide a basis for reexamining existing programs and triggering 
corrective actions, if necessary. 

Best practices indicate that establishing results-oriented goals can 
help agency officials demonstrate they have thought through how the 
activities and initiatives they are undertaking are likely to lead to 
meaningful results in line with programmatic goals. An example of a 
results-oriented goal for EO would be a specific, measurable increase 
in compliance rates for particular types of organizations (such as for 
the credit counseling organizations described above) or for certain 
issues that have been problematic in the past (such as failure to pay 
employment taxes). We have also previously reported that setting 
results-oriented goals, establishing performance measures and related 
performance indicators with targets in meeting such goals, and 
reporting on progress against those goals are the hallmarks of 
effective management.[Footnote 36] The absence of results-oriented 
goals and related performance measures for compliance does not allow 
EO officials to compare the success of different initiatives against 
one another, determine whether their compliance strategy is working as 
intended, or allocate resources to those activities that have the most 
impact on compliance levels. 

New Streamlined Application and Review Process Raises Questions about 
Whether IRS Will Collect Adequate Information to Identify 
Noncompliance among Smaller-Sized Organizations: 

In May 2013, Treasury Inspector General for Tax Administration (TIGTA) 
found that applicants for tax-exempt status experienced significant 
delays in the review of their applications.[Footnote 37] Specifically, 
it reported that as of December 2012, many organizations had not 
received an approval or denial letter--more than two years after they 
submitted their applications. TIGTA also reported that the EO Rulings 
& Agreements function did not have specific timeliness goals for 
processing applications, such as potential political cases, that 
require significant follow-up with the organizations. The Taxpayer 
Advocate also reviewed EO operations and concluded that EO management 
did not have meaningful performance measures required for effective 
management oversight of the application process such as how long it 
takes, on average, to process applications that cannot be disposed of 
during initial screening and what percentage of inventory had not been 
reviewed in nine months or more.[Footnote 38] 

The lack of meaningful performance measures compounded other 
challenges faced by EO management. As discussed earlier, the number of 
charitable organizations recognized as tax-exempt by IRS increased 
over the past decade, as the number of employees has declined along 
with budget cuts. In addition, the auto-revocation process that began 
in 2011 (following changes to legislation in 2006) inadvertently led 
to an increase in the number of applications. By revoking the status 
of organizations that had not filed in three years, the process 
revoked the status of hundreds of thousands of organizations that no 
longer existed as intended, but also purged thousands of organizations 
that still merited tax-exempt status, but may have been unaware of 
their filing requirements. Once their status was automatically 
revoked, many applied for reinstatement, leading to a spike in 
applications. According to IRS senior officials, other challenges 
faced by EO management included outdated information technology 
records management systems, making it difficult for managers to 
understand and manage the size of the application backlog. 

EO managers introduced performance measures and goals to help address 
these challenges and the concerns about applications inventory raised 
by TIGTA and the Taxpayer Advocate. For fiscal years 2013 and 2014, EO 
managers set a goal to eliminate the backlog of applications waiting 
for review for 270 days or more. To assess their progress in managing 
the inventory of applications, EO managers focused on performance 
measures such as number of applications received and closed, average 
age of applications inventory, and number of cases still pending after 
270 days. They anticipate that these measures will allow them (for the 
first time) to track their progress, to more readily identify choke 
points and the reasons why slowdowns are occurring, and to react 
accordingly. Managers can now access this information through a weekly 
dashboard to monitor the inventory and communicate to senior EO 
management on a quarterly basis. As of September 2014, IRS Exempt 
Organizations officials reported they had closed over 117,000 cases in 
FY 2014, an increase of 121 percent over the prior year's closings. 
They also reported that the end of year inventory was 22,759, as 
compared to 65,718 at the end of FY 2013. 

EO managers also introduced a streamlined application review process 
to reduce their inventory of aged cases. Initially, application 
reviewers relied more heavily on attestation statements made under 
penalty of perjury, rather than with substantiating documents. For 
example, if an organization failed to include a narrative statement 
describing its activities as required by the application Form 1023, 
IRS would ask the organization to attest that it met the operational 
test for tax-exempt status, rather than hold the case open until the 
organization submitted the appropriate paperwork.[Footnote 39] 
Similarly, applicants that failed to submit organizing documents--
which are important because they describe how the organization's 
purpose and assets comply with tax-exempt purposes set forth in 
section 501(c)(3)--would need to attest that they had the appropriate 
organizing documents and that they met statutory and regulatory 
requirements, rather than provide actual documents. EO officials said 
attestation statements allowed applicants to indicate that they were 
fully aware of the application requirements, but they were not used in 
isolation. For example, if an application indicated the possibility of 
private inurnment, the reviewer was supposed to ask the applicant 
about this issue and would not rely solely on attestation. In the 
spring of 2014, EO managers determined the interim guidance for 
application reviewers was unclear, and they told reviewers there must 
be a narrative and organizing documents, although the IRM has not yet 
been updated to reflect this change. The new, streamlined procedures 
initially applied only to cases in the applications inventory that 
were more than a year old, but were extended in May, 2014 to all 
existing inventory. EO officials told us these streamlined review 
procedures are temporary and they are commissioning a study to 
evaluate their effectiveness and efficiency. 

In addition, in July 2014, EO managers introduced a new application 
form for relatively small organizations. This application adopts the 
same approach of substituting attestation for documentation as used 
initially in the streamlined inventory procedure. The new application 
(Form 1023-EZ) can be used by certain organizations with annual gross 
receipts of $50,000 or less and assets of $250,000 or less seeking tax-
exempt status.[Footnote 40] This form is considerably shorter than 
Form 1023 (3 pages compared to 12 pages), asks fewer questions, and 
the questions are primarily yes/no questions or checking a box for 
attestation.[Footnote 41] Form 1023-EZ does not require detailed 
information, such as organization documents, financial statements, or 
explanations, descriptions, or narratives about activities, as is 
required on Form 1023. EO managers anticipate that the majority of new 
applicants will use the streamlined Form 1023-EZ. 

Several organizations, including the National Council of Nonprofits 
and National Association of State Charity Officials (NASCO) have 
raised concerns about the impact of the shorter application Form 1023-
EZ on compliance. These concerns include decreasing the quality of 
information the IRS needs to make informed decisions about granting 
tax-exempt status, making it easier for "scam" charities to obtain tax-
exempt status, and shifting IRS oversight obligations onto the public, 
the funding community, and state charity regulators. Likewise, the 
Taxpayer Advocate also raised concerns about the streamlined 1023-EZ 
form, including a lack of empirical data demonstrating that 
organizations anticipating less than $50,000 in gross annual receipts 
pose low risks to compliance, a failure to conduct a comprehensive 
evaluation of downstream consequences of the streamlined application, 
and a post-implementation evaluation plan that relies on the limited 
effect of a small number of audits to correct potential compliance 
problems. EO officials told us they disagreed with the Taxpayer 
Advocate's findings. 

EO officials said that they conducted a risk assessment of their new 
streamlined application process. As part of the risk assessment, IRS 
identified several compliance-related risks, including the possibility 
of an increase in fraudulent applications and consequent potential 
loss of revenue, due to tax deductible contributions to organizations 
that were not eligible for exemption. To address these compliance 
risks, the IRS risk assessment cited the need for a more robust back-
end review of newly-exempt organizations that had received their 
status through the streamlined process. This would include increased 
use of quality control checks, audits, and other reviews, and an 
enhanced EO Examination process to identify ineligible organizations. 

EO managers intend to review a sample of organizations that used the 
Form 1023-EZ to apply for tax exempt status to learn about the 
population of organizations applying for exemption using the new, 
shorter form, including their eligibility to use the form. This phase 
started in July 2014 (when the new form was introduced to the public), 
and occurs after an organization submits an application and before IRS 
makes a determination on tax-exempt status. IRS plans to review a 
random sample of 3 percent--an estimated 1,260--of applications 
submitted using the new streamlined 1023-EZ form. According to EO 
officials, this sample size was based on a reliability factor and was 
then adjusted based on staffing resource capacity.[Footnote 42] As 
part of determining eligibility to use the shorter form, the reviewers 
are supposed to request from the filers in the sample such items as a 
detailed description of past, present, and future activities, and 
revenues and expenses for the most recently completed year. 

The EO Examinations function will also conduct post-determination 
(i.e. after tax exempt status has been determined) compliance reviews 
of organizations that applied for and received their tax-exempt status 
through the streamlined application review as well as organizations 
that applied for and received their tax-exempt status using the 
shorter Form-1023-EZ. The compliance reviews of the first group--
organizations that received their tax-exempt status through the 
streamlined review process--will begin during FY 2015. For this 
review, EO plans to select a random sample of exempt organizations 
reviewed under the streamlined process to provide information about 
the subsequent compliance characteristics of organizations that 
received their status in this way. EO recently approved guidance for 
reviewing these returns, which lists potential areas of noncompliance, 
such as legislative or overseas activities, compensation issues, and 
unrelated business activity. 

According to Tax-Exempt and Government Entities Division and EO 
officials, post-determination compliance reviews of organizations that 
used the Form 1023-EZ to apply for tax-exempt status will begin in 
late FY 2015 or early FY 2016. For this review, EO plans to take a 
random sample of exempt organizations that filed the Form 1023-EZ to 
provide information about the subsequent compliance characteristics of 
organizations that filed the shorter form. They anticipate they will 
use the same review procedures for the Form 1023-EZ exams as they use 
for the streamlined review process. However, they also report some 
modifications will be necessary due to the limited information on the 
EZ application itself as well as the fact that eligible organizations 
would typically be filing the Form 990-N as opposed to the more 
detailed Form 990 or even Form 990-EZ. The limited amount of 
information that will be available about these organizations because 
of the shorter application form and information return raises 
questions about how IRS will identify noncompliance issues for this 
particular segment of charitable organizations. 

Lack of Timely and Complete Data Limits IRS Ability to Provide 
Adequate Oversight of Charitable Organizations and to Provide for the 
Transparency of the Tax-Exempt Sector: 

The e-filing rate for tax-exempt organizations is significantly lower 
than for other taxpayers and organizations. In 2013, 38 percent of 
Forms 990, 990-EZ, and 990-PF were filed electronically, while in 
2011, 64 percent of partnerships and 66 percent of S Corporations 
filed electronically.[Footnote 43] The lower rate is due in large part 
to current law, requiring only very small and very large tax-exempt 
organizations to file electronically.[Footnote 44] Larger tax-exempt 
organizations (those that file at least 250 returns during the 
calendar year) are required to file electronically and smaller 
organizations (those that are excused from filing Form 990 or Form 990-
EZ, generally because their gross receipts are normally less than 
$50,000 annually), must file an annual notice (Form 990-N) in 
electronic format. Medium-sized organizations--those too big to file 
the Form 990-N, but not big enough to file 250 returns--are not 
required to file electronically. 

This lower rate means that there is less digitized data available for 
data mining and analytics and that IRS will have higher labor costs. 
IRS officials said that having more return information available 
electronically might improve examination selection. For instance, when 
IRS examination specialists suggested filters for an EO project to use 
in identifying potentially noncompliant issues, the lack of available 
electronic data prevented EO from using all of the filters. Further, 
IRS officials estimate that mandated electronic filing would save EO 
more than an estimated $1 million in labor costs over a three year 
period, although a complete study has not been performed. 

In the FY 2015 Budget proposal, the administration proposed that 
Congress expand e-filing for tax-exempt organizations.[Footnote 45] 
Expanded e-filing may result in more accurate and complete data 
becoming available in a timelier manner, which in turn, would allow 
IRS to more easily identify areas of noncompliance. In our 2014 report 
on partnerships and S corporations, we recommended that Congress 
consider expanding the mandate for partnerships and corporations to 
electronically file their tax returns in order to cover a greater 
share of filed returns.[Footnote 46] We concluded that increased e-
filing would increase the amount of digitized data available to IRS, 
which examiners could then use to identify which partnership and S 
corporation tax returns could be most productive to examine. Since 
many charitable organizations are organized as not-for-profit 
corporations, the same mandate could also cover 501(c)(3) charitable 
organizations. 

Any option for an e-filing mandate would impose some burden on some 
tax return filers if (for example) they do not already possess the e-
filing technology and they need to get access to it. However, expanded 
e-filing could also reduce taxpayer burden, since greater accuracy 
would reduce false-positives, allowing IRS to identify "bad actors" 
rather than organizations who made mistakes on their returns. In 
addition, the burden could be mitigated. The 2015 budget proposal 
would allow transition relief for up to three additional years after 
the date of enactment to begin electronic filing, for smaller 
organizations and organizations for which electronic filing would be 
an undue hardship without additional transition time. 

According to IRS, electronic filing also increases transparency for 
the tax-exempt community because more searchable data becomes publicly 
available faster than paper-filed returns, which must first be 
converted to machine readable format. Once publicly available, the 
Form 990 data may be used by donors to make more informed contribution 
decisions and by researchers, analysts, and entrepreneurs to 
understand the tax-exempt sector better and to create information 
tools and services to meet the needs of the sector. Having Form 990 
series return data faster would also be useful to state and local 
regulators, charity watch-dog groups, charitable beneficiaries, and 
the press. In addition, e-filing would allow the IRS to process 
returns more quickly and at a lower cost than when paper returns are 
filed. Representatives from across the nonprofit and law enforcement 
community with whom we spoke support this reform as a strategy for 
improving transparency and accountability. 

Uncertainty about How Taxpayer Data Can Be Shared and Used Limits 
Collaboration between IRS and State Charity Regulators: 

To oversee charitable organizations, IRS collaborates with different 
federal and state entities, including DOJ and state charity 
regulators. IRS and DOJ officials identified no obstacles that prevent 
their collaboration for the enforcement of tax laws. IRS refers cases 
involving possible criminal matters to the DOJ Tax Division for 
investigation and possible prosecution. According to DOJ officials, 
the review and referral process is designed to maintain a separation 
between IRS and DOJ decision making to avoid the appearance of (or 
actual) abuse of executive power. As such, DOJ attorneys have little 
involvement with the IRS review and referral process. Once a case is 
referred to DOJ, prosecutors have access to the taxpayer information 
under IRC section 6103(h)(2).[Footnote 47] DOJ Tax Division attorneys 
said they are familiar with the information-sharing framework under 
this IRC provision. This framework allows prosecutors access to the 
information they need to build a case. 

However, state regulators and other subject matter specialists said 
statutory requirements for safeguarding taxpayer information and 
uncertainty about how these safeguards must be implemented limit state 
regulators' ability to use relevant information shared by IRS. They 
add that this may reduce regulators' ability to use that information 
to build cases against charitable organizations engaged in fraudulent 
or other criminal activity. 

Barriers to information sharing between IRS and state charity 
regulators have been a long-standing challenge. Before legislation 
passed in 2006, IRS was only permitted to disclose to state charity 
regulators information concerning final denials of applications for 
tax-exempt status, revocations of tax-exempt status, and final notices 
of deficiencies.[Footnote 48] In 2002 and 2005, we reported that this 
limited data sharing hampered state charity officials' efforts to 
identify charities which are defrauding the public or otherwise 
operating improperly.[Footnote 49] At the time, state charity 
regulators told us that the lack of details impeded their efforts to 
track individuals who tried to re-establish similar, suspicious 
operations in other states. We recommended IRS propose revised 
legislation that would allow IRS to share more data--such as 
information about ongoing and closed examinations of charities--as a 
way to help IRS and states better use limited resources and to allow 
the states to more quickly respond to noncompliance. 

In 2006, the PPA was enacted with provisions to facilitate information-
sharing between IRS and state charity regulators.[Footnote 50] The PPA 
expanded the type of information state charity regulators can receive 
to include sensitive, confidential information, such as revenue 
agents' reports regarding proposed revocations and notices of 
deficiencies.[Footnote 51] IRS can now share information about certain 
proposed revocations and proposed denials before an administrative 
appeal is made and a final revocation or denial issued. In addition to 
the information IRS is now allowed to share with state charity 
regulators, IRS also makes revocations publicly available: IRS lists 
revocations in the Internal Revenue Bulletin, although the reason for 
revocations resulting from exam are not given or made public.[Footnote 
52] 

While the PPA expanded the types of information IRS could share with 
state charity regulators, the law also placed safeguards on that 
information. For the first time, the PPA subjected state charity 
regulators to the same criminal penalty provisions of the Internal 
Revenue Code that all other recipients of tax information are subject 
to, making it a criminal offense for any state official to willfully 
disclose information shared by the IRS under Section 6104(c) in a 
manner unauthorized by the Internal Revenue Code. To have access to 
the increased types of information now available, state charity 
regulators must sign a disclosure agreement with IRS in which they 
agree to certain safeguarding procedures for receiving and handling 
taxpayer data. 

State charity regulators and other subject matter specialists we spoke 
with believe these safeguard requirements are unclear and difficult to 
implement. Although these requirements are the same as those that IRS 
and any state tax agencies receiving federal tax data must follow, 
most states do not have the resources, capacity, or infrastructure 
within their charitable oversight function to fulfill the 
requirements, according to subject matter experts with whom we spoke. 
For example, all disclosures provided by IRS must be reviewed by a 
state charity official, logged to record the receipt of the 
information, and stored behind at least two secured barriers, such as 
locked doors or cabinets. State charity regulators are also prohibited 
from entering the IRS shared data in a word processing program on a 
networked computer, unless lengthy security requirements are met. 

Since the passage of the PPA, charity regulators in three states--
California, New York, and Hawaii--signed a memorandum of understanding 
(MOU) with IRS to share information. However, despite the MOU, these 
state charity regulators still report challenges in storing and 
receiving data from IRS. A lack of clarity surrounding how they can 
use the data from IRS to build their own cases, and the criminal 
penalties attached to improper disclosure of the data, have prevented 
state charity regulators from incorporating IRS data into their 
investigations. For example, state charity regulators said when they 
learn that IRS is examining a charity located in their state for 
violating federal tax law, they must first contact the charity and 
request the documents it has already turned over to IRS. However, if 
the charity refuses or denies it has the requested documents, the 
state charity regulators do not believe they can enforce their request 
by citing the information provided to them by IRS. As a result, they 
seek to independently verify the information from the IRS (to the 
extent they are available) through other sources (such as the internet 
or the state registration database) before contacting the charity. 
Also, according to subject matter experts, IRS interpretation of these 
rules has been inconsistent. As a result, regulators are unsure 
whether they are in violation of the safeguards requirements. 
According to state charity regulators, other states have not entered 
into information-sharing agreements with IRS because they view the 
safeguard requirements as overly burdensome, given their limited 
resources. 

NASCO and the National Association of Attorneys General (NAAG) 
representatives credit IRS with trying to educate state regulators 
about the PPA requirements. IRS staff has given presentations at joint 
NAAG and NASCO conferences. According to the ACT 2013 report on exempt 
organizations, the IRS's designated EO federal/state liaison has 
worked to educate participating state agencies in the mechanics of PPA 
participation, has assisted with the safeguard procedure, and has 
linked state officials with appropriate IRS officials conversant in 
necessary information technology and security issues.[Footnote 53] The 
report also credited IRS with initiating discussions with state 
charity regulators through a task force to develop a pragmatic 
approach for taking advantage of what is presently available under the 
PPA. IRS officials are also working on a new MOU that will clarify how 
state charity regulators can communicate to charities to let them know 
they have received information about them from IRS. In addition, to 
facilitate information sharing between IRS and state charity 
regulators, Treasury officials are in the process of reviewing the PPA 
and Congress's intent in drafting this legislation to determine 
whether additional flexibilities exist. 

Despite these education and outreach efforts, state charity regulators 
are still unclear about how they are permitted to use IRS information 
to identify organizations violating state law and to build cases 
against them. The types of information PPA makes available would 
bolster state oversight efforts in a variety of ways. For example, 
according to the ACT report, state receipt of the names of 
organizations applying for exempt status would help states monitor 
startup entities that cease operations before the IRS responds to 
their for 1023 applications. EO officials told us that there are 
efforts underway to reduce processing times that should address this 
particular concern. Also according to the ACT report, state receipt of 
information about tax-exempt organizations receiving a proposed 
revocation of exemption would raise immediate questions about whether 
those organizations' assets are being properly applied to charitable 
purposes as required by state law. 

The challenges to information sharing between IRS and state charity 
regulators are related to uncertainty about what is permissible under 
the PPA. With limited access to IRS information, state charity 
regulators do not always know why a charity has had its tax-exempt 
status revoked, if it is under examination, or if it has been fined, 
but maintains its tax-exempt status. The lack of information impedes 
state charity regulators' ability to identify and prosecute bad actors 
for violating state laws and hinders states' ability to inform donors 
of scam charities. 

Conclusions: 

EO oversight of charitable organizations helps ensure that these 
entities abide by the purposes that justify their tax exemption and 
protects the sector from potential abuses and loss of confidence by 
the donor community. Over the past several years, reviewers have found 
that various units within the EO division could not fully assess or 
communicate their effectiveness because they lacked meaningful 
performance measures. EO managers have taken actions to address this 
deficiency by adding performance measures to help them track their 
inventory of applications, referrals, and exam cases and to ensure a 
level of quality assurance. EO has also developed its data analytics 
capacity to assist in selecting organizations for exam with greater 
audit potential. It has used these techniques and other information 
sources to select returns for examination and in some cases, has used 
the results of these exams to more systematically review certain tax 
issues. However, these actions have not addressed measuring the 
outcomes of EO activities (such as the effect of EO's actions on the 
compliance rate for the charitable sector as a whole), for specific 
segments of the sector (such as universities and hospitals), or for 
particular aspects of noncompliance (such as personal inurement or 
political activity). EO does not have the compliance measures or the 
quantitative, results-oriented compliance goals needed to assess its 
effect on the compliance of charitable organizations in any of these 
areas. Because EO does not measure the current level of compliance, it 
cannot set goals for increasing compliance or know to what extent its 
actions are affecting compliance. 

The Exempt Organizations Business Division is grappling with several 
other challenges that complicate oversight efforts. The e-filing rate 
for tax-exempt organizations is significantly lower than for other 
taxpayers. This lower rate means that there is less digitized data 
available for data mining and analytics and higher labor costs for 
IRS. Expanded e-filing may result in more accurate and complete data 
becoming available in a timelier manner; in turn this would allow IRS 
to more easily identify areas of noncompliance. This legislative 
reform would also be useful to state and local regulators, charity 
watch-dog groups, charitable beneficiaries, and the press as a 
strategy for improving transparency and accountability. 

A lack of clarity about how state charity regulators can use IRS data 
to build cases against suspect charitable organizations impedes 
regulators' ability to leverage IRS's examination work. IRS and 
Treasury officials are reviewing the statutory protections of taxpayer 
data and whether there is flexibility in regard to how state 
regulators must protect and can use federal tax data. IRS officials 
are also working on a new MOU that will clarify how state charity 
regulators can communicate to charities about information they have 
received from IRS. Once completed, these actions have the potential to 
enable greater collaboration between IRS and state charity regulators. 

IRS budget and staffing levels have declined significantly over recent 
years. Officials and stakeholders we spoke to noted that IRS resources 
dedicated to EO oversight have not kept pace with growth in the sector 
and with the complexity of issues related to tax-exempt organizations. 
IRS faces difficult decisions about how to allocate resources 
dedicated to tax-exempt sector oversight and about what specific 
compliance issues to audit. IRS has already made trade-offs--such as 
examining fewer organizations and streamlining the application process 
for organizations seeking tax-exempt status--which may lead to some 
efficiencies, but will also result in less available information about 
these organizations. If IRS does not collect and use performance data 
to make sound decisions--especially given the likelihood of 
constrained budgets for the foreseeable future--the agency risks 
missing noncompliance, burdening tax-exempt organizations, and wasting 
scarce resources. Furthermore, it will be difficult for IRS to 
communicate agency progress to Congress and the public and thus, be 
held accountable. 

Matter for Congressional Consideration: 

Congress should consider expanding the mandate for 501(c)(3) 
organizations to electronically file their tax returns to cover a 
greater share of filed returns. 

Recommendations: 

To improve oversight of charitable organizations, we recommend that 
the Commissioner of Internal Revenue take the following steps: 

1. Direct EO to develop quantitative, results-oriented compliance 
goals and additional performance measures and indicators that can be 
used to assess impact of exams and other enforcement activities on 
compliance. 

2. Continue to work with Treasury officials to do the following: 
review the flexibility afforded under PPA consistent with statutory 
protections of taxpayer data, clarify what flexibility state 
regulators have in how they protect and use federal tax data, make 
modifications to guidance, policies, or regulations as warranted, and 
clearly communicate this information with state charity regulators. 

Agency Comments and Our Evaluation: 

We sent a draft of this report to the Commissioner of Internal Revenue 
and Assistant Attorney General for Administration, Department of 
Justice for comment. DOJ had no comments on our report. We received 
written comments from IRS's Deputy Commissioner for Services and 
Enforcement on December 4, 2014 (for the full text of the comments, 
see appendix IV). 

In its comments, IRS concurred with our recommendations and described 
ongoing and planned steps to 1) improve the application process for 
organizations seeking tax-exempt status and reduce the backlog of 
applications that had accrued in recent years, 2) refine its strategy 
and approach to better determine the effect of enforcement actions on 
compliance by tax-exempt organizations, including charitable 
organizations, and 3) improve the efficiency with which taxpayer 
information may be shared with state charity regulators through 
education efforts and outreach. 

IRS also noted in its written comments that IRS's National Research 
Program (NRP) may not be well-suited for the tax-exempt sector, given 
the diversity that exists across the sector in regard to 
characteristics and compliance issues. Although we made no specific 
recommendation that EO be part of an NRP study, we note that the NRP 
has helped other IRS divisions determine compliance baselines and 
rates for types of taxpayers, such as corporations, where considerable 
diversity exits. While an NRP study could be a source for baseline 
data, we acknowledge that because of the high cost of such a study, it 
may not be practical at this time. Whatever approach to measuring 
compliance EO adopts, it should be consistent with our recommendation 
that EO develop quantitative, results-oriented compliance goals and 
additional performance measures that can be used to assess the impact 
of its activities on compliance. 

We also received technical comments from IRS, which we incorporated 
into the final report where appropriate. 

We plan to send copies of this report to the Secretary of the 
Treasury, the Commissioner of Internal Revenue, the Assistant Attorney 
General for Administration, DOJ, and other interested parties. The 
report is available at no charge on the GAO website at [hyperlink, 
http://www.gao.gov]. 

If you or your staff has any questions about this report, please 
contact us at (202) 512-9110 or mctiguej@gao.gov. Contact points for 
our offices of Congressional Relations and Public Affairs are on the 
last page of this report. GAO staff members who made major 
contributions to this report are listed in appendix V. 

Sincerely yours, 

Signed by: 

James R. McTigue: 
Director, Tax Issues: 
Strategic Issues Team: 

[End of section] 

Appendix I: Scope and Methodology: 

This report (1) describes what is known about the number, type, size, 
and other characteristics of 501(c)(3) charitable organizations; (2) 
describes IRS oversight activities for charitable organizations; (3) 
determines how IRS assesses its oversight efforts of charitable 
organizations to ensure they are meeting their charitable purposes; 
and (4) determines how IRS collaborates with state charity regulators 
and U.S. Attorneys to identify and prosecute organizations suspected 
of engaging in fraudulent or other criminal activity. 

To address the first objective, we reviewed Internal Revenue Service 
(IRS) forms and publications. We also analyzed data from the IRS's 
Statistics of Income (SOI) files for Form 990, Return of Organization 
Exempt from Income Tax and Form 990-EZ Short Form, Return of 
Organization Exempt from Income Tax for tax year 2011 (the most recent 
year available). Although private foundations are considered 
charitable organizations, we did not analyze data from Form 990-PF, 
Return of Private Foundation or Form 990-N, e-Postcard because the 
data for these organizations is less complete and has other 
limitations. These limitations included total expenses not broken out 
into program service, management and general, and fundraising 
expenses; and private foundations not identified by mission category. 
In addition, our data excludes certain religious organizations, which 
qualify as 501(c)(3) organizations, but are not required to file a 
return. We also did not report data from prior years for the Form 990 
and 990-EZ filers since the reporting threshold for organizations 
filing these returns varied from year to year, which makes year-to-
year comparisons of the data difficult. These SOI samples were based 
on returns as filed, and did not reflect IRS audit results. Using SOI 
sampling weights, we estimated sampling errors for our estimates, 
which are reported in appendix III. Statements of difference are 
statistically significant. 

SOI is a data set widely used for research purposes. SOI data on tax-
exempt organizations are available to the public on the IRS website 
[hyperlink, http://www.irs.gov]. IRS performs a number of quality 
control steps to verify the internal consistency of SOI sample data. 
For example, it performs computerized tests to verify the 
relationships between values on the returns selected as part of the 
SOI sample, and manually edits data items to correct for problems, 
such as missing items. We conducted several reliability tests to 
ensure that the data excerpts we used for this report were complete 
and accurate. For example, we electronically tested the data and used 
published data as a comparison to ensure that the data set was 
complete. To ensure accuracy, we reviewed related documentation and 
electronically tested for obvious errors. We concluded that the data 
were sufficiently reliable for the purposes of this report. 

For the second objective, we reviewed IRS documentation and 
interviewed Exempt Organization (EO) officials on IRS oversight 
activities, such as the examination and revocation of charitable 
organizations. We also obtained data from IRS's Return Inventory 
Classification System (RICS) on examinations and results for fiscal 
years 2011 through 2013. Based on our review of documentation and 
interviews, we determined that this data was reliable for the purposes 
of this report. We also obtained data from IRS's Referral database on 
referrals received on charitable organizations and all tax-exempt 
organizations for fiscal years 2011 through 2013. Although we received 
referral data on charitable organizations, we did not use the data 
because we found it was not reliable for the purposes of this report. 
According to EO officials, reviewers were encouraged but not required 
to enter the organization's subsection category (i.e. that it was a 
501(c)(3) charitable organization) into the referrals data base .The 
EO officials said that if the referral was found to have "no issue" by 
the reviewer, it may not have been assigned a subcategory because the 
subcategory was not required and it would be viewed (in this case) as 
not useful. Therefore, data on the number of referrals received, the 
source of referrals, and the type of referral violations that we 
received could have been undercounted if the data had been used. 
Although we did not use charitable organization referral data, we did 
use referral data on all tax-exempt organizations, as we found that 
data was reliable for the purposes of this report. 

For the third objective, we reviewed relevant strategic and 
performance documents such as the annual reports and work plans, 
quarterly performance reports, and project summary reports. We 
interviewed IRS planning officials and division managers to determine 
the extent to which managers overseeing the tax-exempt sector set 
performance goals; develop measures to monitor their progress toward 
meeting goals; and use data to identify challenges, the cause of those 
challenges, and develop strategies to address those challenges. We 
reviewed past recommendations made by the Treasury Inspector General 
for Tax Administration (TIGTA) and National Taxpayer Advocate related 
to performance management and interviewed IRS managers about how they 
addressed the issues discussed in those reports. For criteria, we 
compared IRS information on performance measures and decision-making 
to Standards for Internal Control in the Federal Government and 
federal guidance on performance management.[Footnote 54] We also 
applied the criteria concerning the administration, compliance burden 
and transparency that characterize a good tax system, as developed in 
our guide for evaluating tax reform proposals.[Footnote 55] We also 
reviewed IRS plans to streamline the application process through the 
introduction of Form 1023EZ. We interviewed EO officials on how they 
plan to assess the impact of the new streamlined process on oversight 
efforts and reviewed available evaluation plans. We applied criteria 
from our 2012 guide on designing evaluations.[Footnote 56] 

To determine how IRS collaborates with state charity regulators and 
U.S. Attorneys, we reviewed various IRS documents, such as policy 
manuals, guidance, and memoranda of understanding. We also interviewed 
officials from IRS , U.S. Department of Justice (DOJ), and the 
National Association of State Charity Officials. For criteria, we 
identified different approaches for sharing information and 
collaboration based on our audit findings, as well as our past 
recommendations and recommendations made by the Advisory Committee on 
Tax Exempt and Government Entities.[Footnote 57] 

To provide additional context for all three objectives, we interviewed 
IRS officials, DOJ officials, state charity regulators, subject matter 
specialists, and stakeholder groups representing different types of 
exempt-organizations and private watchdog organizations that oversee 
charities about the adequacy of IRS oversight of charitable 
organizations; the challenges IRS faces providing effective oversight; 
and strategies to address those challenges. 

[End of section] 

Appendix II: Tax Benefits and Requirements for Different Types of Tax 
Exempt Organizations: 

The federal tax code provides a variety of tax benefits to 
organizations often referred to as "tax exempt." The exact nature of 
those benefits varies depending on the nature of the organization. 
Section 501 provides an exemption from federal income tax for the 
broadest range of organizations.[Footnote 58] In addition to section 
501, there are various other scattered provisions which give a full or 
partial tax exemption to certain specific types of entities and 
income.[Footnote 59] This appendix focuses on organizations qualifying 
for a tax exemption under section 501, which will be referred to as 
tax exempt organizations. Within section 501, there is a division 
between charitable organizations, also known as 501(c)(3) 
organizations (after the subsection in which they are defined), and 
all other organizations qualifying for an exemption under section 501. 
The organizations that qualify for an exemption under section 501 but 
are not charitable organizations have been referred to as mutual 
benefit organizations or non-charitable nonprofits. Charitable 
organizations are further divided between those that are private 
foundations and all other charitable organizations, and private 
foundations are divided between operating and non-operating 
foundations. Each of these types of tax exempt organization--(1) 
mutual benefit organization, (2) charitable organization, (3) 
operating private foundation, and (4) non-operating private 
foundation--are subject to different requirements and receive 
different tax benefits. 

Tax exempt organizations of all types are prohibited from engaging in 
certain transactions with the creator of an organization, a person who 
made a substantial contribution to the organization, a member of the 
family of the creator or substantial contributor, or a corporation 
controlled by a creator or substantial contributor.[Footnote 60] 
Additionally, an organization operated for the primary purpose of 
carrying on a trade or business for profit is not exempt, on the 
grounds that all of its profits are payable to an exempt organization. 
[Footnote 61] These restrictions apply to all types of tax exempt 
organizations. Certain types of mutual benefit organizations and all 
charitable organizations are also subject to the restriction that no 
part of their net earnings inures to the benefit of any private 
shareholder or individual. Additionally, a tax is imposed on income 
from any trade or business unrelated to the exercise or performance of 
the organization's exempt purpose.[Footnote 62] 

Charitable organizations, a subset of tax exempt organizations meeting 
the definition in section 501(c)(3) are as follows: 

"Corporations, and any community chest, fund, or foundation, organized 
and operated exclusively for religious, charitable, scientific, 
testing for public safety, literary, or educational purposes, or to 
foster national or international amateur sports competition (but only 
if no part of its activities involve the provision of athletic 
facilities or equipment), or for the prevention of cruelty to children 
or animals, no part of the net earnings of which inures to the benefit 
of any private shareholder or individual, no substantial part of the 
activities of which is carrying on propaganda, or otherwise 
attempting, to influence legislation (except as otherwise provided 
[elsewhere]), and which does not participate in, or intervene in 
(including the publishing or distributing of statements), any 
political campaign on behalf of (or in opposition to) any candidate 
for public office." 

As stated above, no part of a charitable organization's net earnings 
can inure to the benefit of any private shareholder or individual. 
Additionally they must satisfy two tests: the organizational test and 
the operational test. To pass the organizational test, an entity must 
be organized exclusively for one or more exempt purposes, meaning that 
the governing instrument (such as a trust instrument, articles of 
incorporation, or association charter) must limit the purposes of the 
organization to one or more exempt purposes and does not expressly 
empower the organization to engage in activities not in furtherance of 
an exempt purpose except to an insubstantial degree.[Footnote 63] The 
operational test requires that organizations engage primarily in 
activities that accomplish one or more of the exempt purposes listed 
in statute.[Footnote 64] In general, new organizations seeking 
charitable organization status must apply for a determination of 
exempt status.[Footnote 65] Churches, their integrated auxiliaries, 
and conventions or associations of churches, as well as organizations 
with gross receipts of $5,000 or less and that are not private 
foundations do not need to apply.[Footnote 66] 

Organizations which meet all the requirements to be charitable 
organizations receive tax benefits beyond those available to mutual 
benefit organizations. Contributions of cash or property to charitable 
organizations are deductible by individuals and corporations for 
federal income tax purposes up to certain percentages of adjusted 
gross income.[Footnote 67] Such contributions are also exempt for 
estate and gift tax purposes.[Footnote 68] Charitable organizations 
are exempt from the federal unemployment tax[Footnote 69] and the 
federal gambling tax on lotteries.[Footnote 70] Additionally, 
charitable organizations are exempt from certain requirements related 
to establishing and maintaining retirement plans for employees. 
[Footnote 71] 

Within the category of charitable organizations are private 
foundations. When applying for charitable organization status, an 
applicant is presumed to be a private foundation unless it can 
demonstrate that it is not a private foundation.[Footnote 72] A 
charitable organization is not a private foundation if it is a church 
or convention or associations of churches, an educational institution, 
a medical or hospital care provider, medical education or research 
provider, or a government unit. A charitable organization is also not 
a private foundation if it is broadly publicly supported, as defined 
in section 509, or is a supporting organization of a broadly publicly 
supported organization. Organizations organized and operated 
exclusively for testing for public safety are also not private 
foundations. Charitable organizations not meeting one of these 
definitions are private foundations. 

Private foundations are subject to certain tax consequences which do 
not apply to other charitable organizations. A 2 percent excise tax is 
imposed on the net investment income of private foundations.[Footnote 
73] A private foundation is also subject to additional taxes if it 
engages in self-dealing, has excessive business holdings, makes 
investments which jeopardize its charitable purpose, or makes certain 
taxable expenditures.[Footnote 74] Finally, private foundations are 
subject to additional reporting requirements.[Footnote 75] 

Additional taxes and restrictions are imposed on foundations which do 
not meet the definition of an operating foundation. A private 
foundation is an operating foundation if is uses at least 85 percent 
of its income directly for the active conduct of charitable activities 
rather than for grantmaking and meets either an asset test, endowment 
test, or support test.[Footnote 76] Private foundations that are not 
operating foundations are generally subject to a tax of 30 percent of 
the amount of undistributed income.[Footnote 77] The percentage limits 
on the deductibility of contributions to non-operating private 
foundations are lower than for other charitable organizations. 
[Footnote 78] 

Aside from charitable organizations, section 501 lists 28 other types 
of nonprofits, often referred to as mutual benefit organizations, and 
which include unions, civic leagues, chambers of commerce, credit 
unions, and veteran organizations, among many others. For a complete 
list of the organizations listed in section 501, including charitable 
organizations, see below. Qualified pension, profit-sharing, and stock 
bonus plans are also exempt under section 501.[Footnote 79] Unlike 
charitable organizations, gifts to these mutual benefit organizations 
are not deductible. Mutual benefit organizations are not generally 
exempt from the federal unemployment tax or the gambling tax, and do 
not have the additional flexibility in establishing employee 
retirement plans that is allowed charitable organizations. 

Types of Tax Exempt Organizations Listed in Section 501: 

* Corporations organized by Act of Congress; Central Liquidity 
Facility for Federal Credit Unions; Resolution Trust Corporation; 
Resolution Funding Corporation: 

* Title-holding corporations: 

* Charitable organizations, including public charities, private 
foundations, religious, charitable, scientific, testing for public 
safety, literary, or educational, fostering national or international 
amateur sports competition, prevention of cruelty to children or 
animals: 

* Civic leagues, social welfare organizations, local associations of 
employees dedicated to charitable, educational, or recreational 
purposes: 

* Labor unions, agricultural, or horticultural organizations: 

* Trade associations, professional football leagues: 

* Social and recreational clubs: 

* Fraternal benefit societies providing payment of certain benefits to 
members: 

* Voluntary employees' beneficiary associations providing payment of 
certain employee benefits: 

* Domestic fraternal societies whose net earnings are devoted to 
religious, charitable, scientific, literary, educational, and 
fraternal purposes, which do not provide benefits to members: 

* Teachers' retirement fund associations: 

* Benevolent life insurance associations, mutual ditch or irrigation 
companies, mutual or cooperative telephone, electric, or water 
companies: 

* Cemetery companies: 

* Credit unions: 

* Small mutual insurance companies: 

* Corporations to finance crop operations: 

* Supplemental unemployment benefit trusts: 

* Pre-June 25, 1959 trusts to fund pension benefits: 

* Veterans' groups: 

* Group legal service organizations: 

* Black lung benefit trusts: 

* Multi-employer pension plan trusts: 

* Armed Forces insurance organizations established before 1880: 

* Employee Retirement Income Security Act trusts for certain 
terminated plans: 

* Multi-parent holding companies: 

* State-sponsored, high-risk insurance organizations: 

* State-sponsored worker compensation reinsurance organizations: 

* National railroad retirement investment trust: 

* Co-op health insurance issuers: 

[End of section] 

Appendix III: Additional Tables: 

The tables in this statistical appendix supplement those in the letter 
and provide population estimates for Statistics of Income (SOI) data. 
After each table, notes indicate the sampling errors. We are confident 
the true estimates would be within these percentage points in 95 out 
of every 100 samples. The tables are for charitable organizations that 
filed Forms 990 or 990-EZ. Private foundations that file Form 990-PF, 
small charitable organizations that file Form 990-N, and charitable 
organizations that do not file returns have been excluded from this 
analysis. 

Table 6: Number of Charitable Organization Filers by Mission Category, 
Tax Year 2011: 

Mission category: Arts, culture, and humanities; 
Number of filers: 27,107; 
Percent: 9.9%. 

Mission category: Education; 
Number of filers: 47,928; 
Percent: 17.5%. 

Mission category: Environment and animals; 
Number of filers: 11,763; 
Percent: 4.3%. 

Mission category: Health; 
Number of filers: 35,267; 
Percent: 12.9%. 

Mission category: Human services; 
Number of filers: 105,444; 
Percent: 38.4%. 

Mission category: International and foreign affairs; 
Number of filers: 5,744; 
Percent: 2.1%. 

Mission category: Public and social benefit; 
Number of filers: 24,718; 
Percent: 9.0%. 

Mission category: Religion-related; 
Number of filers: 15,628; 
Percent: 5.7%. 

Mission category: Mutual and membership benefit; 
Number of filers: 687; 
Percent: 0.3%. 

Mission category: Total; 
Number of filers: 274,287; 
Percent: 100.0%. 

Source: GAO analysis of SOI data from Forms 990 and 990-EZ. 
GAO-15-164. 

Note: All percent estimates have 95 percent confidence intervals that 
are within +/-2 percentage points of the estimate itself. We excluded 
a very small sample of unknown or unclassified charitable organization 
filers from our analysis. Therefore, the amounts may not equal the 
total due to this exclusion and to rounding. 

[End of table] 

Table 7: Reported Amounts of Assets, Revenues, and Expenses of 
Charitable Organizations by Mission Category, Tax Year 2011: 

Mission category: Arts, culture, and humanities; 
Number of filers: 27,107; 
Total assets (in millions): $106,969; 
Percent: 3.5%; 
Total revenues (in millions): $30,458; 
Percent: 1.8%; 
Total expenses (in millions): $28,756; 
Percent: 1.8%. 

Mission category: Education; 
Number of filers: 47,928; 
Total assets (in millions): $1,023,648; 
Percent: 33.8%; 
Total revenues (in millions): $317,196; 
Percent: 19.2%; 
Total expenses (in millions): $297,691; 
Percent: 19.1%. 

Mission category: Environment and animals; 
Number of filers: 11,763; 
Total assets (in millions): $42,837; 
Percent: 1.4%; 
Total revenues (in millions): $16,103; 
Percent: 1.0%; 
Total expenses (in millions): $14,546; 
Percent: 0.9%. 

Mission category: Health; 
Number of filers: 35,267; 
Total assets (in millions): $1,238,533; 
Percent: 40.9%; 
Total revenues (in millions): $947,494; 
Percent: 57.5%; 
Total expenses (in millions): $902,599; 
Percent: 57.9%. 

Mission category: Human services; 
Number of filers: 105,444; 
Total assets (in millions): $323,735; 
Percent: 10.7%; 
Total revenues (in millions): $216,322; 
Percent: 13.1%; 
Total expenses (in millions): $209,273; 
Percent: 13.4%. 

Mission category: International and foreign affairs; 
Number of filers: 5,744; 
Total assets (in millions): $32,048; 
Percent: 1.1%; 
Total revenues (in millions): $27,677; 
Percent: 1.7%; 
Total expenses (in millions): $25,309; 
Percent: 1.6%. 

Mission category: Public and social benefit; 
Number of filers: 24,718; 
Total assets (in millions): $218,573; 
Percent: 7.2%; 
Total revenues (in millions): $80,800; 
Percent: 4.9%; 
Total expenses (in millions): $69,165; 
Percent: 4.4%. 

Mission category: Religion-related; 
Number of filers: 15,628; 
Total assets (in millions): $25,217; 
Percent: 0.8%; 
Total revenues (in millions): $9,295; 
Percent: 0.6%; 
Total expenses (in millions): $8,624; 
Percent: 0.6%. 

Mission category: Mutual and membership benefit; 
Number of filers: 687; 
Total assets (in millions): $18,557; 
Percent: 0.6%; 
Total revenues (in millions): $2,462; 
Percent: 0.1%; 
Total expenses (in millions): $2,339; 
Percent: 0.2%. 

Mission category: Total; 
Number of filers: 274,287; 
Total assets (in millions): $3,030,133; 
Percent: 100.0%; 
Total revenues (in millions): $1,647,905; 
Percent: 100.0%; 
Total expenses (in millions): $1,558,401; 
Percent: 100.0%. 

Source: GAO analysis of SOI data from Forms 990 and 990-EZ. 
GAO-15-164. 

Note: All percent estimates have 95 percent confidence intervals that 
are within +/-2 percentage points of the estimate itself. We excluded 
a very small sample of unknown or unclassified charitable organization 
filers from our analysis. Therefore, the amounts may not equal the 
total due to this exclusion and to rounding. 

[End of table] 

Table 8: Reported Amounts of Assets, Revenues, and Expenses of 
Charitable Organizations, Tax Year 2011: 

Asset size category: Under $100,000; 
Number of filers: 92,880; 
Percent: 33.9%; 
Amount of assets: (in millions): $3,533; 
Percent: 0.1%; 
Amount of revenues (in millions): $16,454; 
Percent: 1.0%; 
Amount of expenses: (in millions): $16,188; 
Percent: 1.0%. 

Asset size category: $100,000 under $500,000; 
Number of filers: 69,185; 
Percent: 25.2%; 
Amount of assets: (in millions): $17,097; 
Percent: 0.6%; 
Amount of revenues (in millions): $26,751; 
Percent: 1.6%; 
Amount of expenses: (in millions): $25,705; 
Percent: 1.6%. 

Asset size category: $500,000 under $1,000,000; 
Number of filers: 28,376; 
Percent: 10.3%; 
Amount of assets: (in millions): $20,766; 
Percent: 0.7%; 
Amount of revenues (in millions): $20,063; 
Percent: 1.2%; 
Amount of expenses: (in millions): $19,704; 
Percent: 1.3%. 

Asset size category: $1,000,000 under $10,000,000; 
Number of filers: 62,488; 
Percent: 22.8%; 
Amount of assets: (in millions): $207,027; 
Percent: 6.8%; 
Amount of revenues (in millions): $174,150; 
Percent: 10.6%; 
Amount of expenses: (in millions): $171,684; 
Percent: 11.0%. 

Asset size category: $10,000,000 under $50,000,000; 
Number of filers: 14,713; 
Percent: 5.4%; 
Amount of assets: (in millions): $315,174; 
Percent: 10.4%; 
Amount of revenues (in millions): $209,785; 
Percent: 12.7%; 
Amount of expenses: (in millions): $201,379; 
Percent: 12.9%. 

Asset size category: $50,000,000 or more; 
Number of filers: 6,645; 
Percent: 2.4%; 
Amount of assets: (in millions): $2,466,537; 
Percent: 81.4%; 
Amount of revenues (in millions): $1,200,702; 
Percent: 72.9%; 
Amount of expenses: (in millions): $1,123,740; 
Percent: 72.1%. 

Asset size category: Total; 
Number of filers: 274,287; 
Percent: 100.0%; 
Amount of assets: (in millions): $3,030,133; 
Percent: 100.0%; 
Amount of revenues (in millions): $1,647,905; 
Percent: 100.0%; 
Amount of expenses: (in millions): $1,558,401; 
Percent: 100.0%. 

Source: GAO analysis of SOI data from Forms 990 and 990-EZ. 
GAO-15-164. 

Note: All percent estimates have 95 percent confidence intervals that 
are within +/-2 percentage points of the estimate itself. Amounts may 
not equal the total due to rounding. 

[End of table] 

Table 9: Charitable Organization Expenses by Mission Category, Tax 
Year 2011: 

Mission category: Arts, culture, and humanities; 
Number of filers: 15,307; 
Percent of filers: 8.1%; 
Total expenses (in millions): $27,747; 
Program service expenses (in millions): $22,145; 
Percent of total expenses: 79.8%; 
Management and general expenses (in millions): $4,078; 
Percent of total expenses: 14.7%; 
Fundraising expenses (in millions): $1,524; 
Percent of total expenses: 5.5%. 

Mission category: Education; 
Number of filers: 29,632; 
Percent of filers: 15.6%; 
Total expenses (in millions): $296,473; 
Program service expenses (in millions): $255,998; 
Percent of total expenses: 86.3%; 
Management and general expenses (in millions): $35,038; 
Percent of total expenses: 11.8%; 
Fundraising expenses (in millions): $5,437; 
Percent of total expenses: 1.8%. 

Mission category: Environment and animals; 
Number of filers: 8,407; 
Percent of filers: 4.4%; 
Total expenses (in millions): $14,231; 
Program service expenses (in millions): $11,921; 
Percent of total expenses: 83.8%; 
Management and general expenses (in millions): $1,549; 
Percent of total expenses: 10.9%; 
Fundraising expenses (in millions): $761; 
Percent of total expenses: 5.3%. 

Mission category: Health; 
Number of filers: 28,122; 
Percent of filers: 14.8%; 
Total expenses (in millions): $902,044; 
Program service expenses (in millions): $784,358; 
Percent of total expenses: 87.0%; 
Management and general expenses (in millions): $114,800; 
Percent of total expenses: 12.7%; 
Fundraising expenses (in millions): $2,886; 
Percent of total expenses: 0.3%. 

Mission category: Human services; 
Number of filers: 77,860; 
Percent of filers: 41.1%; 
Total expenses (in millions): $206,744; 
Program service expenses (in millions): $181,883; 
Percent of total expenses: 88.0%; 
Management and general expenses (in millions): $21,616; 
Percent of total expenses: 10.5%; 
Fundraising expenses (in millions): $3,245; 
Percent of total expenses: 1.6%. 

Mission category: International and foreign affairs; 
Number of filers: 3,146; 
Percent of filers: 1.7%; 
Total expenses (in millions): $25,033; 
Program service expenses (in millions): $22,189; 
Percent of total expenses: 88.6%; 
Management and general expenses (in millions): $1,934; 
Percent of total expenses: 7.7%; 
Fundraising expenses (in millions): $910; 
Percent of total expenses: 3.6%. 

Mission category: Public and social benefit; 
Number of filers: 17,789; 
Percent of filers: 9.4%; 
Total expenses (in millions): $68,515; 
Program service expenses (in millions): $59,409; 
Percent of total expenses: 86.7%; 
Management and general expenses (in millions): $7,450; 
Percent of total expenses: 10.9%; 
Fundraising expenses (in millions): $1,656; 
Percent of total expenses: 2.4%. 

Mission category: Religion-related; 
Number of filers: 8,591; 
Percent of filers: 4.5%; 
Total expenses (in millions): $7,900; 
Program service expenses (in millions): $6,509; 
Percent of total expenses: 82.4%; 
Management and general expenses (in millions): $994; 
Percent of total expenses: 12.6%; 
Fundraising expenses (in millions): $397; 
Percent of total expenses: 5.0%. 

Mission category: Mutual and membership benefit; 
Number of filers: 579; 
Percent of filers: 0.3%; 
Total expenses (in millions): $2,333; 
Program service expenses (in millions): $2,199; 
Percent of total expenses: 94.2%; 
Management and general expenses (in millions): $130; 
Percent of total expenses: 5.6%; 
Fundraising expenses (in millions): $4; 
Percent of total expenses: 0.2%. 

Mission category: Total; 
Number of filers: 189,433; 
Percent of filers: 100.0%; 
Total expenses (in millions): $1,551,119; 
Program service expenses (in millions): $1,346,696; 
Percent of total expenses: 86.8%; 
Management and general expenses (in millions): $187,604; 
Percent of total expenses: 12.1%; 
Fundraising expenses (in millions): $16,819; 
Percent of total expenses: 1.1%. 

Source: GAO analysis of SOI data from Forms 990. GAO-15-164. 

Note: All percent estimates have 95 percent confidence intervals that 
are within +/-2 percentage points of the estimate itself. We excluded 
a very small sample of unknown or unclassified charitable organization 
filers from our analysis. Therefore, the amounts may not equal the 
total due to this exclusion and to rounding. Total expenses broken out 
by program service expenses, management and general expenses, and 
fundraising expenses are only reported on the Form 990. Therefore, 
this table does not include Form 990-EZ filers. 

[End of table] 

[End of section] 

Appendix IV: Comments from the Internal Revenue Service: 

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

December 4, 2014: 

James R. McTigue, Jr. 
Director, Tax Issues: 
United States Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. McTigue: 

Thank you for the opportunity to review the draft report of the 
Government Accountability Office entitled "Tax Exempt Organizations: 
Better Compliance Indicators and Data and More Collaboration with 
State Regulators Would Strengthen Oversight of Charitable 
Organizations" (GAO-15-164, JC 451102). The recommendations in the
draft report focus on the development of compliance goals for the 
charitable sector and performance measures that the IRS can use to 
assess and improve compliance. The draft report also recommends that 
the IRS continue to work with Treasury officials and state charity 
regulators regarding the ability to share, protect, and use taxpayer 
data in the oversight of the charitable sector. We provided technical 
corrections and comments to the draft report under separate cover. 

We appreciate your acknowledgment that the IRS Exempt Organizations 
(EO) Division has in recent years been operating in a challenging 
environment in which budgets and staffing have decreased while the 
number of organizations applying for and obtaining recognition of tax-
exempt status has increased. Despite these challenges, EO has worked 
diligently at the complex and sensitive task of overseeing and 
regulating the tax-exempt sector. 

In FY 2014, EO developed new processes and tools to improve the 
application process for exempt organizations and reduce the 
substantial backlog of applications that had accrued in recent years 
due, in part, to the receipt of applications for reinstatement from
organizations whose status was revoked pursuant to the automatic 
revocation law enacted by the Pension Protection Act of 2006. Starting 
in April 2014, EO put in place a streamlined process that simplified 
and accelerated handling of all applications. We assigned and trained 
additional tax examiners from the Tax-Exemp/Government Entities 
(TE/GE) and Wage & Investment (W&I) business operating divisions to help
process the backlog of applications, and issued Interim Guidance to 
formalize new instructions and bring clarity to the process. In July 
2014, EO debuted the Form 1023-EZ, a streamlined application for 
recognition of exemption under section 501 (c)(3) of the Internal 
Revenue Code (IRC) available for use by certain smaller organizations. 
Using these improved processes and tools, EO succeeded in reducing the 
inventory of cases that were more than 270 days old by 91 percent, 
from 54,564 to 4,791 . Further, EO closed more than 117,000 
application cases in fiscal year 2014, 120 percent over the previous 
year's total closings. These results represent a significant positive 
impact on our service to tax-exempt organizations. 

EO recognizes the importance of continuing to promote compliance while 
making these improvements to the efficiency of the determinations 
process. To that end, EO is undertaking pre- and post-determination 
reviews of a statistically valid random sample of the organizations 
that applied for and received recognition of tax-exempt status under
these new initiatives to assess and promote compliance by these 
organizations. 

EO recognizes the value of results-oriented goals and related 
performance measures for purposes of promoting compliance through the 
examination function that are described in the draft report. To that 
end, EO continues to refine its compliance strategy and approach to 
better identify compliance priorities and to determine the effect
of enforcement actions on compliance by tax-exempt organizations, 
including charitable organizations. We are focused on using a data-
driven approach to identify and mitigate compliance risks. As you 
observed, more than 20 percent of charitable organization exams in 
2013 came from Form 990 data analytics. Moreover, we intend to rely more
on data-mining queries based on the redesigned Form 990 to detect high-
risk areas of noncompliance and prioritize enforcement efforts. 

The efficient use of data analytics is at the heart of a risk-based 
approach to compliance, which is now the focus of EO examination 
efforts. Since July 1, 2014, approximately 50 percent of the 
applicants that sought exempt status as a 501 (c)(3) organization 
filed a Form 1023-EZ. As described above, for these smaller tax-exempt
organizations, we are focused on selecting cases for audit, and 
assessing and promoting compliance, through the use of statistically 
valid random samples. This process will take the form of 
correspondence audits similar to what is currently in use for 
examination of organizations that received exemption under the 
streamlined processes debuted in April. With respect to larger 
organizations, EO is focused on utilizing data to select cases using 
an issues-based approach that takes into account the potential risk
of non-compliance. This has not always been EO's approach. Previously, 
EO's exam work plan consisted of projects based on market segments 
rather than a data-driven, risk-based approach. As discussed in the 
following paragraph, an approach based on standardized types of 
taxpayers is not the optimal use of resources, and the compliance
results cannot be extrapolated to the entire charitable sector. 

The National Research Program (NRP) studied the Federal returns of 
identified types of taxpayers with respect to comparable tax issues. 
Form 990-series returns are filed by large, well-funded charities that 
undertake complex and numerous activities, such as universities, as 
well as smaller, less endowed charities that focus on single activities,
such as soup kitchens, and myriad organizations in between. Moreover, 
their tax characteristics and compliance issues may have little in 
common. Given the discrete populations of taxpayers under IRC § 501 
(c)(3), an NRP-type study may not be well-suited for analyzing this 
sector, would require a considerable investment of resources and may 
not be the best use of our limited resources. However, we agree that 
having data that inform us as to the levels and risk of compliance by 
exempt organizations is important. We will continue to explore and 
develop methodologies that will provide us this information. 

You recognized our efforts to collaborate with different federal and 
state entities, including the Department of Justice (DOJ) and state 
charity regulators to oversee charitable organizations. You also 
recognized that there are statutorily imposed requirements to 
safeguard and limit the use of the taxpayer information that is shared
with state charity regulators. Penalties may apply to violations of 
these restrictions. The National Association of State Charity 
Officials (NASCO) has credited the IRS with trying to educate state 
regUlators about these reqUirements. Despite these efforts, we
recognize that uncertainty remains, and we will continue our 
educational efforts and outreach to improve the efficiency with which 
taxpayer information may be shared with and used by state charity 
regulators in appropriate cases. In general, the applicable rules 
already may be in place for State tax agencies as reflected in IRS 
Publication 1075, Tax Information Security Guidelines for Federal, 
State and Local Agencies; Safeguards for Protecting Federal Tax 
Returns and Return Information. 

The IRS is committed to ensuring that we continue to review and 
improve all our efforts to maintain appropriate oversight of, and 
promote compliance by, the tax-exempt sector, including in particular 
the determination and examination processes described in the draft 
report. We appreciate having had the opportunity to review and comment 
on the draft report. Responses to your specific recommendations are 
enclosed. If you have questions, please contact me, or a member of 
your staff may contact Tammy Ripperda, Director, Exempt Organizations, 
at (513) 263-5800. 

Sincerely, 

Signed by: 

John H. Dalrymple: 
Commissioner for Services and Enforcement: 

Enclosure: 

GAO Recommendations and IRS Responses to GAO Draft Report, Tax Exempt 
Organizations: Better Compliance Indicators and Data and More 
Collaboration with State Regulators Would Strengthen Oversight of 
Charitable Organizations: 

To improve oversight of charitable organizations, we recommend that 
the Commissioner of Internal Revenue take the following steps: 

Recommendation 1: 

Direct EO to develop quantitative, results-oriented compliance goals 
and additional performance measures and indicators that can be used to 
assess impact of exams and other enforcement activities on compliance. 

Comment: We will continue to develop data-driven and risk-based 
compliance goals, measures, and indicators to focus our exam and other 
compliance activities. 

Recommendation 2: 

Continue to work with Treasury officials to review the flexibility 
afforded under PPA consistent with statutory protections of taxpayer 
data and clarify what flexibility state regulators have in how they 
protect and use federal tax data, and make modifications to guidance, 
policies, or regulations as warranted and clearly communicate this
information with state charity regulators. 

Comment: We will continue to comply with IRC § 6104(c), as amended by 
the charity reform subtitle of the Pension Protection Act of 2006, in 
keeping with our long-term commitment to proper information-sharing 
and cooperative regulation with State agencies. In partnership with 
responsible officials of the Department of the Treasury and IRS Office 
of Chief Counsel, we shall discuss ongoing communication, informal
guidance, and formal rule-making as warranted to clarify pre-existing 
policies and procedures. 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

Contact: 

James R. McTigue, Jr. (202) 512-9110, mctiguej@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, Kevin Daly, Assistant 
Director, Jeff Arkin, Sara Daleski, Jillian E. Feirson, Laurie C. 
King, Lawrence M. Korb, Donna L. Miller, Ed Nannenhorn, Jessica 
Nierenberg, Karen O'Conor, Dae Park, Amy Radovich, Cynthia Saunders, 
Albert Sim, Stewart Small, Andrew J. Stephens, Lindsay W. Swenson, 
Meredith Trauner Moles, Sonya Vartivarian, James R. White, and John 
Zombro made major contributions to this report. 

[End of section] 

Footnotes: 

[1] For the purposes of this report, charitable organizations are 
those organizations which are tax exempt with regard to their 
charitable activities under section 501(c)(3) of the Internal Revenue 
Code (IRC). Charitable organizations are "corporations, and any 
community chest, fund, or foundations, organized and operated 
exclusively for religious, charitable, scientific, testing for public 
safety, literary, or educational purposes, or to foster national or 
international amateur sports competition, or for the prevention of 
cruelty to children or animals." 

[2] GAO, IRS 2015 Budget: Long-Term Strategy and Return on Investment 
Data Needed to Better Manage Budget Uncertainty and Set Priorities, 
[hyperlink, http://www.gao.gov/products/GAO-14-605] (Washington, D.C.: 
June 12, 2014). 

[3] SOI data from years prior to 2011 are not included in this report 
because the reporting thresholds varied so much in these years that 
year-to-year comparisons of the data would be difficult to interpret. 

[4] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1, 1999). 

[5] GAO, Understanding the Tax Reform Debate: Background, Criteria, & 
Questions, [hyperlink, http://www.gao.gov/products/GAO-05-1009SP] 
(Washington, D.C.: Sept. 1, 2005). 

[6] GAO, Tax-Exempt Sector: Governance, Transparency, and Oversight 
are Critical for Maintaining Public Trust, [hyperlink, 
http://www.gao.gov/products/GAO-05-561T] (Washington, D.C.: April 20, 
2005); GAO, Tax-Exempt Organizations: Improvements Possible in Public, 
IRS, and State Oversight of Charities, [hyperlink, 
http://www.gao.gov/products/GAO-02-526] (Washington, D.C.: April 30, 
2002). 

[7] See appendix II for a full list of accepted charitable purposes 
for 501(c)(3) organizations. 

[8] 26 U.S.C. § 501(c)(3); 26 C.F.R. § 1.501(c)(3). 

[9] Streamlined Application for Recognition of Exemption Under Section 
501(c)(3) of the Internal Revenue Code. Charities that meet certain 
requirements and have gross receipts of $50,000 or less and assets of 
$250,000 or less, may submit the 1023-EZ, an abbreviated version of 
the original form. 

[10] This excludes certain religious organizations, such as churches 
and their auxiliaries and associations, which are recognized as tax 
exempt, but need not apply for tax exempt status. 

[11] IRS Form 990, Return of Organization Exempt from Income Tax. 

[12] Every organization that qualifies for tax exemption as an 
organization described in 501(c)(3) is a private foundation unless it 
falls into one of the categories specifically excluded from the 
private foundation definition. Organizations that fall into the 
excluded categories are institutions such as hospitals or universities 
and those that generally have broad public support or actively 
function in a supporting relationship to such organizations. When 
applying for charitable organization status, an applicant is presumed 
to be a private foundation unless it can demonstrate that it is not a 
private foundation. Private foundations are subject to certain tax 
consequences which do not apply to other charitable organizations. For 
more information on the tax treatment of private foundations, please 
see appendix II. 

[13] Until the fall of 2014, EO also included the Customer Education 
and Outreach unit, which attempted to improve compliance by developing 
and delivering programs and products designed to help charitable and 
other exempt organizations understand their tax responsibilities. This 
unit was moved to Shared Services. 

[14] State charity regulators vary by state and include state 
attorneys general, secretaries of state, consumer protection and 
licensing bodies, a bureau of investigation, and similar entities. 

[15] Internal Revenue Manual (IRM) 9.5.1 Administrative Investigations 
and General Investigative Procedures [hyperlinkk 
http://www.irs.gov/irm/part9/irm_09-005-001.html] downloaded November 
24, 2014). 

[16] Gross domestic product is the market value of all goods and 
services produced within a country during a given time period. See 
Brice S. McKeever and Sarah L. Pettijohn, The Nonprofit Sector in 
Brief 2014 (Washington D.C.: Urban Institute, October 2014); and Molly 
F. Sherlock and Jane G. Gravelle, An Overview of the Nonprofit and 
Charitable Sector, CRS-R40919 (Washington, D.C.: Congressional 
Research Service, Nov. 17, 2009). 

[17] See Sarah L. Pettijohn, Elizabeth T. Boris, Carol J. De Vita, and 
Saunji D. Fyffe, Nonprofit-Government Contracts and Grants: Findings 
from the 2013 National Survey (Washington D.C.: Urban Institute, 
December 2013). 

[18] Tax expenditure estimates do not incorporate any behavioral 
responses and thus do not represent the amount of revenue that would 
necessarily be gained if the tax expenditure was repealed. Changes in 
taxpayer behavior are taken into account when Treasury prepares 
revenue estimates for proposed legislation. 

[19] According to the Congressional Research Service (CRS), the term 
'nonprofit organization' refers to "an entity that is not intended to 
be a profit-making corporation. The term can be more precisely 
understood to mean an entity organized under the laws of a state, with 
its status and privileges determined under state law. Because the 
qualifications for nonprofit status vary among states, it is possible 
for the term 'nonprofit organization' to be broader than, narrower 
than, or identical to the term 'tax-exempt' organization. For a 
nonprofit organization to be exempt from federal income taxes, it must 
meet the statutory requirements found in the Internal Revenue Code and 
usually must file an application with IRS. Some organizations, 
including small 501(c)(3) organizations and qualifying religious 
organizations, are exempt from the application requirement." See 
Sherlock and Gravelle, An Overview of the Nonprofit and Charitable 
Sector. 

[20] See Katie L. Roeger, Amy S. Blackwood, and Sarah L. Pettijohn, 
The Nonprofit Almanac 2012 (Washington D.C.: Urban Institute Press, 
2012). 

[21] Tax-exempt organizations are organizations that have received tax-
exempt status from the IRS under Internal Revenue Code sections 501(c)-
exempt organizations, 501(d)-religious and apostolic associations, 
501(e)-cooperative hospital service organizations, 501(f)-cooperative 
service organizations of operating educational organizations, 501(k)-
child care organizations, 501(n)-charitable risk pools, 527-political 
organizations, and nonexempt charitable trusts and split-interest 
trusts. For more information about other types of tax exempt entities, 
see appendix II. 

[22] IRS, Data Book, 2011, Publication 55B (Washington, D.C.: March 
2012). 

[23] Pub. L. 109-280, § 1223(b), 120 Stat. 780, 1090-1091 (2006) 
(codified at 26 U.S.C. § 6033(j)). 

[24] See Matthew R. Madara, IRS Working to Clear Exempt Organization 
Application Backlog, Tax Notes Today (Aug. 20, 2014).Charitable 
organizations that have had their tax-exempt status automatically 
revoked must file Form 1023, Application for Recognition of Exemption 
Under Section 501(c)(3) of the Internal Revenue Code to have their tax-
exempt status reinstated, even if the organization was not originally 
required to file the form. Certain charitable organizations can file 
for reinstatement using Form 1023-EZ, Streamlined Application for 
Recognition of Exemption Under Section 501(c)(3) of the Internal 
Revenue Code. 

[25] Figure 4 does not include private foundations, or Form 990-N 
filers--which are smaller charitable organizations in terms of assets. 

[26] Although the Form 990-EZ shows the amount of expenses by 
charitable organizations, it does not break out expenses into this 
group of categories. 

[27] [hyperlink, http://www.gao.gov/products/GAO-02-526]. 

[28] These figures represent sources and potential violations for tax-
exempt organizations. The figures could not be broken out separately 
for charitable organizations because of limitations in the EO data. 
However, because charitable organizations are a significant portion of 
tax-exempt organizations (about 66 percent), we expect the relative 
proportions to be similar for the charitable organizations. 

[29] Individual charitable organizations may file information returns, 
such as the Form 990 and Form 990-EZ. They may also file tax returns--
such as the Form 990-T--for unrelated business income and Form 941 for 
employment taxes. 

[30] Corporate tax returns exclude Form 1120S, U.S. Income Tax Return 
for an S Corporation. 

[31] A section 501(c)(3) organization must not be organized or 
operated for the benefit of private interests, such as the creator or 
the creator's family, shareholders of the organization, other 
designated individuals, or persons controlled directly or indirectly 
by such private interests. No part of the net earnings of a section 
501(c)(3) organization may inure to the benefit of any private 
shareholder or individual. A private shareholder or individual is a 
person having a personal and private interest in the activities of the 
organization. 

[32] Although some audits with a written advisory re-enter the EO 
audit stream and will be re-examined at a later date, they are not 
tracked in the aggregate once they re-enter the audit stream. EO 
considered a special project to review the impact of written 
advisories, and it was included in the work plan for years 2013 and 
2014. However, managers reported those cases were not worked, due to 
resource issues and other competing higher priority work. This project 
is also not addressed in FY 2015 work plan. 

[33] Section 1220(a) of the Pension Protection Act of 2006 added new 
Internal Revenue Code subsection 501(q), which establishes standards 
that a credit counseling organization must satisfy to qualify for 
exemption under Code subsections 501(c)(3) or 501(c)(4). 

[34] Internal Revenue Service, Strategic Plan, 2014-2017, [hyperlink, 
http://www.irs.gov/pub/irs-pdf/p3744.pdf]. 

[35] For more information on difficulties we found in measuring 
compliance, see GAO, Corporate Tax Compliance: IRS Should Determine 
Whether Its Streamlined Corporate Audit Process Is Meeting Its Goals, 
[hyperlink, http://www.gao.gov/products/GAO-13-662], (Washington, 
D.C.; Aug. 22, 2013) and Tax Compliance: Better Compliance Data and 
Long-term Goals Would Support a More Strategic IRS Approach to 
Reducing the Tax Gap, [hyperlink, 
http://www.gao.gov/products/GAO-05-753] (Washington, D.C.; July 18, 
2005). 

[36] GAO, The Results Act: An Evaluator's Guide to Assessing Agency 
Annual Performance Plans, [hyperlink, 
http://www.gao.gov/products/GAO/GGD-10.1.20] (Washington, D.C.: April 
1998) and GAO, Streamlining Government: Questions to Consider When 
Evaluating Proposals to Consolidate Physical Infrastructure and 
Management Functions, [hyperlink, 
http://www.gao.gov/products/GAO-12-542] (Washington, D.C.: May 23, 
2012). Also, the Government Performance and Results Act of 1993 
(GPRA), as updated by the GPRA Modernization Act of 2010, requires 
agencies to set results-oriented goals, to establish performance 
measures and related performance indicators with targets in meeting 
such goals, and to report progress. Pub. L. No. 103-62, 107 Stat. 285 
(1993); Pub. L. No. 111-352, 124 Stat. 3866 (2011). 

[37] Treasury Inspector General for Tax Administration, Inappropriate 
Criteria Were Used to Identify Tax-Exempt Applications for Review, 
2013-10-053 (Washington, D.C: May 14, 2013). 

[38] National Taxpayer Advocate, Fiscal Year 2014 Objectives Report to 
Congress and Special Report to Congress, IR-2013-63 (Washington, D.C.: 
July 16, 2013). 

[39] For more on the operational test, see appendix II. 

[40] See Form 1023-EZ, Streamlined Application for Recognition of 
Exemption Under Section 501(c)(3) of the Internal Revenue Code. 

[41] Including schedules for different types of organizations, the 
Form 1023 has 26 pages. 

[42] We did not assess the reasonableness of this sample plan because 
information in the sample plan was not sufficient for such a review. 
For example, the plan did not detail the reasonableness of the 
reliability factor choice, describe implementation of the sample, 
detail how the data would be analyzed, or show how the analysis would 
be presented. 

[43] GAO, Partnerships and S Corporations: IRS Needs to Improve 
Information to Address Tax Noncompliance, [hyperlink, 
http://www.gao.gov/products/GAO-14-453] (Washington, D.C.: May 14, 
2014). 

[44] Churches and governmental entities, as well as certain related 
organizations, generally do not have to file annual returns or 
notices. However, all tax-exempt organizations, including churches, 
must report unrelated business taxable income on Form 990-T, which 
currently cannot be filed electronically. In addition, tax-exempt 
political organizations must file Form 8872 periodically to report 
certain political contributions and expenditures. Form 8872 must be 
filed electronically only if the organization has, or expects to have, 
annual contributions or expenditures in excess of $50,000. 

[45] Department of Treasury, General Explanations of the 
Administration's Fiscal Year 2015 Revenue Proposals, (Washington, 
D.C.: March, 2014). 

[46] [hyperlink, http://www.gao.gov/products/GAO-14-453]. 

[47] 26 U.S.C. § 6103(h)(2). 

[48] A proposed notice of deficiency, also known as a 30-day letter, 
notifies the taxpayer of a proposed change in their tax. The letter 
offers the taxpayer the opportunity to appeal this change. A final 
notice of deficiency is the 90-day letter. 

[49] [hyperlink, http://www.gao.gov/products/GAO-02-526] and 
[hyperlink, http://www.gao.gov/products/GAO-05-561T]. 

[50] Pub. L. 109-280, § 1224, 120 Stat. 780, 1091-1093 (2006) 
(codified at 26 U.S.C. § 6104(c)). 

[51] Reporting on another piece of proposed legislation with a similar 
provision as that which was enacted in the PPA, the Senate Committee 
on Finance stated that by giving state officials "earlier access to 
information about the activities of certain section 501(c) 
organizations, state officials will be able to monitor such 
organizations more effectively and better protect the public's 
interest in assuring that organizations that have been given the 
benefit of tax-exemption operate consistently with their exempt 
purpose." The report also stressed the importance of maintaining the 
confidentiality of taxpayer data and stated the Committee's belief 
that it was important to extend existing protections against 
unauthorized disclosure to disclosures of charitable organizations' 
data. S. Rep. 108-11 at 43 (2003). 

[52] IRS also makes public a list of charitable organizations that 
have had their tax-exempt status automatically revoked. Auto-
revocations occur when an exempt organization fails to file the 
appropriate information return or notice three years in a row. This 
list does not include information about why an organization may have 
had its tax exempt status revoked for other reasons. 

[53] The twelfth report of recommendations of the Advisory Committee 
on Tax Exempt and Government Entities (ACT), Exempt Organizations: 
Leveraging Limited Resources in the Tax Administration of Small Tax-
Exempt Organizations (Washington, DC: September 12, 2013). 

[54] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1, 1999 

[55] GAO, Understanding the Tax Reform Debate: Background, Criteria, & 
Questions, [hyperlink, http://www.gao.gov/products/GAO-05-1009SP] 
(Washington, D.C.: Sept. 1, 2005) 

[56] GAO, Designing Evaluations, 2012 Revision, [hyperlink, 
http://www.gao.gov/products/GAO-12-208G] (Washington, D.C.: Jan. 31, 
2012). 

[57] GAO, Tax-Exempt Sector: Governance, Transparency, and Oversight 
are Critical for Maintaining Public Trust, [hyperlink, 
http://www.gao.gov/products/GAO-06-561T] (Washington, D.C.: Apr. 20, 
2005) and Tax-Exempt Organizations: Improvements Possible in Public, 
IRS, and State Oversight of Charities, [hyperlink, 
http://www.gao.gov/products/GAO-02-526] (Washington, D.C.: Apr. 30, 
2002). 

[58] Unless otherwise noted, all section numbers refer to the Internal 
Revenue Code. 

[59] Certain farmers' cooperatives, shipowners' protection and 
indemnity associations, political organizations, and homeowners 
associations are wholly or partially tax exempt. 26 U.S.C. §§ 521, 
526, 527, 528. Qualified tuition programs established by states (also 
called 529 plans) and Coverdell education savings accounts are exempt 
from federal income taxes. 26 U.S.C. § 529, 530. Income accruing to 
possession of the United States and political subdivisions thereof, 
states and political subdivisions thereof, and the District of 
Columbia, from any essential governmental function or public utility 
is not included in gross income and therefore not taxed. 26 U.S.C. § 
115. Income earned by foreign governments and international 
organizations from investments in the United States is generally 
exempt from taxation. 26 U.S.C. § 892. 

[60] 26 U.S.C. § 503(b). 

[61] 26 U.S.C. § 502. These organizations are sometimes called feeder 
funds. 

[62] 26 U.S.C. §§ 511-513. 

[63] 26 C.F.R. § 1.501(c)(3)-1(b). 

[64] 26 C.F.R. § 1.501(c)(3)-1(c). 

[65] 26 U.S.C. § 508(a). 

[66] 26 U.S.C. § 508(c); 26 C.F.R. § 1.508-1(a). 

[67] 26 U.S.C. § 170. Gifts to certain mutual benefit organizations 
(veteran groups, nonprofit cemetery companies, and fraternal 
beneficiary organizations) that use the gift for charitable purposes 
are deductible. 

[68] 26 U.S.C. §§ 2055, 2522. 

[69] 26 U.S.C. § 3306(c)(8). 

[70] 26 U.S.C. § 4421(2)(B). 

[71] 26 U.S.C. § 403(b). 

[72] 26 U.S.C. § 508(b). Organizations that are exempt from the 
application requirement are also exempt from this presumption. 

[73] 26 U.S.C. § 4940. 

[74] 26 U.S.C. §§ 4941, 4943-4945. 

[75] 26 U.S.C. § 6033(c). 

[76] 26 U.S.C. § 4942(j)(3); 26 C.F.R. § 53.4942(b)-1. 

[77] 26 U.S.C. § 4942. 

[78] 26 U.S.C. § 170(b)(1)(A)(vii), (b)(1)(F). 

[79] 26 U.S.C. §§ 501(a), 401(a). 

[End of section] 

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