The US GAO has issued a report entitled "Tax-exempt organizations: Better Compliance Indicators and Data, and More Collaboration with State Regulators Would Strengthen Oversight of Charitable Organizations". The report provides an overview of the US tax exempt/non-profit sector and also discusses improving transparency and sharing with state regulators to have better regulation of non-profits. The report provides some interesting statistics on US tax exempt organizations.
Here is the introduction:
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.
Here is the conclusion:
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.
There are a number of similarities and differences between the regulation of tax exempt organizations in Canada and the success that the IRS and CRA have been having in trying to ensure compliance with the IRC and ITA.
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.