The impact of the nonprofit sector on our economy and the wellbeing of our citizens is clear. Last month, the Government Accountability Office (GAO) released a report on the IRS’s supervision of nonprofits that showed as much as 5 percent of the country’s GDP is generated by tax-exempt organizations, which the government “increasingly relies on … to provide critical services.” At a time when social services are on shaky legislative and financial ground, more individuals and families are turning to nonprofits to make ends meet, and consequently more money – both private and public – is flowing through nonprofit coffers and into the economy.
The IRS confers tax-exempt status on nonprofits because of their special position in society: they do the important work that supplements what’s done by the public sector. The intersection of public trust and enormous pools of money is exactly why scrutiny of tax-exempt organizations ought to be precise and consistent.
This makes the findings of the recent GAO report, which specifically focuses on the Exempt Organizations (EO) division of the IRS, all the more dismaying. The report noted:
- Funding for the EO division has not kept pace with growth in the sector.
- Funding for state attorneys general – IRS’s enforcement partners – is also challengingly low.
- EO activities are constrained by the relative infrequency of e-filing among nonprofit organizations.
- The EO division cannot fully assess its activities or plan for future activities because it lacks performance measures and a concrete picture of the compliance status quo.
- The examination rate within the EO division is lower than that of individual taxpayers or corporations, while the no-change rate (the number of exams that result in no change in behavior) is higher.
- The number of full-time equivalent employees in the EO division has dropped along with the division’s funding in the last few years.
This indicates that the EO division is not performing as efficiently or effectively as we need it to. It is struggling with deficiencies in staff, resources and knowledge. That spells trouble for the nonprofit sector and society at large. Every unnecessary exam resulting in no change costs taxpayer money and the opportunity to examine an organization that is actually noncompliant. Multiply this problem by the 2.3 million nonprofits operating in the U.S. and you begin to understand its magnitude. The EO division’s responsibility is tremendous and the consequences of failure are grave – ranging from tax fraud to a loss of public trust and disinvestment in nonprofits in general.
It is crucial for an institution tasked with influencing behavior and encouraging policy compliance to have a baseline measure of compliance from which to start. Without accurate performance measures, a bureaucracy can become listless and unresponsive. The lack of widespread e-filing puts significant, but avoidable, strain on the EO division. The division needs tools to plan for and assess their own work or it cannot be successful. Whether addressing these challenges will require a recommitment of funds is unclear from GAO’s report, but assessing the EO division’s infrastructure needs should remain on the table. Congress should work with the IRS and the EO division to develop actionable performance measures and to determine the best way to establish baseline measurements of compliance. The nonprofit sector, the IRS and the EO division should collaborate around efforts to increase the practice of e-filing and study patterns of compliance, thereby streamlining the regulatory process.
NCRP has a long history of pushing for an accountable charitable sector that is transparent and ethical. Our 2009 report Criteria for Philanthropy at Its Best makes the case that one of a grantmaker’s most important responsibilities is to build public and regulatory trust in its activities. We have worked with stakeholders and legislators, including the IRS, in the past to illuminate pressing issues and recommend guidelines. More recently Philamplify, our ongoing initiative to assess foundations, does precisely this by providing recommendations to improve grantmaking practices based on rigorous research, including grantee surveys.
And we are not alone in our concern: For years, experts like Georgetown University’s Pablo Eisenberg, editor of the EO Tax Journal Paul Streckfus, and even National Taxpayer Advocate Nina Olson have been sounding the alarm about the impact of staff and budget cuts on EO operations. Eisenberg has called on nonprofits to “lobby both Congress and state legislatures to give [IRS] more resources to oversee the sector.” Government Executive’s George Clark has highlighted the deliberate targeting of the EO division by partisans in Congress. Last year, Olson’s office identified insufficient funding for IRS operations as a “top problem” for taxpayers. Their alarm must only be heightened by this most recent report.
It is crucial that the government entity responsible for enforcing the law have the tools to succeed. The GAO report is a wake-up call to the IRS: the EO division has the responsibility to oversee the entire civic sector but lacks the human and fiscal resources to actually enforce the law. The nonprofit sector, grantmaking institutions and grantees alike, will benefit greatly from better accountability grounded in facts.
Ryan Schlegel is research and policy assistant at the National Committee for Responsive Philanthropy (NCRP). Follow @NCRP on Twitter.
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