Tax-Exempt Organizations and the Unrelated Business Income Tax

GAO discussed the nature and extent of commercial and other income-producing activities of tax-exempt organizations and the use of the unrelated-business income tax to deal with those activities. GAO found that: (1) there are no complete data to measure tax-exempt organizations' income-producing activities and to show how significant the competition is between the taxable-business and tax-exempt communities; (2) although Congress imposed the unrelated-business income tax on activities not related to an exempt purpose, activities related to the exempt purpose are not taxed, regardless of their competitive nature; (3) the Internal Revenue Service (IRS) cannot routinely identify the most noncompliant organizations, since it does not have the necessary information; and (4) members of the tax-exempt community increasingly use fees for services and income-producing activities to fund their operations. GAO believes that IRS and national tax-exempt organization associations should provide more information to tax-exempt organizations on the unrelated-business-tax requirements to avoid misunderstandings and incorrect returns.