Political Organizations
Data Disclosure and IRS's Oversight of Organizations Should Be Improved Gao ID: GAO-02-444 July 17, 2002Tax-exempt organizations seeking to influence political elections--called Section 527 organizations--are estimated to spend millions of dollars annually in federal elections. These organizations use unregulated "soft money" for issue advocacy, such as sponsoring an advertisement that supports or opposes a candidate's position on an issue. Although all states require these groups to publicly release data on their finances and activities, no central source for such data exists. In July 2000, Congress passed legislation requiring Section 527 organizations to provide data on their purposes, officers, contributors, and expenses to the Internal Revenue Service (IRS) for public disclosure. IRS has established a website for this purpose, but GAO found that the website is difficult to use, and most of the disclosed data are not electronically searchable and downloadable--which can inhibit timely analysis of the relationship between political organizations and the influence of soft money on federal campaigns. IRS has done little to oversee Section 527 organizations' compliance with the law's filing and reporting requirements. As a result, IRS can provide four assurances that the data it disclosed on its website are timely, complete, and correct. IRS officials said that oversight has been limited because of (1) competing demands for resources, (2) the focus on educating Section 527 organizations and on publicly disclosing the data, and (3) having the lack of electronic data on Section 527 organizations. IRS has not developed a strategic plan to ensure that the law's requirements are met.
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Report to the Honorable Bill Thomas, Chairman, Committee on Ways and
Means, House of Representatives:
United States General Accounting Office:
GAO:
July 2002:
Political Organizations:
Data Disclosure and IRS‘s Oversight of Organizations Should Be
Improved:
Political Organizations:
GAO-02-444:
Contents:
Letter:
Results in Brief:
Background:
Objectives, Scope, and Methodology:
IRS Disclosed Data Filed by Section 527 Organizations, but the Data Are
Not Readily Accessible to Support Public Users:
IRS Provides Limited Oversight to Ensure that Section 527 Organizations
Meet Filing Requirements:
IRS Planning for New Responsibilities Not Adhering to Accepted
Principles:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Political Activity and Section 527 Organizations:
Appendix II: IRS Forms Mentioned in Report:
Appendix III: Data About Section 501(c)(3-6) Organizations:
Appendix IV: IRS Section 527 Disclosure Web Site Accessibility
Evaluation:
Appendix V: Groups Interviewed for this Report:
Appendix VI: Selected Provisions of P.L. 107-155, the Bipartisan
Campaign
Reform Act of 2002:
Public Disclosure of Data on the Internet:
Determining Responsibility for Disclosure and Oversight:
Appendix VII: Opportunities for Data Matching to Improve
Oversight:
Appendix VIII: Comments from the Internal Revenue Service:
Appendix IX: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Tables:
Table 1: Items IRS Checks on Forms 8871, Electronic and Paper:
Table 2: Items IRS Checks on Forms 8872, Electronic and Paper:
Table 3: Allowable Political Activities of Section 501(c)(3-6) Tax-
Exempt Organizations:
Table 4: Filing Requirements for Section 527 Organizations:
Table 5: Number of Section 501(c) Tax-Exempt Organizations, Fiscal
Years 1995-2001:
Table 6: Disposition of Applications for Section 501(c)(3-6) Tax
Exemption Status, Fiscal Years 1995-2001:
Table 7: Types of Returns of Tax-Exempt Organizations Audited, Fiscal
Years 1995-2001:
Table 8: Recommended and Average Additional Tax from Audits of Tax-
Exempt Organizations, Fiscal Years 1995-2001:
Table 9: Revocations of Section 501(c)(3-6) Tax-Exempt Status, Fiscal
Years 1995-2001:
Figures:
Figure 1: Time Line of the Development of the Section 527 Disclosure
Web site:
Figure 2: Links to Section 527 Disclosure Web site and Welcome Page
from Home Page:
Abbreviations:
EIN: employer identification number:
FEC: Federal Election Commission:
FECA: Federal Election Campaign Act:
GPRA: Government Performance and Results Act:
IRS: Internal Revenue Service:
PAC: Political Action Committee:
PDF: portable document format:
SSN: Social Security Number:
United States General Accounting Office:
Letter:
Washington, DC 20548:
July 17, 2002:
The Honorable Bill Thomas
Chairman, Committee on Ways and Means
House of Representatives:
Dear Mr. Chairman:
Certain tax-exempt organizations seeking to influence political
electionsócalled Section 527 organizationsóare estimated to annually
spend hundreds of millions of dollar [Footnote 1]In federal elections,
these organizations have been able to use unregulated ìsoft money
[Footnote 2]for indirect or ’issue advocacy,“ such as that conducted
when an organization sponsors an advertisement that supports or opposes
a candidate‘s position on an issue.[Footnote 3] Although all states
required these organizations to provide some type of data on their
finances and activities to the public, no central source provided such
data. In July 2000, Congress passed P.L. 106-230 to require Section 527
organizations to provide the Internal Revenue Service (IRS) with data
on their purposes, officers, contributors, and expenses.[Footnote 4]
Congress established tight time frames for reporting these data to IRS
and the law, or implementing regulations, calls for IRS to then
disclose these data to the public.îs.
You asked us to study three related issues associated with
responsibilities IRS gained in P.L. 106-230. Given the requirements of
P.L. 106-230, our objectives were to determine the extent to which IRS
(1) discloses to the public in an accessible manner the data that
Section 527 organizations file with IRS, (2) oversees Section 527
organizations‘ compliance with the specified filing requirements, and
(3) develops a strategic plan for carrying out its new
responsibilities. To meet these objectives, we reviewed P.L. 106-230
and relevant Internal Revenue Code rulings on Section 527 political
organizations. We interviewed responsible IRS officials and obtained
documentation about processes, plans, and initiatives for disclosure
and oversight related to Section 527 organizations. We also interviewed
officials at the Federal Election Commission (FEC), which publicly
discloses data about federal election activities, to understand the
similarities and differences in disclosure and oversight processes
between FEC and IRS. On disclosure to the public, we tested IRS‘s
Section 527 disclosure Web site and spoke with public users of the Web
site who also represent public interest groups. Our scope and
methodology are discussed in more detail in a separate section of this
report.
Results in Brief:
IRS has been publicly disclosing the data reported by Section 527
organizations on a Web site it established for this purpose but our
work found that this Section 527 Web site has shortcomings in making
the disclosed data accessible to the public. Based on discussions with
public users and our tests, the Web site is difficult to use, and most
of the disclosed data are not electronically searchable and
downloadable, which can inhibit timely analysis of the relationships
between political organizations and the influence of soft money on
federal campaigns. Although IRS intends to make some improvements to
its disclosure Web site, such improvements are not a top priority
because, in part, IRS officials believe that IRS has fulfilled its
public disclosure responsibilities under P.L. 106-230.
IRS has performed limited oversight of Section 527 organizations‘
compliance with the law‘s filing and reporting requirements and as a
result, has provided little assurance that the data it disclosed on the
Section 527 Web site are timely, complete and correct. IRS has made
limited efforts to determine whether Section 527 organizations filed
required forms or that the data reported on the forms are complete and
correct. P.L. 106-230 created penalties for failing to meet filing
requirements but IRS has not imposed any penalties because it has not
performed the oversight to uncover noncompliance, even when IRS‘s data
on filed forms indicate that thousands of Section 527 organizations
might not be filing forms as required since 2000. With this knowledge,
IRS announced in May 2002 that it would not impose penalties through
July 15, 2002, in the belief that this penalty waiver would lead
noncompliant organizations to file the required forms. IRS officials
said that oversight has been limited because of competing demands for
resources, a focus on educating Section 527 organizations and on
publicly disclosing the data, and the workload burden on IRS from
having little electronic data on Section 527 organizations. IRS has
recognized the need to improve its oversight and started a study in
2002 to gauge the extent that compliance issues might exist for Section
527 organizations.
IRS has not developed a strategic plan to carry out its
responsibilities for ensuring that the requirements of the law are met.
That is, IRS has not defined the level of disclosure and oversight it
intends to achieve for Section 527 organizations. Nor has IRS
established a strategy, including the resources needed, to accomplish
such disclosure and oversight levels, or established a set of measures
to assess its progress. Developing such a plan would be consistent with
the principles for strategic planning as articulated in the Government
Performance and Results Act (GPRA)[Footnote 5] and IRS‘s strategic
planning process.
We are making recommendations to IRS to develop results-oriented plans,
including timeframes and resources needed to improve its disclosure Web
site, to oversee compliance by Section 527 organizations in fulfilling
their filing requirements, and to increase the amount of electronically
available data on Section 527 organizations.
We obtained written IRS comments on a draft of this report. (See app.
VIII). IRS agreed with our recommendation to develop results-oriented
plans to oversee whether Section 527 organizations fulfill their filing
requirements but took no position on our recommendations to develop
such plans to improve the disclosure Web site and the availability of
electronic data. IRS officials told us that they need more time to
develop positions on implementing these two recommendations. While IRS
generally agreed with the need for a better Web site and more
electronic data, IRS said that such actions face competing resource
priorities. IRS also provided other comments that expanded on our
discussion about the speed in which IRS created Section 527 filing and
disclosure systems, the barriers to having more electronic Section 527
data, and IRS‘s efforts to improve the filing compliance of Section 527
organizations as well as IRS‘s oversight. Because these comments
expanded on material in the report, we made no changes to our report
based on these comments. The Agency Comments and Our Evaluation section
of this report discusses IRS‘s written comments. We also received oral
comments from IRS officials and FEC officials on technical aspects of
the report, which we used to make changes where appropriate.
Background:
In July 2000, P.L. 106-230 was enacted.[Footnote 6] It created a
reporting and public disclosure process for Section 527 organizations
that operate outside FEC jurisdiction[Footnote 7] and that engage in
political activities at the local, state, or federal level.[Footnote 8]
Under P.L. 106-230, Section 527 organizations are to notify IRS of
their formation and file periodic reports with IRS.[Footnote 9] At IRS,
the Exempt Organizations section of the Tax-Exempt and Government
Entities (TE/GE) division is responsible for public disclosure of data
on Section 527 organizations and oversight of them.
IRS developed two forms to collect required data from Section 527
organizations. IRS released Form 8871 within 12 days of the law‘s
passage and Form 8872 within 17 days. An entity forming as a Section
527 organization must notify IRS within 24 hours by filing
electronically[Footnote 10] and in writing, using Form 8871 (Political
Organization Notice of Section 527 Status). Section 527 organizations
also must file either electronically or in writing with IRS periodic
reports of contributions and expenditures--using Form 8872 (Political
Organization Report of Contributions and Expenditures). In an election
year, these reports are required (1) monthly or quarterly, as selected
by the filing organization; (2) not later than 12 days before an
election if filing on a quarterly basis;[Footnote 11] and (3) not later
than 30 days after a general election. Appendix II contains copies of
these IRS forms.[Footnote 12]
Form 8871 on the notification of Section 527 status is to include the:
* name, address, business address (if a different address), and e-mail
address;
* purpose of the organization;
* names and addresses of officers, highly compensated employees,
contact person, custodian of records, and members of Board of
Directors; and:
* name and address of, and relationship to, any related organizations.
The Form 8872 on the Section 527 contributions and expenditures is to
include the:
* name and address of a contributor and amount of each contribution
and, if the contributor is an individual, the occupation and name of
the employer[Footnote 13] and:
* name and address of a recipient of an expenditure and amount of the
expenditure and, if the recipient is an individual, the occupation and
name of the employer.[Footnote 14]
IRS is required--with no specified timeframe--to publicly disclose in
its offices all data reported on Forms 8871. The law mandates that IRS
disclose on the Internet within 5 business days of receipt of the Form
8871 a list of organizations filing the form and data on the name,
mailing address, and electronic mailing address of each organization as
well as the custodian of records and contact person. For Form 8872
data, the law did not require any disclosure over the Internet,
providing the Secretary of the Treasury with discretion on when and how
to publicly disclose such data. Given such requirements, IRS created a
Web site[Footnote 15] within about 10 weeks of the law‘s passage to
publicly disclose data on Forms 8871 and 8872. Figure 1 shows the
timeframe for developing the Web site.
Figure 1: Time Line of the Development of the Section 527 Disclosure
Web site:
[See PDF for image]
Source: GAO analysis of IRS data.
[End of figure]
Objectives, Scope, and Methodology:
Our objectives were to determine the extent to which IRS (1) discloses
to the public in an accessible manner the data that Section 527
organizations file with IRS; (2) oversees Section 527 organizations‘
compliance with the specified filing requirements; and (3) develops a
strategic plan for carrying out its new responsibilities. In addition,
you asked us to provide statistical data on IRS‘s oversight of other
tax-exempt organizations.
For all three objectives, we reviewed P.L. 106-230 and relevant rulings
on Section 527 organizations. We also reviewed P.L. 107-155, a related
law on campaign finance reform that was passed during our work, and
talked with FEC and IRS officials to determine its potential impacts on
IRS disclosure and oversight.
Specifically, for our objective on disclosure, we interviewed IRS
officials and reviewed documentation to understand how IRS implemented
its disclosure responsibilities immediately after passage of P.L. 106-
230, how implementation of these responsibilities changed over time,
and what plans IRS had. We also sought to understand how IRS officials
interpreted their disclosure responsibilities under the law and
implemented their discretionary authorities provided in the law. We
interviewed IRS officials on the timeliness of IRS‘s public disclosure
of the Section 527 forms; we did not verify their statements. To
understand similarities and differences in the IRS‘s and FEC‘s
implementation of their disclosure responsibilities, we interviewed
responsible FEC officials and reviewed FEC documentation.
To determine whether IRS discloses Section 527 data in a manner
accessible to the public, we tested IRS‘s Section 527 disclosure Web
site for accessibility[Footnote 16] and user-friendliness. We developed
the test instrument by reviewing the literature on Web site
accessibility and consulting with GAO experts. We tested whether the
disclosure Web site had (1) a structure and navigation system that was
consistent, intuitive, and transparent; (2) information content that
clearly described the site‘s scope, content, services, and mission; (3)
functionality that allowed links within the site to work well and the
site to respond quickly; and (4) interactivity in which search and
retrieval mechanisms on the site worked well for users. Our test used
12 GAO analysts who were not familiar with the Section 527 Web site.
While the analysts do not represent all public users, they can serve as
a proxy. Appendix IV contains a copy of our test instructions and
results. We also interviewed 18 public users involved in campaign
finance reform issues about the extent to which the Section 527 Web
site met their needs. We identified these individuals and groups using
an Internet search and referrals from other public interest groups,
congressional staff, and individuals who are knowledgeable about
campaign finance. Since we did not know the universe of public users,
we could not select a random sample. As a result, the views of those we
interviewed do not represent all users. Appendix V lists the groups we
interviewed.
For our second objective on IRS oversight of Section 527 organizations,
we interviewed responsible IRS officials and reviewed documentation on
IRS‘s processes, plans, and initiatives. This included interviewing
officials at the Ogden Service Center, which receives, processes, and
reviews Forms 8871 and 8872,[Footnote 17] and obtaining documentation
on the procedures to be followed. We analyzed information we obtained
on the number of forms that IRS received from Section 527 organizations
and IRS‘s actions to ensure that the forms were timely, complete, and
correct. We did not verify the information provided by IRS. Finally, as
with our work on disclosure, we interviewed responsible FEC officials
and reviewed FEC documentation to understand similarities and
differences in the IRS‘s and FEC‘s implementation of their oversight
responsibilities.
For our third objective on strategic planning, we also reviewed IRS‘s
Strategic Planning, Budgeting and Performance Management Process, and
general planning principles, such as those in GPRA, to determine how
such a planning process and principles could guide IRS‘s planning on
implementation of its responsibilities for P.L. 106-230. We also talked
with IRS officials about any plans related to Section 527 forms or
organizations.
For the statistical data on IRS‘s oversight of other tax-exempt
organizations, we analyzed IRS data on the number of applications,
audits, and revocations of tax-exempt status (see app. III). We relied
on the publicly available data on the IRS Web site as well as data
provided by IRS on its audits. We conducted our review from June 2001
to May 2002, in accordance with generally accepted government auditing
standards.
IRS Disclosed Data Filed by Section 527 Organizations, but the Data Are
Not Readily Accessible to Support Public Users:
According to IRS officials, IRS has disclosed on its Section 527 Web
site all data reported on Forms 8871 and 8872. However, this Web site
falls short of disclosing data to the public in an accessible manner
because the site is difficult to use and lacks electronically
searchable and downloadable data. According to users we interviewed,
these limitations hinder their efforts to understand how money flows
among political organizations. IRS has begun to address some
shortcomings of its disclosure Web site. However, the changes do not
make the site easy to use or increase the amount of electronically
searchable data. Furthermore, IRS has no plans to seek public users‘
views on how to improve disclosure. Enhancing the Section 527
disclosure Web site is not a top IRS priority in part because officials
believe that IRS has fulfilled its public disclosure role as mandated
by law.
IRS Has Publicly Disclosed Data Filed by Section 527 Organizations:
IRS officials said that IRS discloses on the Internet through its
Section 527 Web site all of the data reported on Forms 8871 and 8872 by
Section 527 organizations. Although IRS is required to disclose all
such data to the public, it is not required to disclose any of the Form
8872 data on the Internet and is only required to disclose on the
Internet a portion of the data on the Form 8871. IRS officials said
that IRS chose to disclose both forms in their entirety on the Internet
to facilitate public access and minimize the burden that would be
created by redacting certain data from the forms before posting to the
Internet.
IRS officials discussed how quickly IRS posts the forms to the Section
527 Web site. The law requires the Form 8871 data to be posted to the
Internet and otherwise made available to the public within 5 business
days of receipt. The law specifies no timeframe for disclosing the Form
8872 data. IRS officials said that IRS generally posts electronically
filed Forms 8871 and 8872 within 48 hours of receipt and paper Forms
8871 within 5 business days. IRS officials said that they post paper
Forms 8872 to the site within, on average, 3 to 4 business days of
receipt.
Accessibility of Data on the Web site Is Hindered Because Site Is
Difficult to Use and Lacks Electronically Searchable Data:
Accessibility of the data disclosed on the Section 527 disclosure Web
site is impaired. The site is neither easy to use nor provides data on
Section 527 organizations in a format that can be readily searched. The
disclosure Web site is difficult to navigate, interact with, and
understand. In addition, much of the Section 527 data on the site is
neither searchable nor downloadable. Representatives of public interest
groups said these shortcomings in IRS‘s disclosure Web site seriously
hinder their ability to access and use IRS data to form a complete
picture of campaign financing activities.
Section 527 Disclosure Web site is Difficult to Use:
Our tests generally indicate that it is difficult to find the Section
527 disclosure Web site within IRS‘s overall Web site,[Footnote 18] and
to search and understand data in the site. For example, of 12 GAO
analysts who tested the site, 10 found it somewhat or very difficult to
find the data they sought, and 11 found it somewhat or very difficult
to understand the content.[Footnote 19] Our results generally echoed
the shortcomings described by public interest groups although they also
note that it is still early in IRS‘s implementation of the law. These
difficulties hinder the public‘s capacity to effectively use the data
disclosed on the Section 527 disclosure Web site.
IRS officials acknowledged that users had difficulty finding the
Section 527 disclosure Web site in part, because the IRS home page
initially had no link to the disclosure Web site, and it often took
users at least seven links to locate the site. Most GAO analysts in our
tests could not find the site without assistance. Noting the absence of
a link on its home page, IRS officials distributed a one-page guide
during public education talks that showed the web address for the
Section 527 disclosure welcome page.
IRS provides two options for searching the disclosed data, but both
have shortcomings. The first option, called basic search, enables users
to query names of filing organizations but does not indicate the number
of records found, which prevents users from estimating the time it will
take to view all records. In addition, its keyword search feature can
only query the first part of an organization‘s name and does not query
data contained on each form. The second option, called advanced search,
can query data by simultaneously searching up to six fields, but only
for electronically filed forms. According to IRS officials, only 5
percent of the universe of Forms 8872 has been filed electronically as
of March 2002. Yet, the Web site does not inform users that the
advanced search cannot query 95 percent of Forms 8872 filed, which may
lead users to misinterpret search results.
The Section 527 disclosure Web site also falls short in helping users
interact with and understand the data disclosed. For example, IRS posts
forms filed by organizations that are exempt from filing under P.L.
106-230, such as those who file reports with FEC, without indicating
that such forms are unnecessary. In addition, users have had problems
understanding technical terminology used in the site. For example, GAO
analysts in our tests had difficulty deciphering whether
’contributions“ refers to donation to or from a Section 527
organization. Some public interest groups we interviewed expressed
frustration over interactions with the customer service tools, pointing
to telephone calls and e-mailed questions that have gone unanswered; at
least one group was told by an IRS operator that the unit was unable to
answer its questions on Section 527 organizations.
Furthermore, IRS‘s Web site does not post information to distinguish
between forms, such as those initially filed versus those filed after
being amended. In contrast, FEC officials said that they post written
contacts with the organizations, such as when a form is amended. Nor
does IRS indicate when it has contacted Section 527 organizations, such
as when it asks for clarifications on filed data, as does FEC.[Footnote
20] Some public users told us that Forms 8871 and 8872 appear on the
Section 527 disclosure Web site months after they were due without
explanation. As a result, they cannot tell whether IRS was late in
posting forms, these forms were filed late, or IRS re-posted the forms
after making corrections. For example, of 50 new postings identified by
one public interest group during 1 day in January 2002, only 10 forms
were being posted for the first time, and 40 forms appeared to be re-
posted after corrections.
IRS Lacks Electronically Searchable Data:
Although not required by law, many of the forms filed by Section 527
organizations are not available to the public in an electronically
searchable and downloadable format. As of March 2002, only about 700 of
the 14,500 Forms 8872 received, or 5 percent, were filed
electronically. Only the
Web-based electronic forms are electronically searchable and
downloadable, while filed paper forms appear in a non-searchable,
photograph-like format.[Footnote 21] Unlike FEC, IRS can receive only
its Web-based forms and not electronic forms generated by software
packages used by the large Section 527 organizations to file with
states and FEC. As a result, these organizations cannot electronically
file Forms 8872 without reentering data from their system into IRS‘s
Web-based system.
The usefulness of IRS‘s Section 527 Web site is limited by this lack of
electronically searchable data. Public interest groups told us that
real disclosure requires the data to be in an electronically searchable
format, rather than a photograph-like format, to be useful and timely
for their analyses of campaign financing and the relationships among
organizations. They cannot readily integrate photograph-like images
into their databases to identify the big donors in an election, the
connections between organizations, or the flow of funds. These groups
said that without prompt access to electronically searchable and
downloadable data, they are unable to effectively follow the flow of
funds in campaigns for public office and on specific legislative
issues.
Given the scarcity of electronically filed Forms 8872, users are left
to manually review one paper form at a time. To create an electronic
database, IRS or the public user would have to manually transcribe the
data from paper forms, which many public interest groups have described
as time-consuming and costly. At least one public interest group gave
up trying to manually transcribe data from paper Forms 8872 due to the
time and resources required.
IRS‘s Improvements to Disclosure Web site Do Not Address Key
Limitations:
IRS officials believe IRS has fulfilled its disclosure responsibility
under the law. Even so, IRS has begun to address some known
shortcomings on its disclosure Web site. However, such efforts do not
address key limitations in the site‘s accessibility--how easy the site
is to use and the amount of electronically searchable data in the site.
IRS has made some enhancements to improve electronic filing, expand the
search capacity, and better integrate the paper and electronic forms on
the site. For example, in January 2002, IRS established a new link on
the IRS home page that more directly leads users to data on Section 527
political organizations. However, neither this new link nor Web pages
in subsequent links clearly direct users to the Section 527 disclosure
Web site. The welcome page and the search page for the Web site lack
clear titles indicating the user‘s location. Furthermore, the new links
bypass the welcome page, thus depriving users of the orientation to the
search site. Figure 2 shows the link system from the IRS home page to
the Section 527 disclosure Web site.
Figure 2: Links to Section 527 Disclosure Web site and Welcome Page
from Home Page:
[See PDF for image]
Source: GAO analysis.
[End of figure]
Nor do the improvements increase the amount of electronically
searchable data. For example, IRS is exploring ways to add data to the
Web site, such as data from the annual Forms 990 on the income and
expenditures of tax-exempt organizations. According to IRS officials,
IRS is considering posting portable document format (PDF) images (which
can not be electronically searched) of the Forms 990 filed by Section
527 organizations to the Section 527 Web site to provide the public a
more complete picture. IRS has a separate effort to allow optional
electronic filing of Forms 990 by 2004, which could increase the amount
of electronically searchable data reported by Section 527
organizations.
While IRS officials have expressed an interest in making the site
easier to use and in increasing the electronically searchable data,
they do not see these as top priorities. For example, officials working
on the Section 527 disclosure Web site have requested funds to make the
site‘s search features more user-friendly, including an expanded
keyword search to allow for ’wildcard operators“[Footnote 22] and
queries whereby a user could type in any word to find all filers whose
names contain that word. However, such a request must compete for
resources with other IRS priorities and IRS has not funded the request.
Despite IRS‘s emphasis on measuring its success in meeting the
expectations of customers, IRS has not identified the actual and
potential users of the disclosure Web site. Nor does IRS plan to survey
whether users can effectively access the disclosed data on Section 527
organizations or believe that the Web site can be enhanced to better
meet their needs. Such outreach efforts would be consistent with the
first goal in IRS‘s current Strategic Plan that emphasizes meeting the
expectations of its customers.[Footnote 23]
IRS Provides Limited Oversight to Ensure that Section 527 Organizations
Meet Filing Requirements:
IRS‘s oversight of Section 527 organizations‘ compliance with the law‘s
filing and reporting requirements has been very limited and has
included checks on whether some of the reported data is correct and
little proactive effort to determine whether all filings are timely and
all organizations that should file have done so. Accordingly, IRS has
provided little assurance to the public that data disclosed on the
Section 527 Web site are timely, complete, and correct. In part, due to
these limited oversight efforts, IRS has not imposed any penalties that
P.L. 106-230 created for failing to meet the filing and reporting
requirements. IRS officials say that the lack of available resources
and other higher priorities, have affected the oversight they have
given to Section 527 organizations. IRS has recognized the need to
improve its oversight and started a study in 2002 to gauge the extent
that compliance issues might exist for Section 527 organizations.
Congress created a penalty structure, which IRS is to administer, for
failures by Section 527 organizations to adhere to P.L. 106-230‘s
requirements. These penalties for not filing complete and correct Forms
8871 and 8872 on time, and for not making the data available to the
public are:
* For failure to file Form 8871: If a Section 527 organization does not
notify IRS of its formation, including specified identifying
information, it will not be treated as exempt and the highest corporate
tax rate, currently 35 percent, is to be applied to all exempt function
income less any expenses generating the income.
* For failure to file Form 8872: Upon failure to make the required
disclosures at the time and in the prescribed manner, to include any of
the required information, or to show the correct information, the
highest corporate tax rate is to be applied to the amount of the
contributions and expenditures that were not so disclosed.
* For failure to allow inspection or furnish a copy of the Form 8871 or
8872 to the public: A penalty of $20 may be assessed for each day that
an organization fails to allow public inspection or provide a copy of
the Form 8871 or Form 8872 upon request. For the Form 8872, the maximum
penalty is $10,000, but the law does not specify a maximum penalty for
Form 8871.
IRS Does Not Fully Check Section 527 Forms When Received to Ensure Data
Quality:
IRS does not fully check whether all required data are included on the
Forms 8871 and 8872 it receives and that the data are correct. Also,
IRS performs limited checks on the timeliness of filings and does not
perform checks to determine whether all Section 527 organizations that
should file have done so.
When Forms 8871 are filed, IRS employees are to review each form for
completeness and correctness. Table 1 shows the specific items that are
to be checked. IRS procedures call for employees to check three items
against IRS records to determine whether the Form 8871 data are
correct: valid name and employer identification number, whether an
amended form has been filed, and the organization‘s tax-exempt status.
For remaining items that are to be checked, employees simply check
whether the data has been provided.
Table 1: Items IRS Checks on Forms 8871, Electronic and Paper:
Item: Valid name and employer identification number (EIN); Electronic
form: X; Paper form: X.
Item: Mailing address, business address, and e-mail address; Electronic
form: X; Paper form: [Empty].
Item: Name of custodian of records and contact person; Electronic form:
X; Paper form: [Empty].
Item: Form signed; Electronic form: [Empty]; Paper form: X.
Item: Correspondence received with filed form (requires IRS response);
Electronic form: [Empty]; Paper form: X.
Item: Amended form filed; Electronic form: [Empty]; Paper form: X.
Item: Organization‘s tax-exempt status recorded; Electronic form:
[Empty]; Paper form: X.
Item: Name of, address of, and relationship to related entities;
Electronic form: [Empty]; Paper form: [Empty].
Item: List of all officers, directors, and highly compensated
employees; Electronic form: [Empty]; Paper form: [Empty].
Source: IRS documents and officials.
[End of table]
Table 2 shows the specific items that are to be checked for Forms 8872.
For
this form, employees are to check two items against IRS records: valid
name and employer identification number and the organization‘s tax-
exempt
status. Other items that are checked are only reviewed to determine if
something has been provided on the form.
Table 2. Items IRS Checks on Forms 8872, Electronic and Paper:
Item: Reason for filing (e.g., initial, amended, or final report);
Electronic form: [Empty]; Paper form: X.
Item: Valid name and EIN; Electronic form: X; Paper form: X.
Item: Date organization formed; Electronic form: X; Paper form: X.
Item: Type of report (e.g., monthly, quarterly, semiannual, or annual);
Electronic form: X; Paper form: X.
Item: Form signed; Electronic form: X; Paper form: X.
Item: Organization recorded at IRS as exempt; Electronic form: [Empty];
Paper form: X.
Item: Correspondence received with filed form requires IRS response;
Electronic form: [Empty]; Paper form: X.
Item: Date received is shown; Electronic form: [Empty]; Paper form: X.
Item: Itemized contributions[A]; Electronic form: [Empty]; Paper form:
[Empty].
Item: Itemized expenditures[B]; Electronic form: [Empty]; Paper form:
[Empty].
[A] Includes each contributor‘s name, mailing address, and ZIP code;
employer‘s name and contributor‘s occupation; aggregate contributions
year-to-date; and amount of contributions.
[B] Includes each recipient‘s name, mailing address, and ZIP code; name
of recipient‘s employer; recipient‘s occupation; and amount of each
expenditure.
Source: IRS documents and officials.
[End of table]
As tables 1 and 2 show, IRS procedures do not require checks for the
completeness of all data. For Form 8871, employees are not required to
check whether data on related organizations and the names of officers,
directors, and highly compensated employees have been provided. These
data can help public users see relationships between Section 527
organizations and others. For Form 8872, no check is required of the
names of employers for contributors and recipients, or contribution and
expenditure amounts. Such data can help users find contributions made
by donors to Section 527 organizations and the related use of funds.
Based on its checks, IRS will correct certain data, such as an EIN, on
the forms or in its computers without contacting a filing organization
according to IRS officials. For other discrepancies, such as forms that
are clearly incomplete or lack a signature, IRS will correspond with a
Section 527 organization. IRS posts Forms 8871 and 8872 as received on
its disclosure site while discrepancies are resolved and then re-posts
corrected forms.
In addition, IRS‘s procedures do not include checks to determine
whether it receives both electronic and paper versions of the Forms
8871 as
P.L. 106-230 requires. Data on forms filed between July 2000, when the
law became effective, and March 2002 suggest that many organizations
are not meeting this requirement. As of March 2002, IRS had received
11,586 electronic and 13,752 paper Forms 8871. An IRS official said IRS
is aware of this discrepancy of nearly 2,000 more paper forms than
electronic forms.
Although the P.L. 106-230 penalties cover timeliness of filings, IRS
does not check the timeliness of Forms 8871 and only checks timeliness
for one aspect of Forms 8872. For Forms 8871, IRS officials said that
they did not check whether Section 527 organizations filed within the
required 24 hours. For Forms 8872, IRS monitored the filing timeframes
that govern the required pre-and post-election periods for federal
general elections, but not other timeframes.
Finally, IRS does not perform checks to determine whether Section 527
organizations have filed all required Forms 8871 and 8872. Our analysis
of IRS data indicates that some Section 527 organizations may not be
meeting the filing requirements. Between July 2000 and March 2002, IRS
data show that 12,756 organizations had filed Forms 8871 on paper
(which all are required to do) but only 3,817 organizations had filed
Forms 8872 (233 electronically and 3,584 on paper). Thus, almost 9,000
more Section 527 organizations have notified IRS of their formation
than have reported any contributions or expenditures. Some of this
discrepancy may not be a problem because, for instance, some
organizations do not have to file a Form 8871 or a Form 8872 in certain
circumstances. However, as of May 2002, IRS had not determined which
organizations unnecessarily filed Forms 8871, filed Forms 8871 but were
not required to file Forms 8872, or did not file required Forms
8872.[Footnote 24] IRS also has no process to check whether
organizations have not filed required Forms 8871.
IRS Does Not Use Tools to Ensure the Quality of Section 527 Data After
Forms Are Filed:
IRS did not have a program to regularly audit (i.e., ask for documented
support on data reported) or match Form 8871 and 8872 data with other
data reported by Section 527 or other organizations to help ensure
timely, complete, and correct data. Nor has IRS imposed penalties for
filing problems with Forms 8871 and 8872.
IRS Audits Have Not Focused on Section 527 Forms:
IRS did not have criteria for selecting forms filed by Section 527
organizations for audit to check whether the filed forms were complete
and correct. Nor did IRS track how often its audits of tax-exempt
organizations for non-Section 527 issues nevertheless may have
addressed Forms 8871 and 8872 issues. As a result, IRS could not
identify any audits that began because of IRS concerns about the Forms
8871 and 8872.
Between July 2000 and March 2002, IRS only audited these forms in two
situations--as part of an investigation of an allegation submitted to
IRS or an audit of other tax-exempt organizations during which a
Section 527 issue arose. For example, in fiscal year 2001 and the first
week of fiscal year 2002, IRS received five allegations of
noncompliance by Section 527 organizations. IRS audited two allegations
involving one Section 527 organization; the audit had not been
completed as of March 2002. IRS did not audit one allegation because
preliminary investigation showed that it was unfounded and it has not
acted on the remaining two.
IRS Did Not Match Existing Data for Section 527 Filing and Reporting
Compliance:
IRS has no program to match data on Forms 8871 and 8872 with data that
IRS already receives from Section 527 and other tax-exempt
organizations. Such matches could be used to help identify
organizations that did not file required Forms 8871 and 8872 or to
verify the completeness and correctness of data on filed Forms 8871 or
8872.
Data matching programs may be able to help IRS identify certain
organizations that are tax-exempt under Section 501(c) of the Internal
Revenue Code and that should file Forms 8871 because they spend
significant amounts on political activities. These organizations are to
annually file Forms 990 to list their activities, income, and expenses-
-including those for political activities. By first analyzing Forms 990
to identify any organizations reporting significant expenditures for
political activity, and then matching to a database of Forms 8871, IRS
could determine whether these organizations had created a Section 527
organization for their political activities and filed Forms 8871. If
not, IRS would be able to follow up to determine whether a Section 527
organization should have been created and a Form 8871 should have been
filed. Similarly, Forms 990 are to include data reported by charitable
organizations about relationships with other tax-exempt organizations,
including Section 527 organizations. If IRS found a charitable
organization that reported a relationship with a Section 527
organization, a match could identify whether such a Section 527
organization filed Forms 8871 and 8872, and reported the relationship.
However, IRS would face challenges in developing a full-scaled matching
program that uses the Form 990 data. Matching organizations‘ or
individuals‘ names is prone to error given possible variations in
spelling and in the use of abbreviations for the same name. Thus,
matching would be facilitated if IRS had unique identifying numbers
associated with specific names. Right now, IRS receives such unique
numbers from tax-exempt organizations that file Forms 990, 8871, and
8872. IRS does not necessarily have such numbers for other third
parties that might have a relationship with a Section 527 organization,
such as their contributors and recipients of their funds. Appendix VII
describes possible matches with existing data and options for
overcoming challenges, such as ensuring valid matches if organizations
or individuals have similar names.
IRS Has Not Penalized Section 527 Organizations:
Without programs to identify potential nonfilers of the Forms 8871 and
8872 and to identify incomplete or incorrect data on forms that are
filed, IRS has little ability to identify potentially noncompliant
organizations, audit them, and impose any relevant penalties. As a
result, IRS has not imposed any penalties authorized by P.L. 106-230.
According to IRS officials, these penalties could not be imposed
automatically. They said that some staff involvement, such as through
an audit, would be needed to justify any penalties.
Even so, IRS has learned that some organizations might not be filing
the Forms 8871 and 8872 as required and thus could be subject to the
penalties. IRS recently announced that it would not assess taxes,
interest, and penalties against Section 527 organizations that file or
correct earlier filings, if the filings are made by July 15, 2002. On
May 2, 2002, IRS issued a notice[Footnote 25] implementing this program
for filings that were due after July 1, 2000. As a result, missing
forms can be filed and already filed forms could be amended without IRS
taking adverse action against Section 527 organizations.
IRS officials believe that this program is likely to achieve the
congressional goal of maximum disclosure to the public and that the
deadline will ensure public disclosure before 2002 general elections.
Data were not available as this report was being prepared to verify
that the desired disclosures were being achieved. Because IRS has no
systematic means for identifying organizations that do not file
required Section 527 forms, it is not clear how IRS can judge whether
the program succeeds.
Various Factors Contribute to Limited Oversight of Section 527
Organizations:
IRS officials cited several factors for the current limited oversight
of Section 527 organizations. One factor cited is that IRS has only had
responsibility for disclosing data from Forms 8871 and 8872 since July
2000. IRS officials said they first focused on educating Section 527
organizations about their responsibilities under P.L. 106-230 and on
publicly disclosing the data. An IRS official said she attended
meetings--such as FEC events--to speak about the law‘s requirements,
and is planning to continue outreach by publicizing the law‘s
requirements, and required forms to file. Also, IRS is preparing a
publication to distribute on Section 527 organizations as part of its
educational outreach.
In addition, IRS officials said that their resources to address Section
527 organizations‘ compliance have to compete with many other tax-
exempt priorities. Section 527 organizations account for about 1
percent of all exempt organizations.[Footnote 26] In 2001, IRS staffing
for the exempt function totaled 811. These staff are to educate and
guide, process forms, oversee activities, and enforce the law for over
1 million exempt organizations of all types, such as charities, in
addition to Section 527 organizations.
Finally, IRS officials said that checking for compliance with the
filing requirements on paper Forms 8872 would be burdensome, in part,
due to the lack of electronic data. IRS officials said that IRS
transcribes about 20 percent of the Forms 990 data into electronic
format. Unlike for Forms 990, filers can choose to file their Forms
8872 electronically and have done so for about 10 percent of the data
on the Forms 8872 filed. To obtain more electronic data, IRS would have
to transcribe more data from these forms or organizations would have to
be required to file electronically.
As for transcription, IRS officials said that transcribing the data
into an electronic format would be challenging and conflicts with IRS‘s
goal to increase voluntary electronic filing. IRS transcribes data from
other forms, such as the Form 1040 filed by individual taxpayers, into
an electronic format, but such data are predominantly numeric. Most of
the Forms 8872 data is text, such as names and addresses. Transcribing
these types of data generally results in a higher error rate and
requires more costly verification than numeric data. Although not
measured, the cost of transcribing textual data into an electronic
format would be high, according to IRS officials.
As for electronic filing, IRS is developing optional electronic filing
of Forms 990 for all tax-exempt organizations, including Section 527
organizations, which is slated to be available by January 2004.
However, IRS cannot accept electronic Forms 8872 generated by
commercial software. IRS officials said that completing Forms 8872 on
the Web site burdens Section 527 organizations that use such software
to manage contribution and expenditure data. To use the Web site, the
organizations must manually re-enter the data; organizations that do
not use such software would not face an increased burden because they
would manually enter their Forms 8872 data regardless. IRS officials
also said that some Section 527 organizations are reluctant to file
electronically because IRS does not provide proof of filing through a
date-time stamp or e-mail, as FEC does. Although IRS favors the
capability to accept electronic Forms 8872 generated by the software,
it has not identified its resource needs. Even with this capability,
IRS may see a low electronic filing rate. FEC allowed organizations to
electronically file, even with the software packages, but the majority
did not file electronically until Congress mandated it.
IRS Is Starting a Study to Improve Oversight of Section 527
Organizations:
To improve oversight, IRS recently convened a task group to study the
consistency and correctness of data reported on Forms 8871 and 8872 by
Section 527 organizations. The task force will study known areas of
noncompliance by auditing random samples of filed forms, such as Forms
8871 and 8872. The study will focus on whether the filed forms complied
with the requirements and whether contributors and contributions are
properly reported on Forms 8872. According to an IRS official, the
study might look at those not filing the required forms with IRS, but
not until IRS develops a reliable means to identify nonfilers. The
study is expected to begin in summer 2002 and take 6 months or longer
to finish. IRS expects the results of the study to provide insights on
the amount and types of oversight needed.
IRS Planning for New Responsibilities Not Adhering to Accepted
Principles:
IRS has not developed a strategic plan to carry out its Section 527
responsibilities. The principles for strategic planning are articulated
in GPRA and IRS‘s strategic planning process, which call for planning
that (1) defines the results to be achieved over several years, (2)
outlines
the strategy and necessary resources to achieve the intended results,
and (3) establishes measures that will be used to assess progress in
achieving intended results. Although GPRA and IRS‘s strategic planning
process address planning at levels higher than specific programs, such
as Section 527 responsibilities, their principles are useful for
managing at the program level. IRS has a plan for tax-exempt activities
overall and has initiatives planned to address specific Section 527
issues, but IRS has not defined what type and amount of disclosure and
oversight it intends to provide, how it would achieve such disclosure
and oversight levels, and how it would measure progress. The importance
of following accepted planning principles is heightened by the recent
passage of campaign finance reform legislation.
IRS Plans Do Not Define Future Results To Be Achieved:
Planning principles in GPRA and incorporated into IRS‘s Strategic
Planning, Budgeting, and Performance Management process call for
agencies to define the results they are attempting to achieve,
generally over several years. This approach is intended to ensure that
agencies have thought through how their activities and initiatives
contribute to a meaningful result that was intended. Furthermore, GPRA
and IRS‘s strategic planning process call for managers to develop a
strategy for achieving the results they have defined for their programs
and to assess the types and amounts of resources they will need to
carry out the strategy. Finally, GPRA‘s and IRS‘s processes call for
managers to develop measures they will use to assess progress in
achieving results. Although GPRA applies at a department or agency
level and IRS‘s strategic planning process applies at the operating
unit level, such as a division within IRS, the planning principles can
be applied at a specific program level, such as planning for how IRS
will execute its responsibilities related to Section 527 organizations.
Although planning is an ongoing management responsibility, the
assumption of new duties, like those IRS has for Section 527
organizations, should trigger such planning. IRS‘s Management Controls
Accountability Program: MCAP Handbook for Managers (Feb. 23, 2001)
notes that assumption of a new responsibility, organization, or program
should cause a manager to review the management controls to administer
the program. The handbook defines a significant control deficiency to
include situations that ’may deprive the public of needed services.“ If
a review identifies significant deficiencies, the guidance calls for a
corrective action plan. A corrective action plan is to include all
actions, listed chronologically and including those completed, needed
to correct a deficiency. The plan is to be updated to reflect revised
or actual completion dates.
Neither IRS‘s plan for tax-exempt activities nor the specific
initiatives IRS is planning to improve its disclosure and oversight
activities define what level of disclosure and oversight it hopes to
achieve, how it will achieve those levels of performance, and how
progress will be measured for Section 527 organizations. For example,
this IRS plan focuses on activities, such as audits, for all types of
tax-exempt organizations. The plan specifies, for instance, the number
of employees to be assigned to each activity, the number of actions
(e.g., audits) to be done, how long such actions take, the quality of
work to be achieved and the satisfaction of tax-exempt organizations
and of IRS employees.
Although the plan provides an understanding of what IRS intends to do
with its staff and other resources, the plan provides little basis for
understanding longer-range results IRS intends to achieve for Section
527 organizations. It does not, for instance, indicate whether, how,
and when IRS plans to provide electronically searchable Section 527
data. The plan also does not provide goals for improving the compliance
levels of Section 527 organizations. In short, the plan does not
provide a vision for the level of service to provide to the public
relative to Section 527 organizations or a clear strategy that
identifies the results desired, the steps and resources to be used in
achieving results, or measures to gauge success in meeting its Section
527 responsibilities.
IRS officials said that the exempt organization function operates with
resource constraints that require difficult choices due to competing
priorities. Following planning principles like those in GPRA and IRS‘s
own processes can enable IRS to provide decision makers within IRS, the
executive branch, and Congress with a more informed basis for
prioritizing and allocating resources for Section 527 responsibilities
based on a clearer understanding of expected accomplishments if
identified resources are provided.
In the absence of an overall plan for the levels of disclosure and
oversight of Section 527 organizations, IRS has begun to develop
initiatives that could improve some aspects of the services it provides
or that could develop data to use as a baseline in determining
additional efforts it should undertake to, for instance, improve
Section 527 organizations‘ compliance. Although these initiatives may
individually be useful, in the absence of an overall definition of what
IRS intends to accomplish, it is difficult to determine how the
initiatives move IRS forward or how they align with IRS‘s goals.
For example, IRS has begun an initiative to disclose Forms 990 data
from Section 527 organizations on its 527 disclosure Web site but the
data will be not be disclosed in an electronically searchable format,
which public users said they need. IRS officials said that they would
like to increase searchable and downloadable data on the Section 527
disclosure Web site. However, IRS has not developed a plan or estimated
the resources needed to do so. When asked the cost of one option--
keypunching data from paper Forms 8872--officials said that they did
not estimate the costs because the option was not consistent with IRS‘s
desire to increase voluntary electronic filing by Section 527
organizations. These officials could not tell us when and how IRS would
begin efforts or what resources IRS would need to increase voluntary
electronic filing of Forms 8872.
In addition, it is not clear how this initiative aligns with one of
IRS‘s agencywide strategic goals--to provide ’top-quality service to
each taxpayer in every interaction.“ IRS‘s goal states that ’the
ultimate measure of success in [this] first strategic goal is whether
or not our customers believe we are meeting their expectations.“ IRS
cannot know how its public users would judge its initiative to disclose
Form 990 information on its Web site because IRS has not identified
public users and their needs and has no plans to do so.
Recent Actions Could Heighten Need for Results-Oriented Planning:
The need for IRS to develop a strategic plan to address its Section 527
responsibilities could be heightened by recent actions. For example, it
is not clear how IRS‘s initiative to suspend penalties for Section 527
organizations that have not filed correct, complete, or timely forms
will be coupled with other efforts to ensure that acceptable compliance
levels are achieved and maintained. Even after the notice announcing
the penalty suspension was publicly released in May 2002, IRS officials
could not provide written plans for this initiative, including how it
would deal with a possible increased workload of filed forms, would
educate organizations about their filing requirements, or would monitor
and enforce filing compliance after July 15, 2002, so that suspensions
of penalties will not again be needed.
Similarly, the Bipartisan Campaign Reform Act of 2002 (P.L. 107-155)
could affect disclosure and oversight responsibilities for Section 527
organizations, heightening the need for IRS planning to meet its
responsibilities.[Footnote 27] The law could change how these
organizations report to FEC or IRS, and how these agencies disclose
reported data and oversee Section 527 organizations. With such changes,
IRS would have a greater need to ensure that its oversight allows quick
identification of nonfilers, late filers, and those no longer needing
to file. Appendix VI describes areas of the law that could affect IRS.
Conclusions:
Effective public disclosure of data on the activities of Section 527
organizations can enable the public to make more informed choices when
voting. These organizations, however, may exist for brief periods
preceding elections, or concentrate their activities during such brief
periods. Congress created reporting and disclosure requirements for
Section 527 organizations that can provide the public with timely data
before elections.
IRS developed a Web site to disclose reported data. However, the Web
site has shortcomings that inhibit the public‘s ability to access and
understand the disclosed data in a timely manner. Among these
shortcomings, the lack of electronically searchable and downloadable
data challenges the public in quickly accessing data about Section 527
organizations. Although IRS‘s goal is to provide top-quality service to
each taxpayer in every interaction, IRS has not identified public users
of the Section 527 disclosure site and their needs.
Enhanced Web site features would be of limited value unless Section 527
organizations file timely, complete, and correct forms as required.
Discrepancies between the number of Section 527 organizations that have
reported their formation to IRS and reported subsequent activities
suggest that many Section 527 organizations are not filing timely, as
required. Furthermore, IRS‘s oversight provides little assurance that
Section 527 organizations comply with the law. IRS was sufficiently
concerned about possible noncompliance that it announced in May 2002 a
waiver of penalties to encourage noncompliant Section 527 organizations
to comply before July 15, 2002.
Although IRS officials acknowledge that the Section 527 Web site and
its oversight practices could be improved, they have not defined the
levels of disclosure and oversight to be obtained over time, developed
a strategy to achieve those results, and identified the resources to
execute it. Such results-oriented planning would adhere to principles
articulated in statutory guidance and IRS‘s Strategic Planning,
Budgeting, and Performance Management Process. Such a plan would also
provide decision makers within the executive branch and Congress a more
informed basis to determine the priority to give to IRS‘s Section 527
responsibilities as well as related amounts and types of resources. IRS
officials face many challenges in attaining higher levels of disclosure
and oversight that may limit what can be achieved over a given time.
These issues should be taken into consideration in developing a
results-oriented plan for IRS‘s Section 527 responsibilities.
Recommendations for Executive Action:
To improve public disclosure of data filed by Section 527 organizations
and IRS‘s oversight of their compliance with P.L. 106-230, we recommend
that the Commissioner of Internal Revenue develop results-oriented
plans, including timeframes and resources needed, for:
* improving the usability of the disclosure Web site after consulting
with the full range of users of the data;
* overseeing whether Section 527 organizations fulfill their filing
requirements; and:
* increasing the availability of electronic data on Section 527
organizations to improve the public accessibility of disclosed data as
well as to support IRS‘s oversight efforts.
Agency Comments and Our Evaluation:
We obtained written comments from the IRS Commissioner on a draft of
this report. (See app. VIII). IRS agreed with our recommendation on
developing results-oriented plans to oversee whether Section 527
organizations fulfill their filing requirements. IRS said that it will
increase such oversight now that it has developed the filing system,
educated the organizations, and provided a last chance to comply with
the requirements.
IRS‘s written comments took no position on our recommendations to
develop results-oriented plans to improve the disclosure Web site and
to increase the availability of electronic data. IRS officials told us
that they need more time to develop specific positions on the degree
and method for implementing these recommendations. Even so, IRS
generally agreed that improving the usability of its disclosure Web
site and increasing the availability of electronic data would be useful
to the public and helpful to IRS enforcement. However, IRS said that
such actions face competing resource priorities in its budget
allocation process. IRS‘s agreement that improvement in these areas is
needed is encouraging. We continue to believe that results-oriented
plans to do so are the appropriate foundation to ensure that IRS has a
well-thought out strategy and a supportable basis for determining how
many and what type of resources will be needed. Such plans would
provide decision makers a basis to make informed judgments about the
priority to give to IRS‘s Section 527 responsibilities and what level
of budgetary support to allocate to them.
IRS also provided comments to expand on points that we raised in our
report. Because these comments emphasized or expanded on material in
the report, we made no changes to our report based on these comments.
In general, these comments expanded on our discussion about the speed
in which IRS met the challenges of creating systems for filing and
disclosing data about Section 527 organizations, the barriers to
obtaining Section 527 data in an electronic format, and efforts to
improve the filing compliance of Section 527 organizations as well as
IRS‘s oversight. For example, although our report describes what the
law required and what IRS did in creating the Section 527 forms and Web
site, IRS said that our report understated the steps necessary to
implement the law and the difficult challenges IRS faced. IRS
elaborated on its initial effort to implement the law and noted that
disclosures on the Web site go beyond what the law required, which our
report acknowledges by describing that IRS posts more information to
the Web site than the law requires.
In addition, IRS said that our report should make clear that unlike the
statutory penalties for late filing of the Form 1120-POL and Form 990,
no late filing penalties exist for the Form 8871 or 8872. For example,
IRS said that if an organization files a late or incomplete Form 8871,
it does not incur a penalty but rather must recalculate its taxable
income or have IRS do so. A similar provision applies for organizations
that do not file Forms 8872 in the time and manner required. IRS did
not dispute that it has not recalculated any Section 527 organizations‘
taxes under the provisions of P.L. 106-230 that authorize it do so.
Although we agree that the ’penalty“ for late or incomplete filing does
not have the same characteristics as the penalties for late filing of
Forms 1120-POL or 990, we believe we are correct in indicating that
having to pay tax on what had previously been tax-exempt income is a
penalty for noncompliance with the requirement to file timely, complete
and correct Forms 8871 and 8872. P.L. 106-230 refers to the requirement
that taxes be paid on previously tax-exempt income for failure to
properly file Forms 8872 as a penalty, although it does not label the
provision on failure to properly file Forms 8871 as a penalty. We
describe the penalty structure in the report and made no changes based
on IRS‘s comments.
We also received oral comments from IRS officials on technical aspects
of the report. Similarly, FEC officials provided some technical
comments. In both cases, we made changes on the basis of these comments
where appropriate.
As we agreed with your office, unless you publicly announce the
contents of this report earlier, we will make no further distribution
of this report until 30 days from the report date. At that time, we
will send copies of this report to the Ranking Minority Member, House
Committee on Ways and Means, Commissioner of Internal Revenue,
Secretary of the Treasury, Chairman, Federal Election Commission,
Director, Office of Management and Budget, and other interested
parties. In addition, the report will be available at no charge on the
GAO Web site at http://www.gao.gov. If you have questions, please call
me on (202) 512-9110. Key contributors to this report are listed in
appendix IX.
Sincerely yours,
Michael Brostek
Director, Tax Issues:
Signed by Michael Brostek:
[End of section]
Appendix I: Political Activity and Section 527 Organizations:
Section 527 of the tax code has allowed the formation of tax-exempt
political organizations.[Footnote 28] Such organizations that collect
contributions and make expenditures to directly influence elections of
candidates are to register and file reports with the Federal Election
Commission (FEC) once they meet the Federal Election Campaign Act‘s
(FECA) definition of ’political committee.“ Political committees
established by corporations and unions must register when they form
while other political organizations must register when their
contributions or expenditures exceed $1,000 in a calendar year. Once
registered, the political organizations are to report their receipts
and disbursements to FEC, which discloses the data to the public and
oversees the organizations.
In private letter rulings since 1996,[Footnote 29] the Internal Revenue
Service (IRS) has clarified the political activities allowable under
Section 527. The letter rulings interpreted the law as allowing tax-
exempt organizations to collect contributions and make expenditures to
indirectly influence the election of candidates through issue advocacy.
Such organizations have sponsored advertisements that support or oppose
a candidate‘s position on an issue without expressly advocating the
election or defeat of that candidate. Tax-exempt organizations engaging
only in these types of issue ads are generally not subject to FECA, and
until July 2000, not required to report their activities to a federal
agency or publicly disclose data under federal law.
Public disclosure of data about Section 527 organizations involved in
issue advocacy allows voters to see the contributions to and
expenditures of these organizations. P.L. 106-230 created a federal
source of public data at IRS on Section 527 organizations at local,
state, and federal levels.[Footnote 30] Even so, identifying all
individuals or groups that seek to influence an issue can be difficult
because of complex relationships. Section 527 organizations can make
contributions to each other and between federal and state levels,
creating a web of relationships among the organizations.
Other types of tax-exempt organizations may conduct political
activities if the political activities are secondary to their tax-
exempt activities. Table 3 shows four types of tax-exempt organizations
that may engage in political activities and the allowable activities.
Table 3: Allowable Political Activities of Section 501(c)(3-6) Tax-
Exempt Organizations:
Type of tax-exemption: 501(c)(3); Type of organization: Charity;
Allowable political activities: Educational advocacy[A] and limited
legislative advocacy[B].
Type of tax-exemption: 501(c)(4); Type of organization: Social welfare;
Allowable political activities: Educational and legislative advocacy
and limited electioneering[C].
Type of tax-exemption: 501(c)(5); Type of organization: Labor,
agricultural, or horticultural; Allowable political activities: Same.
Type of tax-exemption: 501(c)(6); Type of organization: Business
league; Allowable political activities: Same.
[A] Educational advocacy is aimed at educating the public about an
issue. :
[B] Legislative advocacy is aimed at influencing the public to support
or oppose specific legislation.
[C] Electioneering is aimed at influencing a political campaign such as
influencing voters to vote for or against a particular candidate.
Source: IRS officials and GAO analysis.
[End of table]
With the exception of charities, tax-exempt organizations can choose
among three ways to manage the funds for political activities: (1) keep
such activities within the organizational budget if that activity is
secondary to its exempt purpose, (2) create a separate bank account
called a separate segregated fund (SSF) within its organization, or (3)
establish a distinct but related Section 527 organization. Charities
may not create a related Section 527 organization.
In a 1996 letter ruling, IRS said that it considered a SSF to be a tax-
exempt Section 527 organization. According to IRS officials, Section
527(f) encouraged Section 501(c)(4-6) organizations to create SSFs or
Section 527 organizations instead of keeping their political activities
within the organization and paying tax on the money flowing through for
political activities. IRS officials said that P.L. 106-230 created an
incentive to push the political activities back within the Section
501(c)(4-6) organizations to avoid the disclosure requirements of P.L.
106-230.
[End of section]
Appendix II: IRS Forms Mentioned in Report:
According to IRS, political organizations that have tax-exempt status
under Section 527 of the Internal Revenue Code must file some or all of
the four forms listed in Table 4. The requirements for filing these
forms apply to political organizations that are exempt from federal
income tax provisions, and receive or expect to receive $25,000 or more
in gross receipts in any taxable year.
Table 4: Filing Requirements for Section 527 Organizations:
If a Section 527 organization is: Federal candidate committee,
political party committee, or PAC required to report to FEC; That
organization is to file: Form 1120-POL and Form 990 or Form 990-EZ.
If a Section 527 organization is: State or local candidate committee or
state or local committee of a political party; That organization is to
file: Form 8871, Form 1120-POL, and Form 990 or Form 990-EZ.
If a Section 527 organization is: Any other political organization,
including state or local PACs and federal political organizations that
are not required to report to FEC; That organization is to file: Form
8871, Form 8872, Form 1120-POL, and Form 990 or Form 990-EZ.
Note: A political organization that does not seek tax-exempt status or
a tax-exempt political organization that does not have gross receipts
of at least $25,000 but receives more than $100 in taxable income in
any taxable year is still to file a Form 1120-POL.
Source: IRS Fact Sheet 2002-11, May 2002.
[End of table]
The following pages show the forms used by Section 527 organizations.
[See PDF for image]
[End of section]
Appendix III: Data About Section 501(c)(3-6) Organizations:
Table 5: Number of Section 501(c) Tax-Exempt Organizations, Fiscal
Years 1995-2001:
Type of tax-exempt entity[A]: 501(c)3; FY1995: 626,226; FY1996:
654,186; FY1997: 692,524; FY1998: 733,790; FY1999: 773,934; FY2000:
819,008; : 865,096.
Type of tax-exempt entity[A]: 501(c)4; FY1995: 139,451; FY1996:
139,512; FY1997: 141,776; FY1998: 139,533; FY1999: 138,927; FY2000:
137,037; : 136,882.
Type of tax-exempt entity[A]: 501(c)5; FY1995: 66,662; FY1996: 64,955;
FY1997: 64,902; FY1998: 64,804; FY1999: 63,716; FY2000: 63,456; :
62,944.
Type of tax-exempt entity[A]: 501(c)6; FY1995: 75,695; FY1996: 77,274;
FY1997: 78,406; FY1998: 79,864; FY1999: 81,493; FY2000: 82,246; :
82,706.
Type of tax-exempt entity[A]: All other 501(c)[B]; FY1995: 256,755;
FY1996: 252,583; FY1997: 252,686; FY1998: 253,751; FY1999: 354,577;
FY2000: 252,656; : 251,930.
[A] Because IRS has not identified how many Section 501(c)
organizations have ceased activity, the number of organizations that
are currently active is likely to be overstated. The Treasury Inspector
General for Tax Administration has recommended that IRS take steps to
improve such data.
[B] ’Other“ refers to Section 501(c)(1-27) except 3, 4, 5, and 6.
Source: IRS Annual Data Books, 1995-2002.
[End of table]
Table 6: Disposition of Applications for Section 501(c)(3-6) Tax
Exemption Status, Fiscal Years 1995-2001:
Disposition by fiscal year: Approved; Type of Section 501(c)
organization: 501(c)(3): FY1995: 42,324; Type of Section 501(c)
organization: 501(c)(4): FY1995: 1,717; Type of Section 501(c)
organization: 501(c)(5): FY1995: 341; Type of Section 501(c)
organization: 501(c)(6): FY1995: 2,003; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 2,175; Type of
Section 501(c) organization: Total: FY1995: 48,560.
Disposition by fiscal year: % Approved[B]; Type of Section 501(c)
organization: 501(c)(3): FY1995: 75.0%; Type of Section 501(c)
organization: 501(c)(4): FY1995: 75.2%; Type of Section 501(c)
organization: 501(c)(5): FY1995: 78.9%; Type of Section 501(c)
organization: 501(c)(6): FY1995: 80.4%; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 70.0%; Type of
Section 501(c) organization: Total: FY1995: 75.0%.
Disposition by fiscal year: Denied; Type of Section 501(c)
organization: 501(c)(3): FY1995: 377; Type of Section 501(c)
organization: 501(c)(4): FY1995: 27; Type of Section 501(c)
organization: 501(c)(5): FY1995: 4; Type of Section 501(c)
organization: 501(c)(6): FY1995: 35; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 27; Type of
Section 501(c) organization: Total: FY1995: 470.
Disposition by fiscal year: Approved/Deny Ratio[C]; Type of Section
501(c) organization: 501(c)(3): FY1995: 112.3; Type of Section 501(c)
organization: 501(c)(4): FY1995: 63.6; Type of Section 501(c)
organization: 501(c)(5): FY1995: 85.3; Type of Section 501(c)
organization: 501(c)(6): FY1995: 57.2; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 80.6; Type of
Section 501(c) organization: Total: FY1995: 103.3.
Disposition by fiscal year: Other[D]; Type of Section 501(c)
organization: 501(c)(3): FY1995: 13,707; Type of Section 501(c)
organization: 501(c)(4): FY1995: 538; Type of Section 501(c)
organization: 501(c)(5): FY1995: 87; Type of Section 501(c)
organization: 501(c)(6): FY1995: 454; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 907; Type of
Section 501(c) organization: Total: FY1995: 15,693.
Disposition by fiscal year: Total; Type of Section 501(c) organization:
501(c)(3): FY1995: 56,408; Type of Section 501(c) organization:
501(c)(4): FY1995: 2,282; Type of Section 501(c) organization:
501(c)(5): FY1995: 432; Type of Section 501(c) organization: 501(c)(6):
FY1995: 2,492; Type of Section 501(c) organization: All other 501(c)
organizations[A]: FY1995: 3,109; Type of Section 501(c) organization:
Total: FY1995: 64,723.
Disposition by fiscal year: FY1996; Type of Section 501(c)
organization: 501(c)(3): FY1995: [Empty]; Type of Section 501(c)
organization: 501(c)(4): FY1995: [Empty]; Type of Section 501(c)
organization: 501(c)(5): FY1995: [Empty]; Type of Section 501(c)
organization: 501(c)(6): FY1995: [Empty]; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: [Empty]; Type
of Section 501(c) organization: Total: FY1995: [Empty].
Disposition by fiscal year: Approved; Type of Section 501(c)
organization: 501(c)(3): FY1995: 40,978; Type of Section 501(c)
organization: 501(c)(4): FY1995: 1,648; Type of Section 501(c)
organization: 501(c)(5): FY1995: 313; Type of Section 501(c)
organization: 501(c)(6): FY1995: 1,909; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 1,913; Type of
Section 501(c) organization: Total: FY1995: 46,761.
Disposition by fiscal year: % Approved[B]; Type of Section 501(c)
organization: 501(c)(3): FY1995: 71.2%; Type of Section 501(c)
organization: 501(c)(4): FY1995: 72.2%; Type of Section 501(c)
organization: 501(c)(5): FY1995: 78.4%; Type of Section 501(c)
organization: 501(c)(6): FY1995: 80.1%; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 65.9%; Type of
Section 501(c) organization: Total: FY1995: 71.4%.
Disposition by fiscal year: Denied; Type of Section 501(c)
organization: 501(c)(3): FY1995: 342; Type of Section 501(c)
organization: 501(c)(4): FY1995: 32; Type of Section 501(c)
organization: 501(c)(5): FY1995: 0; Type of Section 501(c)
organization: 501(c)(6): FY1995: 25; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 20; Type of
Section 501(c) organization: Total: FY1995: 419.
Disposition by fiscal year: Approved/Deny Ratio[C]; Type of Section
501(c) organization: 501(c)(3): FY1995: 119.8; Type of Section 501(c)
organization: 501(c)(4): FY1995: 51.5; Type of Section 501(c)
organization: 501(c)(5): FY1995: 313.0; Type of Section 501(c)
organization: 501(c)(6): FY1995: 76.4; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 95.7; Type of
Section 501(c) organization: Total: FY1995: 111.6.
Disposition by fiscal year: Other[D]; Type of Section 501(c)
organization: 501(c)(3): FY1995: 16,217; Type of Section 501(c)
organization: 501(c)(4): FY1995: 602; Type of Section 501(c)
organization: 501(c)(5): FY1995: 86; Type of Section 501(c)
organization: 501(c)(6): FY1995: 450; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 968; Type of
Section 501(c) organization: Total: FY1995: 18,323.
Disposition by fiscal year: Total; Type of Section 501(c) organization:
501(c)(3): FY1995: 57,537; Type of Section 501(c) organization:
501(c)(4): FY1995: 2,282; Type of Section 501(c) organization:
501(c)(5): FY1995: 399; Type of Section 501(c) organization: 501(c)(6):
FY1995: 2,384; Type of Section 501(c) organization: All other 501(c)
organizations[A]: FY1995: 2,901; Type of Section 501(c) organization:
Total: FY1995: 65,503.
Disposition by fiscal year: FY1997; Type of Section 501(c)
organization: 501(c)(3): FY1995: [Empty]; Type of Section 501(c)
organization: 501(c)(4): FY1995: [Empty]; Type of Section 501(c)
organization: 501(c)(5): FY1995: [Empty]; Type of Section 501(c)
organization: 501(c)(6): FY1995: [Empty]; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: [Empty]; Type
of Section 501(c) organization: Total: FY1995: [Empty].
Disposition by fiscal year: Approved; Type of Section 501(c)
organization: 501(c)(3): FY1995: 47,015; Type of Section 501(c)
organization: 501(c)(4): FY1995: 1,535; Type of Section 501(c)
organization: 501(c)(5): FY1995: 336; Type of Section 501(c)
organization: 501(c)(6): FY1995: 1,803; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 2,068; Type of
Section 501(c) organization: Total: FY1995: 52,757.
Disposition by fiscal year: % Approved[B]; Type of Section 501(c)
organization: 501(c)(3): FY1995: 72.3%; Type of Section 501(c)
organization: 501(c)(4): FY1995: 67.3%; Type of Section 501(c)
organization: 501(c)(5): FY1995: 76.9%; Type of Section 501(c)
organization: 501(c)(6): FY1995: 78.1%; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 64.1%; Type of
Section 501(c) organization: Total: FY1995: 72.0%.
Disposition by fiscal year: Denied; Type of Section 501(c)
organization: 501(c)(3): FY1995: 226; Type of Section 501(c)
organization: 501(c)(4): FY1995: 21; Type of Section 501(c)
organization: 501(c)(5): FY1995: 3; Type of Section 501(c)
organization: 501(c)(6): FY1995: 23; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 26; Type of
Section 501(c) organization: Total: FY1995: 299.
Disposition by fiscal year: Approved/Deny Ratio[C]; Type of Section
501(c) organization: 501(c)(3): FY1995: 208.0; Type of Section 501(c)
organization: 501(c)(4): FY1995: 73.1; Type of Section 501(c)
organization: 501(c)(5): FY1995: 112.0; Type of Section 501(c)
organization: 501(c)(6): FY1995: 78.4; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 79.5; Type of
Section 501(c) organization: Total: FY1995: 176.4.
Disposition by fiscal year: Other[D]; Type of Section 501(c)
organization: 501(c)(3): FY1995: 17,761; Type of Section 501(c)
organization: 501(c)(4): FY1995: 726; Type of Section 501(c)
organization: 501(c)(5): FY1995: 98; Type of Section 501(c)
organization: 501(c)(6): FY1995: 483; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 1,133; Type of
Section 501(c) organization: Total: FY1995: 20,201.
Disposition by fiscal year: Total; Type of Section 501(c) organization:
501(c)(3): FY1995: 65,002; Type of Section 501(c) organization:
501(c)(4): FY1995: 2,282; Type of Section 501(c) organization:
501(c)(5): FY1995: 437; Type of Section 501(c) organization: 501(c)(6):
FY1995: 2,309; Type of Section 501(c) organization: All other 501(c)
organizations[A]: FY1995: 3,227; Type of Section 501(c) organization:
Total: FY1995: 73,257.
Disposition by fiscal year: FY1998; Type of Section 501(c)
organization: 501(c)(3): FY1995: [Empty]; Type of Section 501(c)
organization: 501(c)(4): FY1995: [Empty]; Type of Section 501(c)
organization: 501(c)(5): FY1995: [Empty]; Type of Section 501(c)
organization: 501(c)(6): FY1995: [Empty]; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: [Empty]; Type
of Section 501(c) organization: Total: FY1995: [Empty].
Disposition by fiscal year: Approved; Type of Section 501(c)
organization: 501(c)(3): FY1995: 51,329; Type of Section 501(c)
organization: 501(c)(4): FY1995: 1,696; Type of Section 501(c)
organization: 501(c)(5): FY1995: 265; Type of Section 501(c)
organization: 501(c)(6): FY1995: 1,694; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 1,977; Type of
Section 501(c) organization: Total: FY1995: 56,961.
Disposition by fiscal year: % Approved[B]; Type of Section 501(c)
organization: 501(c)(3): FY1995: 74.6%; Type of Section 501(c)
organization: 501(c)(4): FY1995: 70.3%; Type of Section 501(c)
organization: 501(c)(5): FY1995: 74.2%; Type of Section 501(c)
organization: 501(c)(6): FY1995: 80.0%; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 65.0%; Type of
Section 501(c) organization: Total: FY1995: 74.2%.
Disposition by fiscal year: Denied; Type of Section 501(c)
organization: 501(c)(3): FY1995: 382; Type of Section 501(c)
organization: 501(c)(4): FY1995: 15; Type of Section 501(c)
organization: 501(c)(5): FY1995: 2; Type of Section 501(c)
organization: 501(c)(6): FY1995: 14; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 13; Type of
Section 501(c) organization: Total: FY1995: 426.
Disposition by fiscal year: Approved/Deny Ratio[C]; Type of Section
501(c) organization: 501(c)(3): FY1995: 134.4; Type of Section 501(c)
organization: 501(c)(4): FY1995: 113.1; Type of Section 501(c)
organization: 501(c)(5): FY1995: 132.5; Type of Section 501(c)
organization: 501(c)(6): FY1995: 121.0; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 152.1; Type of
Section 501(c) organization: Total: FY1995: 133.7.
Disposition by fiscal year: Other[D]; Type of Section 501(c)
organization: 501(c)(3): FY1995: 17,085; Type of Section 501(c)
organization: 501(c)(4): FY1995: 700; Type of Section 501(c)
organization: 501(c)(5): FY1995: 90; Type of Section 501(c)
organization: 501(c)(6): FY1995: 409; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 1,052; Type of
Section 501(c) organization: Total: FY1995: 19,336.
Disposition by fiscal year: Total; Type of Section 501(c) organization:
501(c)(3): FY1995: 68,796; Type of Section 501(c) organization:
501(c)(4): FY1995: 2,411; Type of Section 501(c) organization:
501(c)(5): FY1995: 357; Type of Section 501(c) organization: 501(c)(6):
FY1995: 2,117; Type of Section 501(c) organization: All other 501(c)
organizations[A]: FY1995: 3,042; Type of Section 501(c) organization:
Total: FY1995: 76,723.
Disposition by fiscal year: FY1999; Type of Section 501(c)
organization: 501(c)(3): FY1995: [Empty]; Type of Section 501(c)
organization: 501(c)(4): FY1995: [Empty]; Type of Section 501(c)
organization: 501(c)(5): FY1995: [Empty]; Type of Section 501(c)
organization: 501(c)(6): FY1995: [Empty]; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: [Empty]; Type
of Section 501(c) organization: Total: FY1995: [Empty].
Disposition by fiscal year: Approved; Type of Section 501(c)
organization: 501(c)(3): FY1995: 52,773; Type of Section 501(c)
organization: 501(c)(4): FY1995: 1,500; Type of Section 501(c)
organization: 501(c)(5): FY1995: 333; Type of Section 501(c)
organization: 501(c)(6): FY1995: 1,635; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 1,897; Type of
Section 501(c) organization: Total: FY1995: 58,138.
Disposition by fiscal year: % Approved[B]; Type of Section 501(c)
organization: 501(c)(3): FY1995: 81.1%; Type of Section 501(c)
organization: 501(c)(4): FY1995: 73.4%; Type of Section 501(c)
organization: 501(c)(5): FY1995: 81.2%; Type of Section 501(c)
organization: 501(c)(6): FY1995: 84.8%; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 69.7%; Type of
Section 501(c) organization: Total: FY1995: 80.6%.
Disposition by fiscal year: Denied; Type of Section 501(c)
organization: 501(c)(3): FY1995: 447; Type of Section 501(c)
organization: 501(c)(4): FY1995: 4; Type of Section 501(c)
organization: 501(c)(5): FY1995: 0; Type of Section 501(c)
organization: 501(c)(6): FY1995: 10; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 9; Type of
Section 501(c) organization: Total: FY1995: 470.
Disposition by fiscal year: Approved/Deny Ratio[C]; Type of Section
501(c) organization: 501(c)(3): FY1995: 118.1; Type of Section 501(c)
organization: 501(c)(4): FY1995: 375.0; Type of Section 501(c)
organization: 501(c)(5): FY1995: 333.0; Type of Section 501(c)
organization: 501(c)(6): FY1995: 163.5; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 210.8; Type of
Section 501(c) organization: Total: FY1995: 123.7.
Disposition by fiscal year: Other[D]; Type of Section 501(c)
organization: 501(c)(3): FY1995: 11,838; Type of Section 501(c)
organization: 501(c)(4): FY1995: 539; Type of Section 501(c)
organization: 501(c)(5): FY1995: 77; Type of Section 501(c)
organization: 501(c)(6): FY1995: 284; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 815; Type of
Section 501(c) organization: Total: FY1995: 13,553.
Disposition by fiscal year: Total; Type of Section 501(c) organization:
501(c)(3): FY1995: 65,058; Type of Section 501(c) organization:
501(c)(4): FY1995: 2,043; Type of Section 501(c) organization:
501(c)(5): FY1995: 410; Type of Section 501(c) organization: 501(c)(6):
FY1995: 1,929; Type of Section 501(c) organization: All other 501(c)
organizations[A]: FY1995: 2,721; Type of Section 501(c) organization:
Total: FY1995: 72,161.
Disposition by fiscal year: FY2000; Type of Section 501(c)
organization: 501(c)(3): FY1995: [Empty]; Type of Section 501(c)
organization: 501(c)(4): FY1995: [Empty]; Type of Section 501(c)
organization: 501(c)(5): FY1995: [Empty]; Type of Section 501(c)
organization: 501(c)(6): FY1995: [Empty]; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: [Empty]; Type
of Section 501(c) organization: Total: FY1995: [Empty].
Disposition by fiscal year: Approved; Type of Section 501(c)
organization: 501(c)(3): FY1995: 61,005; Type of Section 501(c)
organization: 501(c)(4): FY1995: 1,681; Type of Section 501(c)
organization: 501(c)(5): FY1995: 468; Type of Section 501(c)
organization: 501(c)(6): FY1995: 1,718; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 2,362; Type of
Section 501(c) organization: Total: FY1995: 67,234.
Disposition by fiscal year: %Approved[B]; Type of Section 501(c)
organization: 501(c)(3): FY1995: 81.8%; Type of Section 501(c)
organization: 501(c)(4): FY1995: 72.7%; Type of Section 501(c)
organization: 501(c)(5): FY1995: 84.5%; Type of Section 501(c)
organization: 501(c)(6): FY1995: 84.5%; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 73.3%; Type of
Section 501(c) organization: Total: FY1995: 81.3%.
Disposition by fiscal year: Denied; Type of Section 501(c)
organization: 501(c)(3): FY1995: 456; Type of Section 501(c)
organization: 501(c)(4): FY1995: 9; Type of Section 501(c)
organization: 501(c)(5): FY1995: 0; Type of Section 501(c)
organization: 501(c)(6): FY1995: 8; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 9; Type of
Section 501(c) organization: Total: FY1995: 482.
Disposition by fiscal year: Approved/Deny Ratio[C]; Type of Section
501(c) organization: 501(c)(3): FY1995: 133.8; Type of Section 501(c)
organization: 501(c)(4): FY1995: 186.8; Type of Section 501(c)
organization: 501(c)(5): FY1995: 468.0; Type of Section 501(c)
organization: 501(c)(6): FY1995: 214.8; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 262.4; Type of
Section 501(c) organization: Total: FY1995: 139.5.
Disposition by fiscal year: Other[D]; Type of Section 501(c)
organization: 501(c)(3): FY1995: 13,073; Type of Section 501(c)
organization: 501(c)(4): FY1995: 622; Type of Section 501(c)
organization: 501(c)(5): FY1995: 86; Type of Section 501(c)
organization: 501(c)(6): FY1995: 307; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 850; Type of
Section 501(c) organization: Total: FY1995: 14,938.
Disposition by fiscal year: Total; Type of Section 501(c) organization:
501(c)(3): FY1995: 74,534; Type of Section 501(c) organization:
501(c)(4): FY1995: 2,312; Type of Section 501(c) organization:
501(c)(5): FY1995: 554; Type of Section 501(c) organization: 501(c)(6):
FY1995: 2,033; Type of Section 501(c) organization: All other 501(c)
organizations[A]: FY1995: 3,221; Type of Section 501(c) organization:
Total: FY1995: 82,654.
Disposition by fiscal year: FY2001; Type of Section 501(c)
organization: 501(c)(3): FY1995: [Empty]; Type of Section 501(c)
organization: 501(c)(4): FY1995: [Empty]; Type of Section 501(c)
organization: 501(c)(5): FY1995: [Empty]; Type of Section 501(c)
organization: 501(c)(6): FY1995: [Empty]; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: [Empty]; Type
of Section 501(c) organization: Total: FY1995: [Empty].
Disposition by fiscal year: Approved; Type of Section 501(c)
organization: 501(c)(3): FY1995: 59,909; Type of Section 501(c)
organization: 501(c)(4): FY1995: 1,471; Type of Section 501(c)
organization: 501(c)(5): FY1995: 295; Type of Section 501(c)
organization: 501(c)(6): FY1995: 1,473; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 2,225; Type of
Section 501(c) organization: Total: FY1995: 65,373.
Disposition by fiscal year: % Approved[B]; Type of Section 501(c)
organization: 501(c)(3): FY1995: 80.6%; Type of Section 501(c)
organization: 501(c)(4): FY1995: 72.1%; Type of Section 501(c)
organization: 501(c)(5): FY1995: 81.7%; Type of Section 501(c)
organization: 501(c)(6): FY1995: 82.1%; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 73.5%; Type of
Section 501(c) organization: Total: FY1995: 80.1%.
Disposition by fiscal year: Denied; Type of Section 501(c)
organization: 501(c)(3): FY1995: 629; Type of Section 501(c)
organization: 501(c)(4): FY1995: 2; Type of Section 501(c)
organization: 501(c)(5): FY1995: 2; Type of Section 501(c)
organization: 501(c)(6): FY1995: 8; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 5; Type of
Section 501(c) organization: Total: FY1995: 646.
Disposition by fiscal year: Approved/Deny Ratio[C]; Type of Section
501(c) organization: 501(c)(3): FY1995: 95.2; Type of Section 501(c)
organization: 501(c)(4): FY1995: 735.5; Type of Section 501(c)
organization: 501(c)(5): FY1995: 147.5; Type of Section 501(c)
organization: 501(c)(6): FY1995: 184.1; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 445.0; Type of
Section 501(c) organization: Total: FY1995: 101.2.
Disposition by fiscal year: Other[D]; Type of Section 501(c)
organization: 501(c)(3): FY1995: 13,823; Type of Section 501(c)
organization: 501(c)(4): FY1995: 566; Type of Section 501(c)
organization: 501(c)(5): FY1995: 64; Type of Section 501(c)
organization: 501(c)(6): FY1995: 314; Type of Section 501(c)
organization: All other 501(c) organizations[A]: FY1995: 171; Type of
Section 501(c) organization: Total: FY1995: 14,938.
Disposition by fiscal year: Total; Type of Section 501(c) organization:
501(c)(3): FY1995: 74,361; Type of Section 501(c) organization:
501(c)(4): FY1995: 2,039; Type of Section 501(c) organization:
501(c)(5): FY1995: 361; Type of Section 501(c) organization: 501(c)(6):
FY1995: 1,795; Type of Section 501(c) organization: All other 501(c)
organizations[A]: FY1995: 3,026; Type of Section 501(c) organization:
Total: FY1995: 81,582.
Note: Section 508 of the Internal Revenue Code requires most Section
501(c)(3) organizations to apply for recognition of tax-exempt status.
There is no comparable provision in the Internal Revenue Code that
requires Section 501(c)(4-6) organizations to apply for this
recognition.
[A] Applications for Section 501(c)(1-27) except 3, 4, 5, and 6.
Sections 501(c)(26) and (27) included for FY 1998 and FY 1999.
[B] Percent of approvals assumes no carry-over of applications from
previous year(s) and includes Other.
[C] Approved/Deny Ratio = For every 1 denial, there were X approvals.
[D] Application withdrawn and failure to furnish required information,
refusals to rule, information forwarded to other than national office,
correction, disposal, and others.
[End of table]
Table 7: Types of Returns of Tax-Exempt Organizations Audited, Fiscal
Years 1995-2001:
Total number of returns for tax-exempt organizations filed in
previous calendar year[A]; FY1995: 523,191; FY1996: 563,710; FY1997:
577,926; FY1998: 644,496; FY1999: 641,383; FY2000: 836,550; FY2001:
872,210.
Audit Rate (overall)[B]; FY1995: 2.0%; FY1996: 2.0%; FY1997: 1.9%;
FY1998: 1.6%; FY1999: 1.3%; FY2000: 0.8%; FY2001: 0.6%.
Tax-exempt organizations and related taxable returns audited;
FY1995: 10,497; FY1996: 11,020; FY1997: 10,700; FY1998: 10,353; FY1999:
8,611; FY2000: 7,435; FY2001: 5,342.
Forms 990 and 990-EZ[C]; FY1995: 3,852; FY1996: 4,067; FY1997:
4,168; FY1998: 4,145; FY1999: 4,170; FY2000: 3,630; FY2001: 2,494.
Forms 990PF, 5227, and 1041A; FY1995: 318; FY1996: 312; FY1997: 503;
FY1998: 350; FY1999: 209; FY2000: 148; FY2001: 132.
Form 990-C[D]; FY1995: 51; FY1996: 114; FY1997: 78; FY1998: 88;
FY1999: 34; FY2000: 18; FY2001: 9.
Form 1120-POL[E]; FY1995: 62; FY1996: 56; FY1997: 30; FY1998: 107;
FY1999: 75; FY2000: 52; FY2001: 7.
Forms 8038, 8038G, 8038GC, 8038T, and 8028[F]; FY1995: na; FY1996:
68; FY1997: 100; FY1998: 126; FY1999: 92; FY2000: 186; FY2001: 295.
Total; FY1995: 4,283; FY1996: 4,617; FY1997: 4,879; FY1998: 4,816;
FY1999: 4,580; FY2000: 4,034; FY2001: 2,937.
Related taxable returns audited; FY1995: ; FY1996: ; FY1997: ;
FY1998: ; FY1999: ; FY2000: ; FY2001: .
Forms 940, 941, 942, and 943[G] …; FY1995: 3,670; FY1996: 4,157;
FY1997: 3,534; FY1998: 2,845; FY1999: 2,048; FY2000: 1409; FY2001:
1,170.
Form 990-T[H]; FY1995: 2,139; FY1996: 1,747; FY1997: 1,702; FY1998:
1,717; FY1999: 1,198; FY2000: 1217; FY2001: 825.
Form 4720[I]; FY1995: 143; FY1996: 98; FY1997: 51; FY1998: 50;
FY1999: 87; FY2000: 121; FY2001: 41.
Forms 1040 and 1120 adjusted[J]; FY1995: 262; FY1996: 401; FY1997:
534; FY1998: 925; FY1999: 698; FY2000: 172; FY2001: 219.
Total; FY1995: 6,214; FY1996: 6,403; FY1997: 5,821; FY1998: 5,537;
FY1999: 4,031; FY2000: 2,919; FY2001: 2,255.
Notes: (1) Excludes Employee Plans. (2) Detail may not add due to
rounding. (3) na=not available.
[A] For 1995, returns filed include Forms 990, 990-EZ, 990PF, 990-C,
5227, 1041-A, 1065.
[B] In general, audits are associated with returns filed in the
previous calendar year; however, this relationship is only approximate.
[C] Tax-exempt organization returns (Forms 990 and the 990-EZ ’short“
form), other than private foundations or farmers‘ cooperatives.
[D] Form 990-C is filed by farmers‘ cooperatives.
[E] Form 1120-POL is filed by certain political organizations.
[F] Tax-exempt private activity bond issues (Form 8038), government-
purpose tax-exempt bond issues (Form 8038G), small tax-exempt
governmental bond issues (Form 8038GC), arbitrage rebates (Form 8038T),
and carryover election of unused private-activity bond volume cap (Form
8328), respectively.
[G] Employer‘s unemployment tax (Form 940); employer returns for income
and social security tax withheld and advance earned income credit
payments, for other than household or agricultural employees (Form
941); household employee tax (Form 942); and agricultural employees tax
(Form 943), respectively.
[H] Form 990-T is the tax-exempt organization business income tax
return.
[I] Form 4720 reports the excise tax on certain charities.
[J] Tax on related individual (Form 1040 series) or corporation (Form
1120 series) income tax returns, adjusted as a result of audits of tax-
exempt organization return.
Source: IRS Annual Data Books, 1995-2002.
[End of table]
Table 8: Recommended and Average Additional Tax from Audits of Tax-
Exempt Organizations, Fiscal Years 1995-2001:
Number of returns audited[A];
Coordinated Examination Program (CEP)[B]; FY1995: 655; FY1996: 722;
FY1997: 846; FY1998: 725; FY1999: 450; FY2000: 574; FY2001: 511.
Non-CEP; FY1995: 9,842; FY1996: 10,298; FY1997: 9,854; FY1998: 9,628;
FY1999: 8,161; FY2000: 6,861; FY2001: 4,831.
Total; FY1995: 10,497; FY1996: 11,020; FY1997: 10,700; FY1998: 10,353;
FY1999: 8,611; FY2000: 7,435; FY2001: 5,342.
Recommended additional tax after audit (dollars).
CEP; FY1995: 40,038,000; FY1996: 42,236,000; FY1997: 30,225,000;
FY1998: 30,701,000; FY1999: 73,923,000; FY2000: 26,210,000; FY2001:
28,354,000.
Non-CEP; FY1995: 86,521,000; FY1996: 88,242,000; FY1997: 59,252,000;
FY1998: 51,543,000; FY1999: 23,702,000; FY2000: 312,321,000; FY2001:
10,109,000.
Total; FY1995: 126,559,000; FY1996: 130,478,000; FY1997: 89,477,000;
FY1998: 82,244,000; FY1999: 97,625,000; FY2000: 338,531,000; FY2001:
38,463,000.
Average recommended additional tax per return (dollars).
CEP; FY1995: 61,127; FY1996: 58,499; FY1997: 35,727; FY1998: 42,346;
FY1999: 164,273; FY2000: 45,662; FY2001: 55,487.
Non-CEP; FY1995: 8,791; FY1996: 8,569; FY1997: 6,013; FY1998: 5,353;
FY1999: 2,904; FY2000: 45,521; FY2001: 2,093.
Weighted Average; FY1995: 12,057; FY1996: 11,840; FY1997: 8,362;
FY1998: 7,944; FY1999: 11,337; FY2000: 45,532; FY2001: 7,200.
Notes: (1) Detail may not add to totals because of rounding. (2)
Includes Audits of Related Taxable Returns and excludes Employee Plans.
[A] In general, audits are associated with returns filed in the
previous calendar year; however, this relationship is only approximate.
[B] CEP (Coordinated Examination Program) covers ’a taxpayer, and its
effectively controlled organizations, that warrants application of
…team examination‘ procedures.“:
Source: IRS Data Books 1995-2002, and GAO analysis.
[End of table]
Table 9: Revocations of Section 501(c)(3-6) Tax-Exempt Status, Fiscal
Years 1995-2001:
Year: 1995; Section 501(c)(3): 18; Section 501(c)(4): 6; Section
501(c)(5): 0; Section 501(c)(6): 3; Total: 27.
Year: 1996; Section 501(c)(3): 16; Section 501(c)(4): 11; Section
501(c)(5): 0; Section 501(c)(6): 5; Total: 32.
Year: 1997; Section 501(c)(3): 12; Section 501(c)(4): 9; Section
501(c)(5): 1; Section 501(c)(6): 6; Total: 28.
Year: 1998; Section 501(c)(3): 24; Section 501(c)(4): 7; Section
501(c)(5): 2; Section 501(c)(6): 3; Total: 36.
Year: 1999; Section 501(c)(3): 8; Section 501(c)(4): 9; Section
501(c)(5): 1; Section 501(c)(6): 3; Total: 21.
Year: 2000; Section 501(c)(3): 27; Section 501(c)(4): 1; Section
501(c)(5): 2; Section 501(c)(6): 1; Total: 31.
Year: 2001; Section 501(c)(3): 9; Section 501(c)(4): 2; Section
501(c)(5): 1; Section 501(c)(6): 1; Total: 13.
Year: Total; Section 501(c)(3): 114; Section 501(c)(4): 45; Section
501(c)(5): 7; Section 501(c)(6): 22; Total: 188.
Source: IRS‘s Audit Information Management System (AIMS) database,
fiscal years 1995-2001.
[End of table]
[End of section]
Appendix IV: IRS Section 527 Disclosure Web Site Accessibility
Evaluation:
[See PDF for image]
[End of section]
Appendix V: Groups Interviewed for this Report:
To obtain the perspectives of public users, we spoke with
representatives involved in campaign finance reform issues about their
experiences, including public interest groups and those who represent
them, with IRS‘s Section 527 disclosure web site and the extent to
which it met their needs. We also discussed these public users‘ work on
issues related to campaign finance reform, Section 527 organizations,
and the IRS. We did not identify and survey all public users; thus, the
opinions of the public interest groups we interviewed may not reflect
the views of all users of the Section 527 disclosure web site. We spoke
with several individuals active in this area and from those
organizations listed below.
Americans for Tax Reform:
Campaign Finance Institute & Campaign Finance Institute‘s Task Force on
Disclosure :
Campaign for America/ PoliticalMoneyLine.org:
Caplin & Drysdale, Chartered:
Center for Governmental Studies:
Center for Public Integrity:
Center for Responsive Politics:
Citizens Against Government Waste:
Common Cause:
Followthemoney.org / National Institute on Money and State Politics:
GuideStar:
National Taxpayers Union:
Project on Government Oversight:
Public Campaign:
Public Citizen:
The Reform Institute:
University of Miami Law School:
Urban Institute:
[End of section]
Appendix VI: Selected Provisions of P.L. 107-155, the Bipartisan
Campaign Reform Act of 2002:
Provisions in the Bipartisan Campaign Reform Act of 2002, P.L. 107-155,
can affect whether Section 527 organizations report to IRS or FEC, and
how these agencies disclose the reported data and oversee Section 527
organizations. IRS and FEC are reviewing the law to determine how to
implement it, but as of March 2002, officials at those agencies could
not say what changes will be required. The impact of the law will be
influenced by the regulations that FEC develops, and according to FEC
counsel, will only be known over several years. Our review of P.L. 107-
155 indicates that several provisions might affect IRS‘s disclosure and
oversight responsibilities, as discussed below.
Public Disclosure of Data on the Internet:
The legislation requires FEC to maintain a central site on the Internet
for all publicly available election-related reports and information.
The provision draws a distinction between the ’election-related
reports“ that FEC is to disclose under FECA and ’election-related
information“ that IRS is to disclose under P.L. 106-230. FEC officials
said their preliminary reading indicates that this provision requires
FEC to coordinate disclosure efforts with any federal agency disclosing
election-related information, including IRS. The extent of this
coordination has yet to be determined. Coordination could be as limited
as providing links on each other‘s web sites that direct users to both
sites, or as comprehensive as a fully integrated web site of FEC and
IRS disclosed data for all Section 527-related election reports and
information.
A central Internet disclosure site presents challenges because FEC and
IRS do not have compatible Web sites. For example, Section 527
organizations that report to FEC on contributions received over $50,000
and expenditures made, generally are required to electronically file
while those that report to IRS are not and usually file paper forms. As
a result, data on FEC‘s web site are largely electronically searchable
whereas data on IRS‘s web site are largely not electronically
searchable.
Determining Responsibility for Disclosure and Oversight:
Under P.L. 107-155, determining the level of IRS and FEC disclosure or
oversight of a Section 527 organization depends on the activities of
the organization. These include the timing, operations, and parties
involved in the activities. According to FEC officials, this raises the
possibility that Section 527 organizations will report some activities
to IRS and others to FEC, even during the same time in an election
cycle. The overlapping agency responsibilities for Section 527
organizations raises questions about the degree and type of
coordination that will be needed for future Section 527 disclosure and
oversight efforts by IRS and FEC.
For example, Section 501(c)(5) unions will be prohibited from spending
their treasury funds for newly defined electioneering communications.
FEC will need to oversee union activities to enforce this prohibition
while IRS will continue to have responsibility for overseeing whether
Section 501(c)(5) unions engage in political activities that exceed
those permissible for tax-exempt organizations. Similarly, if a Section
527 organization runs a ’promote or attack“ advertisement as defined by
P.L. 107-155, disclosure and oversight responsibility depends on
whether the organization coordinated with a candidate‘s committee.
Thus, both agencies will need to know whether the advertisements run by
Section 527 organizations include such advertisements.
[End of section]
Appendix VII: Opportunities for Data Matching to Improve Oversight:
IRS does not use existing data, such as from the Form 990, that it
receives from Section 527 and other tax-exempt organizations to
identify Section 527 organizations that might not be filing required
Forms 8871 and 8872, or Section 501(c)(4-6) organizations that should
have established a separate segregated fund for their political
activities and filed Forms 8871 and 8872. Some options exist for
starting to match these data to identify noncompliance such as unfiled
Forms 8871 and 8872.
IRS could use the Form 990 data to calculate the ratio of a Section
501(c) organization‘s political activity expenditures to its total
expenses.[Footnote 31] This would give IRS information on the amount of
reported political activity. High amounts of political activity might
merit follow up to determine whether the organization should have
notified IRS of its activities under Section 527.
IRS could use the Form 990 data to check the completeness and
correctness of reporting on relationship between Section 527 and
charitable organizations. These relationships are to be reported on the
Form 990 and Form 8871. These matches could identify Section 527
organizations that may have filed incomplete or incorrect data. In
addition, such matches could help to identify Section 527 organizations
that did not file the required Forms 8871 or 8872.
A barrier to matching data across forms is the uncertainty that would
exist about whether IRS is matching the right names for people and
organizations listed on the forms. The Form 8871 and Form 990 require
organizations to list the names of related organizations. If a tax-
exempt organization were to list a Section 527 organization as the
’Clean Water Initiative“ but that organization identifies itself by a
different name such as the ’Clean Water PAC,“ IRS could not match the
names electronically to determine whether these organizations are in
fact the same. Also, similar problems arise with common names of
individuals such as ’John Smith“ in assuring that IRS is matching or,
public users are analyzing, the same person versus someone else with
the same name. Without the capability to match names with the right
organizations or people across forms, IRS could not determine whether
organizations have met the legal requirement to file complete and
correct data.
One option that would allow IRS to match individual and organization‘s
names would require IRS to collect social security numbers and employer
identification numbers (EINs) for each individual or organization
listed on the forms filed by Section 527 and 501(c)(3-6) organizations.
This option is not without complications. According to IRS officials,
IRS cannot protect sensitive privacy information since IRS discloses
Forms 8871 and 8872 in their entirety. In addition, current law would
compel filing organizations to disclose such sensitive data whenever
requested to provide copies of forms filed with IRS. Furthermore, IRS
officials said that unless the data on the Forms 8871 and 8872 is filed
electronically, IRS would face an administrative burden to redact these
data in time to meet its disclosure requirements.
Another option that would allow IRS to match individual and
organization‘s names entails establishing a system similar to one used
by FEC. FEC standardizes names of political committees and candidates
who file with them by manually assigning unique identification numbers.
In addition, if a political committee or candidate appears as a
contributor or recipient on the filings of another entity, FEC
standardizes the names. For example, when a PAC reports a contribution
from ’Smith for Congress,“ the FEC generates a list from its database
of all organizations identified as ’Smith for Congress.“ By manually
comparing the submission with the names and addresses of all ’Smith for
Congress“ organizations, FEC can determine whether that contributor is
already in its database with a unique identification number.
[End of section]
Appendix VIII: Comments from the Internal Revenue Service:
DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON, D.C.
20224:
COMMISSIONER:
July 15, 2002:
Mr. Michael Brostek Director, Tax Issues United States General
Accounting Office Washington, D.C. 20548:
Dear Mr. Brostek:
I am responding to your draft report entitled Political Organizations:
Data Disclosure and IRS‘s Oversight of Organizations Should Be
Improved. I agree that improving the usability of our disclosure web
site and increasing the availability of electronic data on section 527
organizations would be useful to the public and helpful to our
enforcement capabilities. However, any substantial improvements to our
web site and electronic data availability will face competing resource
priorities in our budget allocation process. I also agree with your
recommendation that we increase our oversight of whether section 527
organizations are fulfilling their filing requirements. As discussed
below, it is our intention to focus on enforcement now that we have
developed the filing system, educated the customer community, and
provided a last chance to comply with these new rules.
Public Disclosure:
Your report criticizes the way we have disclosed information. Public
Law 106-230 requires political organizations to file with the IRS. I
believe we have met, and even exceeded, the statutory requirements for
the disclosure of information from Forms 8871 and 8872. However, I
agree the material disclosed on our website is not easy to research.
Our budgetary constraints and the short time frame imposed by law have
limited what we could accomplish. The report understates the steps
necessary to implement the law and the difficult challenges that we
faced.Consequently, I feel it necessary to restate some of that
history.
Before the enactment of Public Law 106-230 on July 1, 2000, political
organizations qualified as tax-exempt organizations, but many had no
requirement to file with the IRS. The new law expanded the annual tax
reporting requirements for political organizations, included political
organizations in the annual information-reporting regime applicable to
other exempt organizations, and required the creation and filing of two
new forms for political organizations.
The statute had an aggressive effective date and required filings
within the same month it was passed. In addition, one of the new forms
required electronic and written filings.
At the time of passage, the forms did not exist, and we had no
capability to receive and process either the paper or electronic forms.
In response to these requirements, the IRS developed Form 8871,
including the electronic filing capability, and Form 8872 by July 17,
2000, and gave political organizations two weeks to complete the forms
before the filing due date of July 31, 2000. We diverted considerable
resources from other enforcement efforts. Meeting the statutory
deadlines was quite an accomplishment.
In terms of disclosure, the law required us to provide certain
information from the Form 8871 on the Internet. The law also made the
forms public, but did not require us to provide them on the Internet.
However, because of the importance of these filings and the need for
timely review by the public, the IRS posted actual copies of all
filings in real time to speed public access. We agree that the website
is not fully user friendly, but the report ignores that we went farther
than the statutory mandate in building the website.
Within the 45 days mandated by the new law, the IRS not only made
available on the Internet the minimal listing of information from filed
Forms 8871 required by the law, but also the images of the filed Forms
8871. Thus, people who wanted to see what political organizations had
filed did not need to make a request and wait for their response.
Within the next month, we also made available on the Internet images of
the filed Forms 8872.
We continue to improve the system. In the fall of 2000, we made an
electronic filing option available for Form 8872. In the spring of
2001, we improved the electronic filing for Form 8871. Unfortunately,
our efforts at electronic filing are stalled, as the software
development industry has to date not shown an interest in developing
software for up-loadable electronic filing of Form 8872. Thus, we are
faced with mostly paper filings and the best we can do within currently
available resources is image this material. As a result, the website
information is not digitized and not as researchable as public research
groups desire.
We remain committed to continual improvement of the filing and
disclosure system, consistent with available resources and our need to
oversee tax compliance for all exempt organizations.
Oversight:
The report indicates that the IRS provides limited oversight to ensure
the fact and correctness of filed returns by section 527 organizations.
In the report, the GAO notes that we have imposed no penalties and
questions our strategic planning in our oversight of this area. Our
focus to date has been less on enforcement and more on building the
required systems and educating our customer base. We are, however,
working on a more focused enforcement program, which will begin after
the voluntary compliance program discussed in the report.
The report states the IRS has not yet assessed penalties for failure to
comply with the new reporting and disclosure requirements. However, the
report should make clear that unlike the statutory penalties for late
filing of the Form 1120-POL and Form 990 under the legislation, no late
filing penalties exist for the Form 8871 or Form 8872. If a political
organization files a late or incomplete Form 8871, it does not incur a
penalty. Rather, it must recalculate its taxable income as reported on
Form 1120-POL. Similarly, if a political organization does not disclose
a contribution or expenditure as required on Form 8872, we require it
to report the undisclosed amount on Form 1120-POL. Thus, it is
impossible
for existing IRS automated assessment of penalty mechanisms to work in
this
area.A late or incomplete filing of Form 8871 or Form 8872 requires
either
the political organization to self-assess and report on the Form 1120-
POL
or the IRS to examine the form and determine the amounts the
organization must report on the Form 1120-POL. In fact, we know that
some political organizations did self-assess and report taxable income
on Form 1120-POL.
Earlier, the focus of our strategic planning was on developing the
forms and systems necessary for political organizations to comply with
the new reporting requirements. Concurrently with the development of
systems, we worked to educate organizations on their new reporting
obligations by doing the following:
* Developing guidance
* Engaging in outreach efforts
* Publishing numerous press releases
* Issuing a proposed revenue ruling in August 2000
(finalized as Rev. Rul. 2000-49, 2000-44 I.R.B. 430 (October 30,
2000)),
addressing more than fifty questions arising from the new reporting
and disclosure requirements:
* Working with the Federal Election Commission on several articles
appearing in the FEC Record:
* Providing information to the state election authorities:
Our senior leadership is developing our compliance strategy with a
working group of specialists established as part of our Implementing
Guidelines for 2002 (the Implementing Guidelines are our workplan
explaining what we were to work on in that year).As part of our
compliance strategy, and as outlined in your report, we determined that
before we can focus any enforcement efforts relating to this new set of
requirements, we will allow organizations a last chance to file.
Therefore, the IRS announced a voluntary compliance program to promote
disclosure for political organizations in Notice 2002-34, 2002-21
I.R.B. 990 (May 28, 2002). According to this program, the IRS will not
assert any tax, penalty or interest that arises solely because a
political organization fails to file a form, or filed an incorrect
form, if the political organization files the required forms by a
certain date. This program applies to all forms required by Public Law
106-230. As part of this program, the IRS contacted several thousand
section 527 organizations that may not be in full compliance with the
new rules to allow them to provide us information that they have
complied or to enter the voluntary compliance program. After the
voluntary compliance program ends, we will assess the success of the
program and implement steps to develop an overall compliance strategy
in this area. The Implementing Guidelines for 2003 will contain a
number of projects focused on this area, including a sampling of
filings to assess the correctness of the information on the forms. In
addition, as part of our market segment studies of section 501(c)(5)
unions and section 501(c)(6) trade associations, we will determine
whether these organizations have affiliated section 527 organizations
and, if so, whether those organizations have complied with the new
reporting and disclosure requirements.
We are taking a studied and appropriate approach to implement and
enforce new requirements on organizations that previously had no
interaction with us. I believe we have acted responsibly to provide the
customer every available opportunity to comply with this new law. Once
we have given the organizations this opportunity, we will focus more on
enforcing the new rules on non-compliant customers.
I hope this information is helpful. If you have additional questions,
please contact me at (202) 622-9511 or Steven T. Miller at (202) 283-
2300.
Sincerely,
Charles O. Rossotti:
Signed by an official for Charles O. Rossotti:
[End of section]
Appendix IX: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Tom Short, (202) 512-9074
Kerry Gail Dunn, (415) 904-2234:
Staff Acknowledgments:
In addition to those named above, Rodd Hobbs, Shirley Jones, Anne
Laffoon, Kristeen McLain, Dan Mesler, Cheryl Peterson, and Tama
Weinberg made key contributions to this report.
FOOTNOTES:
[1] No reliable estimate of this spending has been developed because of
the lack of a readily available source to fully aggregate the
expenditures. IRS officials said that they might have enough data
during 2003 to compute this spending, at least to some degree.
[2] Unlike hard money, soft money is not spent directly for or against
federal candidates.
[3] Appendix I describes the use of Section 527 organizations to
conduct issue advocacy.
[4] Section 527 organizations also may be required to report to the
Federal Election Commission (FEC), if they raise and spend hard money
to be used directly for or against federal candidates.
[5] P.L. 103-62 (1993).
[6] The constitutionality of P.L.106-230 is being challenged in
National Federation of Republican Assemblies, et.al. v. United States
of America, Civil Action No. 00-0759-RV-C (S.D. Ala. Filed Aug. 21,
2000).
[7] Section 527 organizations that seek to directly influence elections
for federal office report their activities to the FEC, which is to
oversee the use of hard money raised and spent for these activities.
[8] Other types of tax-exempt organizations may also conduct political
activities, provided that the political activities are secondary to
their tax-exempt activities (see app. I).
[9] P.L.106-230 created some exceptions to these requirements for
filing with IRS such as for Section 527 organizations already reporting
to FEC and those anticipating that their annual gross receipts would
always be less than $25,000.
[10] Creating electronic forms is a departure from IRS‘s policy of not
competing with private software developers. The short time frames and
lack of interest from the private sector necessitated such action to
meet the law‘s requirements.
[11] Under Section 527(j)(6), an ’election“ is for a federal office; a
political party convention or caucus to nominate a candidate for
federal office; or a primary election to select delegates to a national
nominating convention or to express a preference for nomination to the
office of President. ’Election“ does not include a purely state or
local election.
[12] Section 527 organizations also might be required to file Form 990
(Return of Organization Exempt From Income Tax) and Form1120-POL (U.S.
Income Tax Return for Certain Political Organizations). Appendix II
discusses the filing requirements for these forms and has copies of the
forms to show the types of data to be reported. Also, we recently
reported our concerns about Form 990 expense data reported by
charities. See Tax-Exempt Organizations: Improvements Possible in
Public, IRS, and State Oversight of Charities, GAO-02-526, Apr. 30,
2002 (www.gao.gov).
[13] Disclosure is required if the aggregated contributions from a
person in the calendar year is $200 or more.
[14] Disclosure is required if the aggregated expenditures to a person
in the calendar year is $500 or more.
[15] http://www.irs.gov/polorgs.
[16] Accessibility refers to how easy or difficult the Web site is to
use and the usefulness of the format of data on the Web site. Ease of
use, or user-friendliness, includes how easily a user can navigate,
interact with and understand data on the Web site. The usefulness of
the format relates to the extent to which data on the Web site can be
electronically searched and downloaded for independent analysis.
[17] Ogden Service Center also receives and processes all Forms 990 and
Forms 1120-POL.
[18] IRS‘s Digital Daily Web site is a portal or entry to other Web
sites, including the Section 527 Web site.
[19] In addition, 10 of the 12 GAO staff rated the site as poor
overall. However, many of the staff rated parts of the Web site more
positively. When asked to perform four tasks, most of the staff found
two of those tasks at least somewhat easy to do. Also, the staff tended
to have a more positive view of how the site functioned in terms of
speed and links. The results of our test are in appendix IV.
[20] According to IRS officials, IRS may publicly disclose IRS
correspondence on Forms 8871 and 8872 filings, if the correspondence
has no ’tax return information“. Section 6103 of the Internal Revenue
Code prohibits the disclosure of tax return information to the public.
[21] Unlike the electronic forms, paper forms are scanned into a
portable document format (PDF), creating a photograph-like image. In
short, PDF files cannot function as an electronic database.
[22] A wildcard operator, such as an asterisk, allows the user to find
related word matches. For example, a search for corp* would return all
items with the word ’corporation“ and other words starting with ’corp.“
[23] The first goal of the IRS strategic plan is to provide ’Top-
Quality service to each taxpayer in every interaction“ by determining
whether customers believe IRS is meeting their expectations.
[24] Section 527 organizations that are (1) not required to file Forms
8871 include those with gross receipts under $25,000 or that have to
report to FEC as political committees and
(2) required to file Forms 8871 but are exempt from filing Forms 8872
include state or local committees of a political party or committee of
a state or local candidate.
[25] Notice 2002-34, 2002-21 I.R.B., accompanied by a News Release
(IR2002-57) and Fact Sheet (FS2002-11).
[26] By 2000, IRS master file listed 1.35 million tax-exempt
organizations under Section 501(c). About 12,700 Section 527
organizations notified IRS of their existence since passage of P.L.
106-230, as of March 2002.
[27] This act affects the financing of political campaigns and includes
provisions on the disclosure and oversight of campaign activities
associated with ’soft money“ and indirect issue advocacy.
[28] Under Section 527, a political organization is defined as an
organization operated primarily for the purpose of accepting
contributions or making expenditures, to influence the selections,
nominations, elections, or appointments for federal, state, or local
public offices, offices in a political organization, or Presidential or
Vice-Presidential electors.
[29] PLR 9652026 (Oct. 1, 1996), PLR 9725036 (Mar. 24, 1997) and PLR
199925051 (Mar. 29, 1999) clarified the law.
[30] Section 527 organizations that report to IRS must still fulfill
any reporting obligations to the states.
[31] For the tax year 2001 Form 990, this would be line 81a divided by
line 17.
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