Tax Gap
Requiring Information Reporting for Charitable Cash Contributions May Not Be an Effective Way to Improve Compliance Gao ID: GAO-09-555 May 14, 2009Individual taxpayers who misreport charitable cash contributions they deduct on their tax returns contribute to the tax gap, the difference between tax amounts taxpayers report and pay voluntarily and on time and the amounts they should pay under the law. The Internal Revenue Service (IRS) most recently estimated a gross tax gap of $345 billion for tax year 2001. One approach that tends to result in high levels of taxpayer compliance is information reporting to IRS by third parties on taxpayer transactions. GAO was asked to (1) provide information on characteristics of individual taxpayer misreporting of charitable cash contributions, (2) provide information on actions that IRS takes to address misreporting, and (3) evaluate potential benefits and challenges associated with requiring information reporting for charitable cash contributions. To meet its objectives, GAO used data from IRS's tax year 2001 National Research Program (NRP) compliance study of individual taxpayers, reviewed IRS guidance and enforcement data, and interviewed IRS officials and representatives from charities or organizations that represent charities. GAO made no recommendations in this report. In email comments on a draft of this report, IRS agreed with GAO's overall conclusion that requiring information reporting for charitable cash contributions may not be an effective way to improve compliance.
For tax year 2001, an estimated 46 percent of taxpayers who deducted cash contributions misreported, resulting in an estimated $13.8 billion in underreported net income. Since this amount is in income, and not tax dollars, the tax gap from the misreported cash contributions was much less than $13.8 billion. About 79 percent of misreporting taxpayers overstated a total of $16 billion in contributions while about 21 percent of misreporting taxpayers understated a total of $2.2 billion in contributions. IRS attempts to ensure charitable cash contribution reporting compliance through enforcement and taxpayer service efforts. Cash contributions are one of the areas IRS examines most frequently for individual taxpayers. For fiscal year 2008, IRS examined about 175,000 taxpayers who potentially misreported cash contributions, out of about 1.4 million individual taxpayers it examined that fiscal year, and adjusted cash contribution amounts by $593 million in net terms. Through its taxpayer service programs, IRS provides publications and instructions to tax forms to help taxpayers comply with cash contribution reporting and recordkeeping requirements. Requiring information reporting for charitable cash contributions may not be an effective way to improve compliance. Charities could incur substantial costs and burdens if they were required to file information returns with IRS and taxpayers on the cash contributions they receive. Exempting some cash contributions, such as those below a certain dollar amount or those made to small or religious charities, from information reporting could reduce the burden on some charities. However, exempting some cash contributions from information reporting would reduce the effect that the reporting would have on improving compliance, in part because IRS may not be able to match information returns against tax returns without complete information reporting. Also, the extent to which information reporting would improve voluntary compliance is unclear. Since the 2001 NRP study, more stringent requirements for the documentation taxpayers must keep to substantiate their cash contributions have gone into effect. It is not yet known whether the requirements have improved taxpayer reporting compliance, although an ongoing NRP study of individual taxpayers could show this.
GAO-09-555, Tax Gap: Requiring Information Reporting for Charitable Cash Contributions May Not Be an Effective Way to Improve Compliance
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Report to the Committee on Finance, U.S. Senate:
United States Government Accountability Office:
GAO:
May 2009:
Tax Gap:
Requiring Information Reporting for Charitable Cash Contributions May
Not Be an Effective Way to Improve Compliance:
GAO-09-555:
GAO Highlights:
Highlights of GAO-09-555, a report to the Committee on Finance, U.S.
Senate.
Why GAO Did This Study:
Individual taxpayers who misreport charitable cash contributions they
deduct on their tax returns contribute to the tax gap, the difference
between tax amounts taxpayers report and pay voluntarily and on time
and the amounts they should pay under the law. The Internal Revenue
Service (IRS) most recently estimated a gross tax gap of $345 billion
for tax year 2001. One approach that tends to result in high levels of
taxpayer compliance is information reporting to IRS by third parties on
taxpayer transactions.
GAO was asked to (1) provide information on characteristics of
individual taxpayer misreporting of charitable cash contributions, (2)
provide information on actions that IRS takes to address misreporting,
and (3) evaluate potential benefits and challenges associated with
requiring information reporting for charitable cash contributions.
To meet its objectives, GAO used data from IRS‘s tax year 2001 National
Research Program (NRP) compliance study of individual taxpayers,
reviewed IRS guidance and enforcement data, and interviewed IRS
officials and representatives from charities or organizations that
represent charities.
GAO made no recommendations in this report. In email comments on a
draft of this report, IRS agreed with GAO‘s overall conclusion that
requiring information reporting for charitable cash contributions may
not be an effective way to improve compliance.
What GAO Found:
For tax year 2001, an estimated 46 percent of taxpayers who deducted
cash contributions misreported, resulting in an estimated $13.8 billion
in underreported net income. Since this amount is in income, and not
tax dollars, the tax gap from the misreported cash contributions was
much less than $13.8 billion. About 79 percent of misreporting
taxpayers overstated a total of $16 billion in contributions while
about 21 percent of misreporting taxpayers understated a total of $2.2
billion in contributions.
Table: Distribution of Estimated Net Misreported Cash Contribution
Amounts by Individual Taxpayers, Tax Year 2001:
Net misreported amount per taxpayer: Overstated contributions: Less
than $1,000;
Number of misreporting taxpayers (in millions): 9.1;
Percentage of misreporting taxpayers: 53%;
Total net misreported contributions (dollars in billions): $3.2.
Net misreported amount per taxpayer: Overstated contributions: $1,000
to $4,999;
Number of misreporting taxpayers (in millions): 3.9;
Percentage of misreporting taxpayers: 23%;
Total net misreported contributions (dollars in billions): $8.1.
Net misreported amount per taxpayer: Overstated contributions: $5,000
or greater;
Number of misreporting taxpayers (in millions): 0.5;
Percentage of misreporting taxpayers: 3%;
Total net misreported contributions (dollars in billions): $4.7.
Net misreported amount per taxpayer: Understated contributions: Less
than $1,000;
Number of misreporting taxpayers (in millions): 3.2;
Percentage of misreporting taxpayers: 19%;
Total net misreported contributions (dollars in billions): -$0.6.
Net misreported amount per taxpayer: Understated contributions: $1,000
or greater;
Number of misreporting taxpayers (in millions): 0.4;
Percentage of misreporting taxpayers: 2%;
Total net misreported contributions (dollars in billions): -$1.6.
Net misreported amount per taxpayer: Total;
Number of misreporting taxpayers (in millions): 17.1;
Percentage of misreporting taxpayers: 100%;
Total net misreported contributions (dollars in billions): $13.8.
Source: GAO analysis of IRS data.
[End of table]
IRS attempts to ensure charitable cash contribution reporting
compliance through enforcement and taxpayer service efforts. Cash
contributions are one of the areas IRS examines most frequently for
individual taxpayers. For fiscal year 2008, IRS examined about 175,000
taxpayers who potentially misreported cash contributions, out of about
1.4 million individual taxpayers it examined that fiscal year, and
adjusted cash contribution amounts by $593 million in net terms.
Through its taxpayer service programs, IRS provides publications and
instructions to tax forms to help taxpayers comply with cash
contribution reporting and recordkeeping requirements.
Requiring information reporting for charitable cash contributions may
not be an effective way to improve compliance. Charities could incur
substantial costs and burdens if they were required to file information
returns with IRS and taxpayers on the cash contributions they receive.
Exempting some cash contributions, such as those below a certain dollar
amount or those made to small or religious charities, from information
reporting could reduce the burden on some charities. However, exempting
some cash contributions from information reporting would reduce the
effect that the reporting would have on improving compliance, in part
because IRS may not be able to match information returns against tax
returns without complete information reporting. Also, the extent to
which information reporting would improve voluntary compliance is
unclear. Since the 2001 NRP study, more stringent requirements for the
documentation taxpayers must keep to substantiate their cash
contributions have gone into effect. It is not yet known whether the
requirements have improved taxpayer reporting compliance, although an
ongoing NRP study of individual taxpayers could show this.
View [hyperlink, http://www.gao.gov/products/GAO-09-555] or key
components. For more information, contact Michael Brostek at (202) 512-
9110 or brostekm@gao.gov.
[End of section]
Contents:
Letter:
Results:
Agency Comments:
Appendix I: Congressional Briefing on Charitable Cash Contribution
Reporting Compliance:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
May 14, 2009:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
Based on Internal Revenue Service (IRS) data, individual taxpayers
overstated the deductions they took for donating cash to charities by
an estimated $13.8 billion, in net terms, for tax year 2001.[Footnote
1] By overstating their cash contributions, these taxpayers contributed
to the gross tax gap, estimated most recently at $345 billion for tax
year 2001.[Footnote 2] The tax gap is the difference between the taxes
that taxpayers report and pay voluntarily and on time and the amounts
they should pay under the law. Given the magnitude of the tax gap, even
small improvements in taxpayer compliance could result in substantial
revenue. Also, increasing compliance could improve the fairness of the
tax system, as misreporting taxpayers increase the burden of funding
the nation's commitments for those taxpayers who accurately pay their
taxes.
One approach that tends to lead to high levels of taxpayer compliance
is information reporting, through which third parties, such as
employers or banks, file returns with IRS and taxpayers that provide
information on a variety of taxpayer transactions. IRS tries to match
information from information returns filed by third parties against
taxpayers' income tax returns to see if taxpayers have filed returns
and reported all their income. Currently, information reporting is not
required for cash contributions to charities.[Footnote 3] Given your
long-standing interest in addressing the tax gap, you asked us to (1)
provide information on characteristics of individual taxpayer
misreporting of charitable cash contributions, (2) provide information
on actions that IRS takes to address individual taxpayer misreporting
of charitable cash contributions, and (3) evaluate potential benefits
and challenges associated with requiring information reporting for
charitable cash contributions.
To provide information on the characteristics of individual taxpayer
misreporting of charitable cash contributions, we used data from IRS's
National Research Program (NRP) study of individual taxpayers for tax
year 2001. Through this study, IRS examined about 46,000 randomly
selected individual tax returns and used the results of the
examinations to estimate misreporting of income and taxes for all
individual tax returns. We also reviewed data from IRS's Statistics of
Income (SOI) individual files for tax years 2001 through 2006, the most
recent year for which data are available. SOI is a widely used database
consisting of a sample of unexamined income tax returns. Since the
estimates we provide using these data sources are based on samples,
they involve margins of error. Unless otherwise noted, all percentage
estimates have margins of error of 2 percentage points or less; value
estimates have margins of error of 10 percent or less. We assessed both
sources of IRS data and determined that they were sufficiently reliable
for the purposes of this report.
To provide information on the actions that IRS takes to address
individual taxpayer misreporting of charitable cash contributions and
any challenges that it faces with these actions, we reviewed IRS forms,
publications, and taxpayer guidance on deducting cash contributions to
charities and reviewed documents and data from IRS's enforcement
programs including the Examination Operational Automation Database of
IRS taxpayer examinations. We assessed this data source and determined
that it was sufficiently reliable for the purposes of this report. We
also interviewed officials from IRS's Wage and Investment; Small
Business/Self Employed; Tax Exempt and Government Entities; and
Research, Analysis, and Statistics Divisions and the Office of the
Chief Counsel who have knowledge of cash contribution compliance
issues.
To evaluate the potential benefits and challenges associated with
requiring information reporting for charitable cash contributions, we
reviewed requirements of the Paperwork Reduction Act of 1995[Footnote
4] under which federal agencies, such as IRS, must obtain approval from
the Office of Management and Budget that the benefits of collecting new
information outweigh the costs. We also examined IRS's policies and
procedures relating to information reporting. For example, IRS
generally requires that each information return include a taxpayer
identification number for purposes of matching information returns with
tax returns. We also reviewed prior GAO reports related to information
reporting and interviewed IRS officials from the divisions previously
listed. In addition, we interviewed representatives from the tax return
preparation industry and from charities or organizations that represent
charities. The briefing in appendix I provides details on the
charitable organizations we interviewed.
We conducted this performance audit from September 2008 through May
2009 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
On March 3, 2009, we briefed your staff on the results of our work.
This report, including the information in appendix I conveys an update
to the information provided during that briefing.
Results:
For tax year 2001, an estimated 46 percent of individual taxpayers who
deducted cash contributions misreported, resulting in an estimated
$13.8 billion in underreported net income. Since this amount is in
income, and not tax dollars, the tax gap from the misreported cash
contributions was much less than $13.8 billion. About 79 percent of
misreporting taxpayers overstated a total of $16 billion in
contributions, while about 21 percent of misreporting taxpayers
understated a total of $2.2 billion[Footnote 5] in contributions.
We also found that:
* about two-thirds of taxpayers who overstated their cash contributions
overstated less than $1,000,
* about 70 percent of the $16 billion in overstated contributions were
from taxpayers who overstated less than $5,000,
* most taxpayers who overstated cash contributions overstated at least
half of the amount they deducted on their tax returns, and:
* taxpayers who deducted cash contributions and used paid tax return
preparers misreported about as often as those who deducted cash
contributions and prepared their own tax returns.
Taxpayers misreport cash contributions, for example, when they are
unable to substantiate with required documentation the contribution
amounts they deducted on their tax returns.
IRS attempts to ensure charitable cash contribution reporting
compliance through enforcement and taxpayer service efforts. As part of
its enforcement efforts, IRS examines tax returns that include
potential misreporting of cash contributions. Cash contributions are
one of the areas IRS examines most frequently for individual taxpayers.
For fiscal year 2008, IRS examined about 175,000 individual taxpayers
who potentially misreported cash contributions out of about 1.4 million
individual taxpayers it examined that fiscal year. IRS adjusted cash
contribution amounts for about 76 percent of the taxpayers it examined
that year for a net total of $593 million (IRS reduced overstated cash
contributions by about $760 million and increased understated cash
contributions by about $167 million). The $760 million of overstated
contributions IRS reduced in fiscal year 2008 would have represented
less than 5 percent of the $16 billion in estimated overstated
contributions from tax year 2001. Through its taxpayer service
programs, IRS provides publications and instructions to tax forms to
help taxpayers comply with cash contribution reporting and
recordkeeping requirements.[Footnote 6]
Requiring information reporting for charitable cash contributions may
not be an effective way to improve compliance. Charities could incur
substantial costs and burdens if they were required to file information
returns with IRS and taxpayers on the cash contributions they receive.
Exempting some cash contributions, such as those below a certain dollar
amount or those made to small or religious charities, from information
reporting could reduce the burden on some charities. However, exempting
some cash contributions from information reporting would reduce the
effect that the reporting would have on improving compliance, in part
because IRS may not be able to match information returns against tax
returns without complete information reporting. Also, the extent to
which information reporting would improve voluntary compliance is
unclear. The Pension Protection Act of 2006 included more stringent
requirements for the documentation taxpayers must keep to substantiate
their cash contributions, starting in tax year 2007.[Footnote 7] It is
not yet known whether the enhanced substantiation requirements have
improved taxpayer recordkeeping and reporting compliance, although an
updated NRP study of individual taxpayers could show whether compliance
improved following the passage of the act. Finally, requiring
information reporting could result in reduced charitable cash
contributions from taxpayers, for example, because taxpayers may not
want the federal government to know to which charities they donate,
particularly for donations to religious organizations.
Agency Comments:
In an e-mail commenting on a draft of this report, the Director of
Compliance from IRS's Wage and Investment Division agreed with our
overall conclusion that requiring information reporting for charitable
cash contributions may not be an effective way to improve compliance.
IRS noted that information reporting could impose substantial costs and
burdens on charities, especially smaller charities. In terms of
exempting some contributions from a reporting requirement to reduce the
burden on smaller charities, IRS noted that exempting some
contributions and not others would lead to an incomplete process of
matching information returns to tax returns, which would reduce the
impact that reporting would have on improving compliance and produce
disparate treatment of taxpayers.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from its issue date. At that time, we will send copies to the Chairman
and Ranking Member, House Committee on Ways and Means; the Secretary of
the Treasury; the Commissioner of Internal Revenue; and other
interested parties. The report also will be available at no charge on
GAO's Web site at [hyperlink, http://www.gao.gov].
If you or your staffs have any questions, please contact me at (202)
512-9110 or brostekm@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this report. Key contributors to this report were Charlie
Daniel, Assistant Director; Jeff Arkin; Crystal Bernard; Sara Daleski;
John Mingus; Melanie Papasian; and Andrew Stephens.
Signed by:
Michael Brostek:
Director, Tax Issues:
Strategic Issues Team:
[End of section]
Appendix I: Congressional Briefing on Charitable Cash Contribution
Reporting Compliance:
Requiring Information Reporting for Charitable Cash Contributions May
Not Be an Effective Way to Improve Compliance:
Briefing for the Senate Committee on Finance:
Engagement Objectives:
* Provide information on the characteristics of individual taxpayer
misreporting of charitable cash contributions.
* Provide information on actions the Internal Revenue Service (IRS)
takes to address individual taxpayer misreporting of charitable cash
contributions.
* Evaluate potential benefits and challenges associated with requiring
information reporting for charitable cash contributions.
Background: Misreporting of Cash Contributions and the Tax Gap:
For tax year 2001, individual taxpayer misreporting of cash
contributions resulted in an estimated $13.8 billion in underreported
net income.
* This estimate includes contributions made by cash, check, credit
card, electronic funds transfer, or payroll deduction;
* The estimate does not include donations of property, such as stocks
or household items, which individual taxpayers report separately on
their tax returns;
* The tax gap from misreported cash contributions was much less than
$13.8 billion.
Misreporting of cash contributions contributes to the gross tax gap,
which IRS most recently estimated to be $345 billion for tax year 2001.
* The tax gap is the difference between the taxes that taxpayers report
and pay voluntarily and on time and the amounts they should pay under
the law;
* IRS estimated $55 billion of the tax gap would eventually be
recovered.
Background: Charitable Cash Contribution Reporting Requirements:
Individual taxpayers must itemize deductions to deduct charitable
contributions.
Taxpayers who receive a benefit from a contribution can only deduct the
amount of the contribution that exceeds the value of the benefit
received.
* For example, a taxpayer who contributes $65 to a fund raising event
that includes a meal valued at $25 can only deduct $40.
* Taxpayers do not have to exclude the value of token items, such as
mugs bearing the logos of charitable organizations.
Taxpayers can deduct certain out-of-pocket expenses, such as car
expenses, directly related to giving services to a charitable
organization.
Background: Charitable Cash Contribution Recordkeeping Requirements:
Taxpayers must keep records to substantiate all charitable cash
contributions they deduct.
The type of documentation that taxpayers must keep changed with the
passage of the Pension Protection Act of 2006 (Pub. L. No. 109-280).
* Prior to the passage of the act, acceptable documentation included
bank records (e.g., canceled checks or credit card statements), written
records from charities, or other written records (e.g., taxpayer-
prepared logs).
* For contributions of $250 or more, taxpayers had to have statements
from the recipient charities (per contribution rather than for
cumulative contributions) that showed whether the charities did or did
not provide goods or services in return for contributions and a
description and estimated value of any goods or services provided,
among other requirements.
Following the passage of the Pension Protection Act, beginning with tax
year 2007, taxpayers must have a bank or written record from charities
to substantiate their cash contributions.
Taxpayers can no longer use other written records to substantiate their
contributions.
Taxpayers still must have written records from charities for
contributions of $250 or more.
Background: Taxpayers Who Deducted Charitable Cash Contributions:
For tax year 2001 through tax year 2006:
* From 28 percent to 30 percent of all individual taxpayers were
estimated to have deducted cash contributions.
* Total deducted cash contributions increased from an estimated $105
billion to an estimated $144 billion.
* From 79 percent to 85 percent of taxpayers who were estimated to have
itemized their deductions were estimated to have reported deductions
for cash contributions.
Background: Information Reporting:
Information reporting involves third parties, such as employers or
banks, filing returns with IRS and taxpayers that provide information
on a variety of taxpayer transactions.
Information reporting helps ensure compliance:
* Taxpayer voluntary compliance tends to be high for items subject to
information reporting, in part because of the deterrent effect that
information reporting can have on taxpayers who might otherwise
misreport intentionally.
* Generally, IRS matches amounts that third parties report on
information returns against amounts that taxpayers report on tax
returns to help identify potential misreporting and address it through
enforcement actions (for example, through its Automated Underreporter
program).
Scope and Methodology:
To provide information on characteristics of individual taxpayer
misreporting of charitable cash contributions, we analyzed data from
two sources:
* IRS‘s tax year 2001 National Research Program (NRP) study of
individual taxpayer compliance (the latest year available);
* IRS Statistics of Income individual taxpayer data from tax years2001
through 2006 (the latest year available).
Estimates from these data sources are based on samples and involve
margins of error, and unless otherwise noted:
* percentage estimates have margins of error of 2 percentage points or
less and;
* value estimates have margins of error of 10 percent or less.
To provide information on actions that IRS takes to address individual
taxpayer misreporting of charitable cash contributions, we:
* reviewed documents and data from IRS‘s enforcement programs,
* reviewed IRS guidance on deducting charitable cash contributions,
and,
* interviewed officials from IRS‘s Wage and Investment; Small
Business/Self Employed; Tax Exempt and Government Entities; and
Research, Analysis, and Statistics divisions and the Office of Chief
Counsel who have knowledge of cash contribution compliance issues.
To evaluate the potential benefits and challenges associated with
requiring information reporting for charitable cash contributions, we:
* reviewed the requirements of the Paperwork Reduction Act of 1995(Pub.
L. No. 104-13),under which federal agencies, such as IRS, must get
Office of Management and Budget approval that the benefits of
collecting any new information outweigh the costs;
* examined IRS‘s policies and procedures relating to information
reporting (for example, IRS generally requires that each information
return include a taxpayer identification number for purposes of
matching information returns with tax returns);
* reviewed prior GAO reports related to information reporting;
* interviewed IRS officials from the divisions listed previously; and;
* interviewed representatives of the American Institute of Certified
Public Accountants to obtain information on how information reporting
of cash contributions might affect its members in preparing tax returns
for taxpayers.
We also interviewed representatives from the following organizations
that represent different types of charitable organizations accounting
for substantial amounts of cash contributions:
* Independent Sector is a leadership forum for a diverse group of
charities, foundations, and corporate-giving programs, whose members
include some of the largest charities;
* The National Council of Churches and the Evangelical Council for
Financial Accountability are membership organizations that represent
various religious organizations and denominations (religious
organizations receive substantial amounts of cash contributions);
* The United Way of America and the Combined Federal Campaign are
conduits for large amounts of cash contributions collected for
charities, some of which are given via payroll deduction;
* The Council on Foundations is an association of grant-making
foundations and corporations (individuals mostly make large
contributions to foundations);
* The National Council of Nonprofits and Independent Charities of
America represent a diverse group of charities and nonprofit
organizations, many of which are of small or medium size.
Characteristics of Individual Taxpayer Misreporting of Charitable Cash
Contributions:
For tax year 2001, an estimated 46 percent of taxpayers deducting cash
contributions misreported, resulting in an estimated $13.8 billion in
underreported net income.
About 79 percent of misreporting taxpayers overstated their
contributions:
* Overstated contributions resulted in an estimated $16 billion in
underreported net income;
* The estimated median overstated contribution amount was $504.
About 21 percent of misreporting taxpayers understated their
contributions:
* Understated contributions resulted in an estimated $2.2 billion in
overreported net income (estimate has a margin of error of 34 percent);
* The estimated median understated contribution amount was $132
(estimate has a margin of error of 11 percent).
Types of misreporting of cash contributions could include the
following:
Overstated deductions:
* Taxpayers being unable to substantiate with required documentation
the cash contributions they deducted on their tax returns;
* Taxpayers deducting cash contributions to organizations that were not
qualified charitable organizations;
* Taxpayers deducting portions of cash contributions for which they
received benefits.
Understated deductions:
* Taxpayers who during the course of IRS‘s examinations identified cash
contributions that they did not initially deduct on their tax returns.
About two-thirds of overstating taxpayers (9.1 million out of 13.5
million overstating taxpayers) overstated less than $1,000.
About 70 percent of all overstated contributions ($11.3 billion out of
$16.0 billion in overstated contributions) were from taxpayers who
overstated less than $5,000.
Table: Distribution of Estimated Net Misreported Cash Contribution
Amounts by Individual Taxpayers, Tax Year 2001:
Net misreported amount per taxpayer: Overstated contributions: Less
than $1,000;
Number of misreporting taxpayers (in millions): 9.1;
Percentage of misreporting taxpayers: 53%;
Total net misreported contributions (dollars in billions): $3.2.
Net misreported amount per taxpayer: Overstated contributions: $1,000
to $4,999;
Number of misreporting taxpayers (in millions): 3.9;
Percentage of misreporting taxpayers: 23%;
Total net misreported contributions (dollars in billions): $8.1.
Net misreported amount per taxpayer: Overstated contributions: $5,000
or greater;
Number of misreporting taxpayers (in millions): 0.5;
Percentage of misreporting taxpayers: 3%;
Total net misreported contributions (dollars in billions): $4.7[A].
Net misreported amount per taxpayer: Understated contributions: Less
than $1,000;
Number of misreporting taxpayers (in millions): 3.2;
Percentage of misreporting taxpayers: 19%;
Total net misreported contributions (dollars in billions): -$0.6.
Net misreported amount per taxpayer: Understated contributions: $1,000
or greater;
Number of misreporting taxpayers (in millions): 0.4;
Percentage of misreporting taxpayers: 2%;
Total net misreported contributions (dollars in billions): -$1.6[B].
Net misreported amount per taxpayer: Total;
Number of misreporting taxpayers (in millions): 17.1;
Percentage of misreporting taxpayers: 100%;
Total net misreported contributions (dollars in billions): $13.8.
Source: GAO analysis of IRS data.
[A] Estimates have margins of error of 21 percent or less.
[B] Estimate has a margin of error of 47 percent.
[End of table]
Most taxpayers who overstated cash contributions overstated at least
half of the contribution amount they deducted on their tax returns.
Table: Distribution of Estimated Overstated Cash Contribution Amounts
as a Percentage of Reported Cash Contribution Amounts for Individual
Taxpayers, Tax Year 2001:
Percentage of reported amount that was overstated: Less than 10
percent;
Number of taxpayers who overstated (in millions): 2.0;
Percentage of taxpayers who overstated: 15%;
Total overstated contributions (dollars in billions): $0.4[A].
Percentage of reported amount that was overstated: 10 percent to less
than 25 percent;
Number of taxpayers who overstated (in millions): 1.6;
Percentage of taxpayers who overstated: 12%;
Total overstated contributions (dollars in billions): $0.8[A].
Percentage of reported amount that was overstated: 25 percent to less
than 50 percent;
Number of taxpayers who overstated (in millions): 2.0;
Percentage of taxpayers who overstated: 15%;
Total overstated contributions (dollars in billions): $2.1[B].
Percentage of reported amount that was overstated: 50 percent to less
than 75 percent;
Number of taxpayers who overstated (in millions): 1.8;
Percentage of taxpayers who overstated: 14%;
Total overstated contributions (dollars in billions): $2.5[A].
Percentage of reported amount that was overstated: 75 percent or
greater;
Number of taxpayers who overstated (in millions): 6.1;
Percentage of taxpayers who overstated: 45%;
Total overstated contributions (dollars in billions): $10.3.
Total:
Number of taxpayers who overstated (in millions): 13.5;
Percentage of taxpayers who overstated: 100%;
Total overstated contributions (dollars in billions): $16.0.
Source: GAO analysis of IRS data.
Note: Estimates for overstated contributions do not sum to totals
because of rounding.
[A] Estimates have margins of error of 15 percent or less.
[B] Estimate has a margin of error of 24 percent.
[End of table]
For tax year 2001, taxpayers who deducted cash contributions used paid
preparers more often than taxpayers who did not deduct cash
contributions (63 percent to 53 percent, respectively).
Taxpayers deducting cash contributions who used paid tax return
preparers misreported about as often as those who deducted cash
contributions and prepared their own tax returns.
Table: Estimated Number of Individual Taxpayers Deducting Cash
Contributions, Misreporting Percentages, and Net Misreported
Contributions by Tax Return Preparation Method, Tax Year 2001:
Tax return preparation method: Self-prepared;
Number of taxpayers deducting cash contributions (in millions): 14.1;
Percentage of taxpayers deducting cash contributions who misreported:
45%;
Net misreported contributions (dollars in billions): $8.5[A].
Tax return preparation method: Paid tax return preparer;
Number of taxpayers deducting cash contributions (in millions): 23.1;
Percentage of taxpayers deducting cash contributions who misreported:
46%;
Net misreported contributions (dollars in billions): $5.3[B].
Total:
Number of taxpayers deducting cash contributions (in millions): 37.2;
Percentage of taxpayers deducting cash contributions who misreported:
46%;
Net misreported contributions (dollars in billions): $13.8.
Source: GAO analysis of IRS data.
[A] Estimate has a margin of error of 19 percent.
[B] Estimate has a margin of error of 11 percent
[End of table]
IRS Tries to Ensure Compliance through Enforcement and Taxpayer
Services:
Enforcement:
IRS examines tax returns that include potential misreporting of cash
contributions.
Cash contributions is one of the most frequently examined areas for
individual taxpayers (mostly through correspondence).
* For fiscal year 2008, IRS examined about 175,000 taxpayers who
potentially misreported cash contributions (IRS examined about 1.4
million individual taxpayers that fiscal year);
* IRS adjusted cash contribution amounts for about 76 percent of these
taxpayers for a total of about $593 million, in net terms:
- IRS reduced overstated cash contributions by about $760 million (the
median reduced overstatement amount was $3,573);
- IRS increased understated cash contributions by about $167 million
(the median increased understatement amount was $1,416);
- The $760 million of overstated contributions IRS reduced in fiscal
year 2008 would have represented less than 5 percent of the $16 billion
in estimated overstated contributions from tax year 2001.
Taxpayer services:
IRS provides publications and instructions to tax forms to help
taxpayers comply with cash contribution reporting requirements:
* Instructions to Schedule A (Itemized Deductions) of the individual
tax return;
* Publication 526, Charitable Contributions;
* Publication 1771, Charitable Contributions – Substantiation and
Disclosure Requirements.
Requiring Information Reporting for Charitable Cash Contributions May
Not Be Effective:
Charities could incur costs and burdens if information reporting were
required for cash contributions.
Exempting some cash contributions could reduce the burden on charities
but would limit the effect that reporting would have on improving
compliance.
The extent to which information reporting would improve compliance is
unclear.
It is not known whether recently enhanced substantiation requirements
have improved taxpayer reporting compliance:
* An updated NRP study of individual taxpayers, which is under way,
could show any improvements.
Requiring information reporting could also result in reduced charitable
cash contributions from taxpayers.
Charities could incur substantial costs and burdens if information
reporting were required for cash contributions:
* Some administrative practices could be foreign to smaller charities,
which may make up a large share of charitable organizations;
* Although some charities already collect and maintain information
about their donors and donations, all charities would need to routinely
employ this practice;
* Charities may need to bear costs to safeguard and ensure against
stolen donor information (especially if Social Security numbers were
required with reporting);
* Charities would need to spend time filing information returns or pay
to have the returns filed on their behalf;
* Charities are evaluated on having low overhead costs; information
reporting would likely increase those costs.
Exempting some contributions from a reporting requirement could reduce
the burden on charities associated with information reporting:
For example:
* Exempting yearly contributions below a certain dollar threshold that
a taxpayer makes to a single charity;
* Exempting contributions to charities with annual gross receipts of
$25,000 or less and religious organizations, which generally do not
have to report income and asset information to IRS as is required for
other charities.
However, exempting some cash contributions from information reporting
would reduce the effect that reporting would have on improving
compliance.
* Partial reporting likely would not have the same impact on taxpayer
voluntary compliance as full information reporting.
* Exempting certain contributions would make it more difficult for IRS
to effectively use information returns in its enforcement efforts:
- Many taxpayers could deduct cash contributions for which IRS would
not receive a corresponding information return;
- As such, IRS may not be able to address misreporting through its
Automated Underreporter program for cash contributions, and might only
be able to use information returns for examinations;
- IRS contacts many more potentially noncompliant taxpayers through the
Automated Underreporter program than through examinations.
* Also, with a dollar threshold exemption, charities would likely need
to collect information for all donors upon first receiving donations
because charities would not know if their donors‘ gifts would
eventually exceed the established threshold.
For taxpayers who misreport in that they cannot substantiate their cash
contributions, information reporting could improve voluntary compliance
without increasing tax revenue.
* Some misreporting taxpayers IRS examined through NRP may have made
the contributions they were unable to substantiate.
* For these taxpayers, information reporting should improve compliance
in that they should be able to substantiate the cash contributions they
deduct.
* However, for these taxpayers, information reporting would not likely
change the amount of cash contributions they deduct, resulting in
improved compliance without increased tax revenue.
* It was not possible to determine from the NRP data the extent to
which taxpayers misreported their cash contributions because of a lack
of substantiating documentation (or whether taxpayers without
documentation actually made the cash contributions they deducted).
It is not known whether the requirement that taxpayers now must
maintain records from banks or charities for all cash contributions has
improved taxpayer recordkeeping.
* IRS has not studied the impact the recordkeeping requirements from
the Pension Protection Act have had on compliance.
* IRS is implementing a new NRP study through which it examines
individual taxpayers on an annual basis and will use the results of 3
years of examinations to estimate compliance.
* The results of examinations from tax year 2007 through tax year 2009
could identify whether misreporting decreased with the new
recordkeeping requirement.
* If IRS finds a decrease in taxpayer misreporting compared to tax year
2001, it could be, in part, because of the more stringent recordkeeping
requirement.
Requiring information reporting could result in reduced cash
contributions.
* Taxpayers may reduce giving because they are reluctant to provide
Social Security numbers to charities given concerns over identity
theft:
- Social Security numbers are generally required on information returns
and IRS uses Social Security numbers to match information returns to
tax returns;
- Donors may perceive that charities will not adequately safeguard
their Social Security numbers;
- Many charities rely on volunteers, to whom donors may not want to
provide their Social Security numbers;
- An alternative means to uniquely identify donors, that is, for IRS to
provide separate, unique numbers for this purpose, could alleviate
donor concerns about identity theft but could be burdensome to
implement.
With information reporting, taxpayers may reduce their contributions
because of privacy concerns:
* Taxpayers may not want the federal government to know to which
charities they donate;
* Privacy concerns may be particularly relevant for donations to
religious organizations.
Information reporting could lead to a reduction in spontaneous giving
(such as at a fund-raising event) or onetime gifts (such as a memorial
gift) if taxpayers perceived information reporting to be too
burdensome.
Information reporting could inhibit anonymous giving:
* Currently, anonymous donors can receive substantiation letters from
recipient charities through representatives on the donors‘ behalf;
* It may not be possible for taxpayers to deduct anonymous donations if
information reporting were required.
Other challenges to using information reporting with charitable cash
contributions exist.
* Information reporting would have to account for contributions for
which the taxpayer received a benefit (i.e., gross versus net
contributions).
* Information reporting would not be possible for taxpayers who deduct
out-of-pocket expenses (such as car expenses directly related to giving
services to a charitable organization),which are classified as cash
donations for tax purposes, because of the lack of a third-party
document for substantiation.
Concluding Observations:
Information reporting generally results in high levels of voluntary
taxpayer compliance and provides IRS with an effective enforcement tool
to address misreporting.
The costs and burden that information reporting for cash contributions
could pose for charities could be mitigated to some extent by exempting
some contributions from reporting.
However, exempting some cash contributions would likely limit
improvements in voluntary compliance and the effectiveness of
information reporting as an enforcement tool for IRS.
Also, both the extent to which misreporting is because of taxpayers‘
lack of documentation and whether a more stringent recordkeeping
requirement that went in effect for tax year 2007 has improved taxpayer
recordkeeping are unclear.
The results of an ongoing NRP study could identify whether and to what
extent reporting compliance improved following the new recordkeeping
requirement.
[End of enclosure]
Footnotes:
[1] Individual taxpayers overstated about $16 billion and understated
about $2.2 billion in cash contributions, resulting in a net
overstatement of $13.8 billion. The $13.8 billion includes charitable
contributions made by cash, check, credit card, electronic funds
transfer, or payroll deduction, but does not include donations of
property, such as stocks or bonds, vehicles, or household items, which
individual taxpayers report separately on their tax returns. IRS
estimated that individual taxpayers overstated their deductions for
these noncash contributions by about $4 billion, in net terms, for tax
year 2001.
[2] IRS estimated that it would eventually collect about $55 billion of
the gross tax gap through late payments and IRS enforcement actions,
leaving a net tax gap of around $290 billion. Unless otherwise noted,
references to the tax gap refer to the gross tax gap.
[3] Information reporting is required for some other types of
charitable contributions, such as the donation of motor vehicles,
airplanes, or boats resulting in gross proceeds of more than $500.
[4] 44 U.S.C. §§ 3501-3520.
[5] Estimate has a margin of error of 34 percent.
[6] In addition to the instructions to Schedule A of the individual tax
return, on which taxpayers itemize their deductions, including those
for charitable cash contributions, IRS produces two publications that
cover charitable cash contribution reporting and recordkeeping
requirements--Publication 526, Charitable Contributions, and
Publication 1771, Charitable Contributions - Substantiation and
Disclosure Requirements.
[7] Pub. L. No. 109-280, § 1217, 120 Stat. 780, 1080 (Aug. 17, 2006),
26 U.S.C. § 170(f)(17).
[End of section]
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