Report: IRS Nonprofit Office Needs Improvement

A new report looks at the IRS’s Exempt Organizations office, and the findings say it could use some help.

A new report from the Advisory Committee on Tax Exempt and Government Entities (ACT) found that the IRS office that oversees tax-exempt organizations isn’t prepared to do its job.

The ACT report [PDF], based on extensive interviews with the nonprofit sector, says it’s clear that the role and function of the Exempt Organizations (EO) office has been fundamentally hindered by various critical factors, including dwindling resources, declining budgets, loss of historical knowledge and personnel, and antiquated technology.

“Taken together, these critical factors contribute to a widely held perception that the IRS is not able to regulate our tax-exempt community consistently and effectively,” the ACT report states. “A lack of visibility on the part of the EO is not a neutral position—it is detrimental to the sector it regulates. A lack of responsiveness or guidance inexorably leads to an undermining of the public trust.”

The panel presented its findings and annual recommendations to the IRS on June 8 with some specific areas where the EO office might focus its attention beginning next year.

A 2015 realignment of EO staff and responsibilities contributed to the current status of the office, ACT said. In January 2015, the IRS announced that all formal guidance for nonprofits would now come from the IRS Office of Chief Counsel, which caused EO to lose personnel.

In addition, the report argues that the adoption of Form 1023-EZ—an abbreviated application for tax-exempt status that helped the agency process a backlog of 60,000 tax-exempt applications—demonstrates that while EO is focused on improving efficiencies, it hasn’t addressed examinations or oversight of the tax-exempt sector.

The panel recommended that EO make sure it is fully equipped to carry out its responsibilities by both ensuring that employees are well-trained and that the office is sufficiently staffed.

From 2009 to 2015, the EO office endured a 13.5 percent reduction in staff, and the 2015 realignment resulted in a number of tax law specialists transferring from EO to the Office of Chief Counsel. As a result, audits have dropped, and there has been a reduction in the availability of expertise to answer questions from the community it regulates, the ACT report said. “This reduction is a major impediment to effective regulation of the sector,” it reads.

Notably, the report suggested that the EO office strengthen the expertise of its remaining staff by sending them to conferences held by associations and other types of nonprofit organizations. “We encourage TE/GE leadership to find ways to enable staff to participate in educational opportunities and interactions with the sector itself,” the report said.

Other recommendations for EO included providing nonprofits with necessary tools to be tax-compliant, such has making the website user-friendly, strengthening cybersecurity, increasing transparency by releasing and sharing appropriate information with the public, and opening better communication between EO and the organizations.

(Matthew G. Bisanz/Wikimedia Commons)

Chris Vest, CAE

By Chris Vest, CAE

Chris Vest, CAE is vice president, corporate communications and public relations at ASAE. MORE

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