IRS and state charity regulators both play a key role providing oversight  of charitable organizations. However, the health and  education sectors had the largest amount of assets. The human services sector includes activities related to  employment, housing and shelter, and youth development. In addition to being concentrated in a few sectors, a large  proportion of total assets were controlled by a relatively small number of  charitable organizations. Limited Resources Contribute to Fewer Examinations

With IRS budget cuts, the number of EO FTEs has declined over the past  several years, leading to a steady decrease in the number of  organizations examined. For  charitable organizations, the examination rate was about 0.7 percent in  2013, while for individual and corporate tax returns it was 1 percent and  1.4 percent, respectively. From fiscal year 2011 to 2013, the  exam rate decreased from .81 percent to .71 percent (by about 12  percent). Lack of Timely and Complete Data Limits IRS Ability to Provide Adequate Oversight of Charitable Organizations and to Provide for the Transparency of the Tax- Exempt Sector

The e-filing rate for tax-exempt organizations is significantly lower than for  other taxpayers and organizations. Expanded e- filing may result in more accurate and complete data becoming available  in a timelier manner, which in turn, would allow IRS to more easily identify  areas of noncompliance. In our 2014 report on partnerships and S  corporations, we recommended that Congress consider expanding the  mandate for partnerships and corporations to electronically file their tax  returns in order to cover a greater share of filed returns. However, state regulators and other subject matter specialists said  statutory requirements for safeguarding taxpayer information and  uncertainty about how these safeguards must be implemented limit state  regulators’ ability to use relevant information shared by IRS. Conclusions

EO oversight of charitable organizations helps ensure that these entities  abide by the purposes that justify their tax exemption and protects the  sector from potential abuses and loss of confidence by the donor  community. However, these actions  have not addressed measuring the outcomes of EO activities (such as the  effect of EO’s actions on the compliance rate for the charitable sector as  a whole), for specific segments of the sector (such as universities and  hospitals), or for particular aspects of noncompliance (such as personal  inurement or political activity). Because EO does not measure the current level of  compliance, it cannot set goals for increasing compliance or know to what  extent its actions are affecting compliance. The Exempt Organizations Business Division is grappling with several  other challenges that complicate oversight efforts. This  lower rate means that there is less digitized data available for data mining  and analytics and higher labor costs for IRS. A lack of clarity about how state charity regulators can use IRS data to  build cases against suspect charitable organizations impedes regulators’  ability to leverage IRS’s examination work. Direct EO to develop quantitative, results-oriented compliance goals  and additional performance measures and indicators that can be used  to assess impact of exams and other enforcement activities on  compliance. 2. GAO staff members who made major contributions to this report  are listed in appendix V.

Appendix I: Scope and Methodology

This report (1) describes what is known about the number, type, size, and  other characteristics of 501(c)(3) charitable organizations; (2) describes  IRS oversight activities for charitable organizations; (3) determines how  IRS assesses its oversight efforts of charitable organizations to ensure  they are meeting their charitable purposes; and (4) determines how IRS  collaborates with state charity regulators and U.S. Attorneys to identify  and prosecute organizations suspected of engaging in fraudulent or other  criminal activity.
Why GAO Did This Study

IRS oversight of charitable organizations helps to ensure they abide by the purposes that justify their tax exemption and protects the sector from potential abuses and loss of confidence by the donor community. In recent years, reductions in IRS's budget have raised concerns about the adequacy of IRS oversight.
GAO was asked to review IRS oversight of charitable organizations. In this report, GAO (1) describes the charitable organization sector, (2) describes IRS oversight activities, (3) determines how IRS assesses its oversight efforts, and (4) determines how IRS collaborates with state charity regulators and U.S. Attorneys to identify and prosecute organizations suspected of engaging in fraudulent (or other criminal) activity.
GAO reviewed and analyzed IRS data, strategic planning and performance documents, and documented improvement efforts. We also interviewed IRS and Department of Justice officials, state charity regulators, and subject matter specialists. GAO compared IRS's practices to federal guidance on performance management.

What GAO Found

Charitable organizations play a major role in our economy and provide critical services and resources to families and individuals in need. Although charitable organizations vary considerably in size and purpose, in 2011 the largest number of organizations was in the human services sector, providing services such as employment and housing assistance. The highest concentration of assets was in the health and education sectors, which include hospitals and universities. In addition to being concentrated in a few sectors, a large proportion of all assets were controlled by a relatively small number of charitable organizations—less than 3 percent hold more than 80 percent of the assets.
Over the past several years, as the Internal Revenue Service (IRS) budget has declined, the number of full-time equivalents (FTEs) within its Exempt Organizations (EO) division has fallen, leading to a steady decrease in the number of charitable organizations examined. In 2011, the examination rate was 0.81 percent; in 2013, it fell to 0.71 percent. This rate is lower than the exam rate for other types of taxpayers, such as individuals (1.0 percent) and corporations (1.4 percent).
EO is grappling with several challenges that complicate oversight efforts. While EO has some compliance information, such as how often exams result in change of tax exempt status, it does not have quantitative measures of compliance for the charitable sector as a whole, for specific segments of the sector (such as universities and hospitals) or for particular aspects of noncompliance (such as personal inurement or political activity). Because EO does not have these measures and does not know the current level of compliance, it cannot set quantitative, results-oriented goals for increasing compliance or assess to what extent its actions are affecting compliance.
Statutory requirements for safeguarding taxpayer data limit both IRS's ability to share data and state regulators' ability to use it. A lack of clarity about how state regulators are allowed to use IRS data to build cases against suspect charitable organizations further impedes regulators' ability to leverage IRS's examination work.
The e-filing rate for tax-exempt organizations is significantly lower than for other taxpayers. This lower rate means there is less digitized data available for data analytics and higher labor costs for IRS. Expanded e-filing may result in more accurate and complete data becoming available in a timelier manner, which in turn, would allow IRS to more easily identify areas of noncompliance.

What GAO Recommends

GAO recommends IRS 1) develop compliance goals and additional performance measures that can be used to assess the impact of enforcement activities on compliance and 2) clearly communicate with state charity regulators how they are allowed to use IRS information related to examinations of charitable organizations. GAO also recommends that Congress consider expanding the mandate for 501(c)(3) organizations to electronically file their tax returns to cover a greater share of filed returns. In written comments, IRS agreed with GAO's recommendations.