Within the charitable community, various organizations have been concerned about the accuracy of charitable expense reporting, with concerns often focusing on fundraising expenses. First, IRS does not have a process to proactively share data that it is allowed to provide to states, such as data on the denial or revocation of tax-exempt status. State officials believe that accessing IRS’s oversight data would help them allocate resources in overseeing charities. In this oversight framework, IRS has a limited role in considering how well charities are spending funds or accomplishing charitable purposes. However, due to suspected but unmeasured inaccuracy in some charities’ reporting of their expenses and to the range of discretion that charities have in charging and allocating expenses, Form 990 expense data alone are not adequate for public oversight of charities and should be used with caution. IRS’s investment in reviewing charity applications and examining charity returns has not kept pace with the growth in the number of applications and returns. Furthermore, certain issues related to charities, such as the extent to which their fundraising activities may be misleading, can be addressed by state officials. Recommendations

To improve oversight by the public, IRS, and the states, we recommend that the commissioner of Internal Revenue   ensures (either through the planned market segment studies or other means) that IRS obtains reliable data on compliance issues (including expense reporting) for the full charity community;   develops results-oriented goals, strategies (including levels of staffing and other resources to accomplish the goals), and measures to gauge progress in accomplishing those goals when overseeing the charity community; and   develops, in consultation with state charity officials, a procedure to regularly share IRS data with states as allowed by federal tax law. To obtain recognition of its tax-exempt status, a charity must apply to the Internal Revenue Service (IRS).
Why GAO Did This Study

The tremendous outpouring of charitable donations in response to September 11 has raised concerns about whether some charities are spending too much on fundraising and management and too little on the charitable purposes related to their tax-exempt status.

What GAO Found

GAO found that Form 990 expense data is inadequate for public oversight purposes because charities have considerable discretion in recording their expenses when it comes to fundraising, management, and charitable services. The Internal Revenue Service (IRS) lacks data on the type and extent of possible compliance issues among charities. Moreover, IRS oversight of charities suffers from a lack of results-oriented goals and strategies. Concerns have also been raised that IRS's resources have not kept pace with the growth in the charitable sector, and some measures suggest that available resources may not be used as effectively as in the past. State officials consider inadequate the charity data IRS shares with them. IRS does not proactively share some data that states are permitted to receive, such as denials and revocations of charities' tax-exempt status. Federal law prohibits sharing some data that state officials believe would be valuable, such as the status and results of examinations of charities' returns.