Section 501(c) entities are  involved in a variety of activities and exempt purposes. Tax-Exempt Assets, Revenues, and Expenses Have Grown, Making It A Significant Sector In The Nation’s Economy

The tax-exempt sector is growing. Figure 1 shows the growth in reported assets for tax years 1998  to 2002 (the most recent year of data). The reported assets grew 15 percent  to over $2.5 trillion—about 12 percent growth for section 501(c)(3)  charities and about 22 percent growth for the other 27 types of noncharities  covered under section 501(c). 2). Tax-Exempt Sector Is a Significant Part of the Economy and Civilian Workforce

The growth in the tax-exempt sector indicates that it has become a major  part of our economy and workforce. Strong Self-governance And Transparency Are Essential Elements For A Thriving And Effective Exempt Sector

Strong self-governance and transparency are essential elements to help  provide assurance that tax-exempt entities operate with integrity and  effectiveness in meeting their missions while maintaining public trust. Transparency Complements Good Governance

While strong governance practices can help ensure that tax-exempt entities  operate effectively and with integrity, public availability of key information  about the entities--i.e., transparency--can both enhance incentives for  ethical and effective operations and support public oversight of tax-exempt  entities, while helping to achieve and maintain public trust. This is in stark contrast to the  strong protections for the privacy of individuals’ tax returns. Recent Concerns about Abuses Have Led to Support for Enhanced Governance Processes and Transparency

With recent concerns about abuses in the tax-exempt sector, attention has  been renewed on improving the sector’s governance and transparency. More information about the practices employed by exempt entities  to compensate executives and others, and by nonprofit hospitals to serve  their patients, would be valuable. This House Committee on Ways and Means’  hearing exemplifies that interest. IRS Has Been Challenged to Oversee Tax-Exempt Entities and Is Beginning Steps to Enhance Its Oversight Capacity

Staffing and insufficient data have constrained IRS’s oversight of the tax- exempt sector. 4). IRS Has Identified Priority Compliance Issues and Is Working to Address Them

Because of increasing concerns about specific types of noncompliance, IRS  has created initiatives to address specific abuses across the tax-exempt  sector. IRS plans to address other compliance problems as well. States Play an Important Role in Overseeing Tax- Exempt Entities and May Benefit from Additional Coordination With IRS

In addition to IRS oversight, states oversee tax-exempt entities, often  focusing on potential fund-raising fraud and misuse of charitable assets. Our lives are enriched and improved through  the work of this sector. As we recommended, we look forward to IRS, the  Department of the Treasury, and states identifying the specific information  that should be shared and procedures for sharing it consistent with  taxpayer privacy rights, to help Congress in deliberating changes to current  restrictions on IRS sharing such data with the states. 501(c)(7) orgs. IRS Data on Its Tax-Exempt Oversight

The following tables summarize data provided by IRS on its oversight  activities involving tax-exempt entities under section 501(c) of the Internal  Revenue Code.
Why GAO Did This Study

The tax-exempt sector under section 501(c) of the Internal Revenue Code covers over a million-and-a-half entities of varying sizes and purposes. Its diversity allows it to address the needs of many citizens. To help it do so, Congress and some in the tax-exempt sector itself encourage good governance practices by exempt entities. Transparency over exempt entities' activities is aided by public access to their annual tax returns. As the nation's tax administrator, the Internal Revenue Service (IRS) has a key role in overseeing this sector. Oversight can help ensure adherence to exempt purposes, protect against abuses, and sustain public support for the sector. The Chairman of the House Committee on Ways and Means asked GAO to address (1) the growth of the section 501(c) tax-exempt sector; (2) the role of governance and transparency in ensuring that tax-exempt entities function effectively and with integrity; (3) IRS's capacity for overseeing the exempt sector, including its results and efforts to address critical compliance problems; and (4) states' oversight and their relationship with IRS in overseeing the tax-exempt sector.

What GAO Found

The section 501(c) tax-exempt sector has grown steadily in reported assets, revenues, and expenses. For example, between 1998 and 2002 (the most recent year of data), its reported assets grew to over $2.5 trillion---with 12 percent growth for 501(c) charities and 22 percent growth for other 501(c) entities (noncharities). Accordingly, this tax-exempt sector comprises a significant part of the nation's economy and workforce. For example, spending in this sector appears to be about one-tenth of our economy and the paid exempt workforce appears to be comparable in size to some of the largest sectors of the U.S. civilian workforce, such as food and lodging. Good governance and transparency are essential elements to help provide assurance that exempt entities operate with integrity and effectiveness in meeting their missions. Good governance facilitates well-run operations that dissuade abusive behavior. Transparency sheds light on entities' practices, which enhances ethical and effective operations and facilitates oversight by the public and others. With recent concerns about abuses in the tax-exempt sector, renewed attention is being given to improving governance practices and increasing the transparency related to the sector. Staffing trends and insufficient data have contributed to IRS being challenged in executing its oversight role. IRS has begun to increase staffing, obtain better data on tax-exempt entities, and increase its capacity to analyze and use the data it obtains. For the critical compliance issues IRS has identified, it has started special initiatives to improve compliance. States often oversee tax-exempt entities, frequently focusing on protecting the public from fraudulent activities and guarding against misuse of charitable assets. States and the IRS believe that more data sharing would make their oversight more efficient and effective. Consistent with our earlier recommendations, IRS has improved its processes for sharing its oversight data with the states, and Congress is considering expanded data sharing.