IRS Has Failed to Effectively Oversee Charities, Says Draft Report From Congressional Research Unit
By Harvy Lipman


A draft report by the investigative arm of Congress concludes that the Internal Revenue Service lacks adequate data on the finances of nonprofit groups and has failed to develop effective strategies for overseeing charities.

The draft report, prepared by the General Accounting Office at the request of Sen. Charles E. Grassley, an Iowa Republican, also says that state officials believe the IRS does not share enough information with state charity regulators. It adds that the Form 990 informational tax return filed by nonprofit organizations does not provide all the information the IRS needs to properly oversee charities.

The summary findings of the draft report were published in the electronic newsletter of the Direct Marketing Association Nonprofit Federation. The release set off a minor tempest, with GAO officials insisting they had told Lee M. Cassidy, the federation's director, that the copy of the draft they sent him was strictly confidential, and Mr. Cassidy saying he was never told the summary could not be made public. The report is scheduled to be issued later this month, at the earliest.

Jill Gerber, a spokeswoman for Mr. Grassley, said the senator was "profoundly unhappy" that the federation had sent copies of the draft summary to its newsletter's 550 subscribers.

In a note to federation newsletter subscribers, Mr. Cassidy says he expects Mr. Grassley to propose legislation making "significant changes" in the way the IRS regulates charities. Ms. Gerber said it is premature to reach any conclusions about what the senator will propose as a result of the GAO report -- especially because it isn't finished yet. That is why the senator is upset at its release by the federation, she added.

Over the past 10 months Mr. Grassley, the senior Republican on the Senate Finance Committee, has requested a series of investigations into charities and the federal government's oversight of them ( The Chronicle, April 18). He requested the GAO study last summer, saying he was particularly concerned about the many charities that are used, in the senator's words, "as vehicles to defraud taxpayers who believe they are contributing to a worthwhile cause" (The Chronicle, July 26).

Mr. Grassley asked the GAO to determine how much of the money charities raise is spent on charitable programs, how good a job the IRS is doing at making sure charities comply with federal tax laws, and whether the IRS is doing a good job of cooperating with state regulators.

The draft report concludes that several problems exist with the data the IRS collects from the Forms 990 filed by nonprofit groups. "Form 990 data alone are not adequate for oversight, and caution is warranted in using the data," the GAO states in the draft report.

It adds that the IRS and various other groups have noted inaccuracies in the way charities report expenses on the forms, although the tax service has not determined the extent to which improper information is reported.

The draft report adds that federal law gives nonprofit organizations "considerable discretion" in the way they report expenses, and as a result it is very difficult to compare the data filed by different charities.

As for the quality of oversight conducted by the IRS, the draft report states, "Concerns arise because IRS's resources have not kept pace with growth in the charity sector." It adds that the number of IRS employees overseeing tax-exempt organizations decreased by 16 percent from 1996 to 2001, while the number of Forms 990 being filed by charities increased 25 percent. The IRS currently examines only 0.43 percent -- fewer than 5 of every 1,000 -- of those tax returns annually, the draft report notes.

It also says that state charity regulators think the IRS does not keep them informed about charities whose applications for tax-exempt status are denied or that have their tax exemptions revoked by the service. In addition, the draft report says, federal tax laws prohibit the IRS from sharing valuable data with state regulators.

The draft study says , however, that the IRS "has agreed to improve its sharing of data" and "to explore possible changes to federal law to expand data sharing."

In the federation newsletter, Mr. Cassidy said that he had spent "several hours" helping the GAO's chief investigator "understand the composition of the charitable community."

The fact that the investigator sent Mr. Cassidy a summary of the draft report's findings, he added, shows "that helpfulness has now paid off."

That, however, is not how the GAO views the matter. Thomas Short, an assistant director of the GAO, said he had sent Mr. Cassidy a copy of the draft summary along with a draft of the section on telemarketers because Mr. Cassidy had been interviewed as part of the GAO study.

"We told him we would appreciate any comments he had on the section that was relevant to his organization," Mr. Short said. He added that he had made it clear in a phone call to Mr. Cassidy that any material the GAO sent the federation prior to the official release of the report was to be kept confidential.

"He didn't say that," Mr. Cassidy responded. "It doesn't say any place on that report to keep it confidential, so I thought it could be released."