Exempt Organizations Advisory - IRS Continues to Target Tax-Exempt Organizations

In two recent speeches, Mark Everson, Commissioner of Internal Revenue, has made it clear that exempt organizations continue to be a major focus of the IRS’s enforcement program.

On March 20, the Commissioner testified before the Subcommittee on Oversight of the House Ways and Means Committee regarding the 2007 income tax filing season and the 2008 budget request.

He stated that examinations of tax-exempt organizations have risen, as a part of expanding enforcement efforts by the IRS. According to Everson, the IRS closed examinations on 5,342 tax-exempt organizations in FY 2001; this number rose to 7,079 in FY 2006.

Tax-exempt organizations are included in a list of six specific initiatives aimed at improving compliance proposed in the FY 2008 Budget. According to Everson’s testimony, $15 million is designated to target abuse by entities under the jurisdiction of the Tax-Exempt and Governmental Entities Division (TE/GE) and misuse of such entities by third parties for tax avoidance or other unintended purposes. The goal of the additional funding is to increase the number of TE/GE compliance contacts by 1,700 (6%) and employee plan/exempt organization determinations closures by over 9,000 (8%) by FY 2010. In addition to tax-exempt organizations, TE/GE is responsible for employee plans; tax-exempt bonds; federal, state and local governments; and Indian tribal governments.

On March 27, Commissioner Everson spoke at the National Press Club and reiterated the IRS’s commitment to enforcement with respect to exempt organizations, in part, to combat "potential damage to the public trust of charitable and tax-exempt institutions" by an increasing convergence between the tax-exempt and commercial sectors. Everson cited credit counseling and housing down-payment assistance as two examples of "bad areas" in which the IRS has intervened.

The Commissioner also addressed the misuse of charitable organizations, in the form of excessive compensation, abuse and poor reporting of loans and expense accounts, abusive donor-advised funds and supporting organizations, and the use of tax-exempt organizations as accommodation parties for abuse of tax shelters.

Finally, Everson addressed the accumulation of assets in the tax-exempt sector, raising questions about "what is potentially needed to support the programs of some of these institutions." He added that an additional question to ask is whether tax-exempt organizations are providing the programs and services that are commensurate with the tax benefit they receive.