TIGTA: IRS Needs to Crack Down on Non-Filing Charities

The Treasury Department’s Inspector General for Tax Administration is urging the IRS to ensure better compliance by tax-exempt organizations that don’t file their tax returns.

TIGTA has released a report recommending that a comprehensive, documented strategy is needed to focus the IRS’s effort on improving compliance by non-filing charities. Even though they are technically tax-exempt, such organizations are generally required to file an annual information return with the IRS. The IRS recently revised its Form 990 to require charities and other types of nonprofits to reveal more information about matters such as executive compensation. TIGTA said in its audit report that it believes steps could be taken by the IRS to more fully identify and address tax-exempt non-filers.

“The filing of required tax-exempt organization returns in a timely manner is critical to increasing the ability of taxpayers to accurately view the operations of tax-exempt organizations and make contribution decisions,” said the report.

TIGTA acknowledged that the Exempt Organizations function within the IRS’s Tax Exempt and Government Entities Division has taken many actions to identify non-filers and obtain delinquent returns.

However, TIGTA believes that the division's Exempt Organizations function needs to develop a documented non-filer strategy that could allow it to evaluate and improve case selection criteria to ensure that cases with the best potential for affecting the non-filer population are selected, and allocate sufficient resources to work on the cases. The IRS could also develop specific indicators to identify non-filers.

The commissioner of the Tax Exempt and Government Entities Division responded that Exempt Organizations officials plan to evaluate the memorandum of understanding for collection services with the Small Business/Self-Employed Division and consider whether changes are needed. The commissioner stated that it would be more effective to concentrate on educational activities rather than to immediately begin work on TIGTA’s recommendation to determine how best to use Small Business/Self-Employed Division data.

While educational activities are important, TIGTA said it continues to believe the Exempt Organizations function should also concentrate on filing compliance by improving its current non-filer efforts. For example, the IRS should conduct analyses on its current non-filer cases to determine the reasons for non-filing, the impact of delinquent return notices, and other non-filer trends.