GAO

United States Government Accountability Office

A

Testimony

Before the House Committee on Ways and Means 

For Release on Delivery 

Expected at 10:30 a.m. EST 

Wednesday April 20, 2005

TAX-EXEMPT SECTOR 

Governance, Transparency, 

and Oversight Are Critical 

for Maintaining Public 

Trust 

Statement of David M. Walker

Comptroller General of the United States

GAO-05-561T
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-561T. 

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Michael 

Brostek at (202) 512-9110 or 

brostekm@gao.gov. 

Highlights of GAO-05-561T, a testimony 

before the House Committee on Ways and 

Means 

April 20, 2005

TAX-EXEMPT SECTOR

Governance, Transparency, and 

Oversight Are Critical for Maintaining 

Public Trust 

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. 

Assets Reported by Section 501(c) Entities in 2004 Constant Dollars, Tax Years 1998-2002 

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) taxexempt 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 Recommends

GAO makes no recommendations 

but suggests a full re-examination 

of the tax-exempt sector in light of 

the challenges facing the nation in 

the 21st century. 
Page 1 GAO-05-561T 

Chairman Thomas and Members of the Committee:

I am pleased to participate in today’s hearing about the tax-exempt sector 

and oversight of it. The sector recognized under section 501(c) of the 

Internal Revenue Code (IRC) covers a diverse group of over 1.5 million 

entities with varying sizes and exempt purposes (see app. I for types of 

section 501(c) exempt entities). The breadth and diversity of the taxexempt sector allows it to address the specific needs of many of our 

citizens and the general needs of society. The exempt sector, and those 

who volunteer to assist, also supplements government programs to meet 

various needs. For example, charities can supplement programs by 

providing comfort to the aging, health care to the uninsured, and education 

to the uneducated. 

As the nation’s tax administrator, the Internal Revenue Service (IRS) has a 

key role in overseeing the tax-exempt sector. Oversight can help sustain 

public faith in the sector and ensure that exempt entities stay true to the 

purposes that justify their tax exemption. It also can help protect the entire 

sector from potential abuses initiated by a small minority. 

Before discussing the work we did for the Committee, I want to frame 

today’s hearing within a broader context. GAO recently issued a report 

entitled, 21st Century Challenges: Reexamining the Base of the Federal 

Government.1 This report provides examples of a number of key questions 

that need to be explored in light of our current and projected fiscal 

imbalances as well as other changes and challenges. It highlights the need 

for a re-examination of all major federal policies and programs in light of 

21st century realities. Although that report did not specifically cover the 

tax-exempt sector, the sector is a microcosm of the issues raised in the 

report. While the provisions granting federally recognized tax-exempt 

status and associated policies have been layered upon one another to 

respond to challenges at the time, a comprehensive re-examination of the 

tax-exempt sector has not been done in recent times. On a broad scale, a 

comprehensive re-examination could help address whether exempt entities 

are providing services to our citizens commensurate with their favored tax 

status, whether the current number and nature of exemptions continue to 

make sense, whether restrictions on the activities of tax-exempt entities 

remain relevant, and whether the framework for ensuring that exempt 

entities adhere to the requirements attendant to their status is satisfactory.

1 GAO-05-325SP.
Page 2 GAO-05-561T 

Today’s hearing provides an excellent forum to launch such a reexamination. Some of the more specific issues that may merit reexamination for the tax-exempt sector include: 

• Should the criteria for granting exempt status be reconsidered and do 

we need as many types of tax-exempt entities? 

• Do we need to modify the model used in overseeing tax-exempt entities 

to ensure that the tax- exempt purpose is met and that fraud or other 

misuse is deterred?

• What governance standards should apply to the tax-exempt sector, and 

should particular types of exempt entities have more specific standards?

• Are the operations and activities of tax-exempt organizations 

sufficiently transparent to support oversight by the public, news media, 

and federal, state, and local governmental agencies?

• Beyond revoking tax-exempt status and various currently available 

intermediate sanctions, do we need more intermediate sanctions to 

deter abuse and enhance accountability while minimizing any damage to 

those served by the exempt entity?

• Should certain federal audit and internal control requirements apply to 

tax-exempt entities, and if so, how should the requirements vary 

according to entities’ size or other characteristics?

• Is there sufficient transparency over the total compensation package 

and its justification for executives and other officials at tax-exempt 

entities?

• What should be the allowable “lobbying and political” activities in which 

different types of tax-exempt entities can engage and how should such 

activities be reported?

• What are the differences between nonprofit and for-profit entities that 

perform similar missions, such as nonprofit and for-profit hospitals, and 

do the nonprofit entities provide sufficiently different services to justify 

their exemption? 
Page 3 GAO-05-561T 

Based on your request, I will discuss

• the growth of the tax-exempt sector, focusing on those entities whose 

tax-exempt status falls under section 501(c) of the IRC;

• the roles of sound governance practices and transparency in ensuring 

that tax-exempt entities function with integrity and perform their 

missions effectively;

• IRS’s capacity for overseeing those exempt from taxation under section 

501(c), results of its oversight activities, and efforts to address critical 

compliance problems; and

• the states’ role in overseeing tax-exempt entities and their relationship 

with IRS in conducting oversight.

To summarize the growth of the tax-exempt sector, we analyzed data filed 

annually with IRS by section 501(c) entities. To summarize governance 

practices and transparency in the tax-exempt sector, we reviewed 

documents published by IRS and others, and official statements made in 

testimony before Congress. To summarize IRS’s oversight capacity, results, 

and efforts to deal with critical compliance problems, we reviewed IRS’s 

data and interviewed IRS officials. To summarize the role of states and 

their relationship with IRS, we reviewed our previous reports2

 and outside 

articles and reports. To the extent possible, we sought data from 1998 

through the most recent year available for all descriptive statistics. We 

reviewed the reliability of the data used and found them reliable for our 

purposes. We did our work from December 2004 through March 2005 in 

accordance with generally accepted government auditing standards. 

Let me begin by highlighting key points I will make.

• The 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 available data), their reported assets grew 15 percent to 

over $2.5 trillion. Accordingly, the tax-exempt sector comprises a 

2

 See Tax-Exempt Organizations: Improvements Possible in Public, IRS, and State 

Oversight of Charities, GAO-02-526 (Apr. 30, 2002); Political Organizations: Data 

Disclosure and IRS's Oversight of Organizations Should Be Improved, GAO-02-444 (July 

17, 2002); and Vehicle Donations: Benefits to Charities and Donors, but Limited Program 

Oversight, GAO-04-73 (Nov. 14, 2003).
Page 4 GAO-05-561T 

significant part of the nation’s economy and workforce. For example, 

spending in the tax-exempt 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. The sector’s significance in the economy might be 

greater because the asset, revenue, and expense data are likely 

understated to some unknown amount. For example, the data do not 

include all tax-exempt entities under section 501(c) because not all 

entities are required to file, such as religious entities, and some entities 

do not file required Form 990. 

• Good governance and transparency are essential elements to ensure 

that tax-exempt entities operate with integrity and effectiveness in 

carrying out their missions. Governance facilitates well-run operations 

that dissuade abusive behavior. Transparency sheds light on entities’ 

practices, which enhances incentives for ethical, efficient, and effective 

operations and facilitates oversight by the public and others. With 

recent concerns about abuses within the tax-exempt sector, renewed 

attention is being given to improving governance practices and 

expanding and increasing the transparency of the sector’s operations.

• Staffing trends and insufficient data have contributed to IRS being 

challenged in executing its oversight role. IRS has begun to increase 

staffing during 2005, which results in 467 full-time equivalents (FTE) to 

examine the compliance of about a half million section 501(c) entities 

that file Forms 990. However, IRS does not know the extent to which 

these entities comply. Recognizing this, IRS started efforts in 2002 to 

obtain compliance data for various segments of the exempt sector but 

had to suspend most of these efforts to use those resources on higher 

priorities such as pursuing known types of noncompliance. For 

example, IRS has ongoing special compliance initiatives dealing with 

critical issues such as excessive compensation and abusive tax 

transactions involving exempt entities. IRS is also seeking ways to 

access and better analyze existing data at IRS or elsewhere on exempt 

entities. 

• States often oversee tax-exempt entities, frequently focusing on 

protecting the public from fraudulent activities and guarding against 

misuse of charitable assets. States and 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 data and Congress has been considering a 
Page 5 GAO-05-561T 

legislative proposal to expanded IRS’s authority to share data with 

specified state officials under appropriate restrictions and protections 

related to using the data.

My statement today will address each of these topics in turn. Before that, I 

will provide some background on the tax-exempt sector and IRS’s oversight 

of it.

Background Internal Revenue Code (IRC) section 501(c) specifies 28 types of entities 

that are eligible for tax-exempt status and over 1.5 million entities have 

been recognized as exempt as of 2003.3

 Section 501(c) entities are 

involved in a variety of activities and exempt purposes. Congress 

authorized the tax exemption for each type of entity to meet specific 

purposes, such as health care for the uninsured. 

Almost two-thirds of these entities--over 960,000 in 2003--were classified as 

501(c)(3) charities, which have exempt purposes such as serving the poor; 

advancing religious, educational, and scientific endeavors; protecting 

human rights; and addressing various other social problems.4

 About 

another 20 percent of exempt entities were social welfare organizations, 

labor unions, and business associations--501(c) (4 through 6), respectively. 

The remainder covered an array of types of exempt entities with varying 

purposes and numbers. In 2003, such types included 15 teacher retirement 

funds, over 10,000 cemetery companies, over 4,000 state-chartered credit 

unions, an employee-funded pension trust, 20 corporations to finance crop 

operations, and over 35,000 veteran organizations. 

An entity that believes it meets the requirements set by Congress must 

apply to IRS to obtain tax-exempt recognition by submitting the following:

5

3

 Other types of tax-exempt entities are authorized under other Section 501 subsections 

such as for cooperative hospital service or educational investment organizations or under 

other sections such as Section 521 (farmer cooperatives) and Section 527 (political 

organizations), among others.

4

 Taxpayers may deduct from their taxable income the value of donations to charities, unlike 

for almost all other types of tax-exempt entities.

5 Entities that are not required to apply include those that are not private foundations and 

that have gross receipts of less than $5,000 as well as churches and church-affiliated entities.
Page 6 GAO-05-561T 

• Form 1023 (Application for Recognition of Exemption under Section 

501(c) (3) of the Internal Revenue Code) or Form 1024 (Application for 

Recognition of Exemption under 501(a)); 

• organizing documents, such as the Articles of Incorporation, Articles of 

Association, Trust Indenture, Constitution, or other enabling 

documents;

• 4 years of financial data;6

 and

• a full description of the purposes and the activities of the entity.

After receiving tax-exempt recognition, many entities must annually file a 

Form 990 to report their financial transactions and activities for a “tax 

year” (see app. II for a copy of Form 990) if annual gross receipts are 

normally more the $25,000. Those that have less than $100,000 in gross 

receipts and year-end assets of less than $250,000 may use Form 990-EZ. 

Generally, entities with gross receipts below $25,000 are not required to 

file. Certain types of entities such as churches and religious organizations 

also are not required to file. Form 990 has information on revenues, 

expenses, and assets. For 2003, the form had 105 line items on 6 pages as 

well as 46 pages of instructions plus two schedules. Schedule A covers 

several areas such as compensation, lobbying, and revenue sources. 

Schedule B covers the source of contributions to charities and certain 

other exempt entities, such as IRC Section 527 political organizations.

IRS oversight relies on two activities. First, IRS reviews applications for 

tax-exempt status to determine whether a tax-exempt purpose is 

envisioned. IRS can approve or deny the application. Once an application 

is properly completed, the criterion for approving or denying the 

exemption is whether the applicant provides sufficient evidence that its 

operations will match an allowable exempt purpose. Second, IRS annually 

examines some Forms 990 to determine whether selected exempt entities 

meet various requirements (such as restrictions on political activities). In 

general, IRS attempts to select entities that it believes are likely to have 

violated requirements. IRS can accept the Form 990 as filed or change the 

6

 If the entity has operated for less than a year or has not begun operations, a proposed 

budget for two full accounting periods and a current statement of assets and liabilities will 

be acceptable. Otherwise, entities that have operated for less than 4 years should report 

data for those years.
Page 7 GAO-05-561T 

status of the entity, impose excise taxes for certain types of violations, or 

revoke the exempt status if the violations are serious enough. IRS can also 

assess taxes if an entity has not fully paid employment taxes or taxes on 

unrelated business income.

Given concerns about the tax-exempt sector, the Senate Committee on 

Finance asked that a panel of experts make recommendations to Congress 

to improve oversight, transparency, and governance in the sector. To do so, 

the Independent Sector7

 convened a Nonprofit Sector Panel in October 

2004, which includes 24 nonprofit and philanthropic leaders.8

 It provided 

an interim report of findings and recommendations in March 2005 and 

plans to issue a final report in June 2005. 

Tax-Exempt Assets, 

Revenues, and 

Expenses Have Grown, 

Making It A Significant 

Sector In The Nation’s 

Economy

The tax-exempt sector is growing. During 1998 through 2002, more entities 

have been filing Forms 990 and reporting higher amounts of assets, 

revenues, and expenses. These reported amounts indicate that the taxexempt sector is a significant part of the economy and the civilian 

workforce. 

The data on the growth in assets, revenues, and expenses reported on the 

annual Form 990 are likely to be understated because not all tax-exempt 

entities under section 501(c) are included. Entities below certain asset or 

gross receipt tolerances are not required to file. Nor are various types of 

religious entities. Further, an unknown number of tax-exempt entities do 

not file the required Form 990. The number and finances of those not 

included are unknown. 

Tax-Exempt Entities Have 

Reported Increased Assets, 

Revenues, and Expenses 

For tax years 1998 through 2002, the number of section 501(c) exempt 

entities filing a Form 990 grew from about 450,000 to 465,000--about 3 

percent (see table 1 in app. III). These Forms 990—of which between 63 

and 65 percent are filed by charities--have been reporting higher asset 

amounts. 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 

7

 The Independent Sector is a national coalition of nonprofit organizations, private 

foundations, and corporate-giving programs that is to support the tax-exempt sector.

8

The panel is assisted by over 100 nonprofit executives and other experts on five work 

groups. 
Page 8 GAO-05-561T 

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). (See table 2 in app. III.) 

Figure 1: Assets Reported by Section 501(c) Entities in 2004 Constant Dollars, Tax 

Years 1998-2002 

The reported revenue and expense amounts also grew from tax years 1998 

through 2002 (see tables 3 and 4 in app. III). However, the amount by 

which reported revenues exceeded expenses has been closing for exempt 

entities filing Forms 990---from about 9 percentage points in 1998 to 2 

percentage points in 2002 (see fig. 2).

0

.5

1.0

1.5

2.0

2.5

3.0

1998 1999 2000 2001 2002

Tax year

Dollars (trillions)

Total assets

501(c)(3) assets (charities)

Non-501(c)(3) assets (noncharities) 

Source: Tabulation of data from IRS’s Return Inventory Classification System, 1998-2002.
Page 9 GAO-05-561T 

Figure 2: Revenue and Expenses Reported by Section 501(c) Entities in 2004 

Constant Dollars, Tax Years 1998-2002 

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. From 1975 to 1995, the real assets of 

entities filing Forms 990 more than tripled while the economy grew 74 

percent during the same 20-year period, according to an IRS study.9

 More 

recently, based on data reported on Forms 990 during 1998 through 2002, 

spending by tax-exempt entities was roughly 11 to 12 percent of the U.S.’s 

gross domestic product (GDP).10 (See table 5 in app. III.) Because the taxexempt sector is not measured as a specified GDP sector, its percentage of 

GDP cannot be compared to official GDP sectors such as medical care or 

housing, which likely include spending by tax-exempt entities. Even so, no 

single sector accounted for more than 15 percent of the GDP in 2002.

0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1998 1999 2000 2001 2002

Tax year

Dollars (trillions)

Tax-exempt entities’ total revenues

Tax-exempt entities’ total expenses

Source: Tabulation of data from IRS's Return Inventory Classification System, 1998-2002.

9 A 20-Year Review of the Nonprofit Sector, 1975-1995, Compendium of Studies of Taxexempt Organizations, Volume 3, IRS Statistics of Income. 

10Gross domestic product is the market value of all goods and services produced within a 

country during a given time period.
Page 10 GAO-05-561T 

Figure 3 indicates that tax-exempt entities appear to account for a major 

portion of the civilian workforce. Data from the U.S. Census indicates that 

over 9.6 million employees in the tax-exempt sector accounted for about 9 

percent of the civilian workforce in 2002. Although generally aligned with 

section 501(c), the Census definition of a tax-exempt entity excluded 

certain types of entities (such as universities, labor unions, religious 

organizations, and public administration), which means that the number of 

tax-exempt employees is understated. 

Figure 3: Paid Employees by Economic Sector as Percentage of U.S. Workforce, 

2002

Note: “Other” category includes 13 economic sectors that individually accounted for less than 8 

percent of the workforce in 2002, including educational services such as technical, driving, and other 

specialized training schools; mining; utilities; construction; and real estate.

Other

46%

Tax-exempt entities

Waste management and remediation

Food and lodging

Retail

14% Manufacturing

14%

9%

8%

9%

Source: U.S. Bureau of the Census, 2002 Economic Census.
Page 11 GAO-05-561T 

In addition to paid workers, one study11 suggests that the number of 

volunteers at certain tax-exempt entities (which account for at least 60 

percent of the sector) grew about 27 percent from 4.5 million in 1982 to 5.7 

million volunteers in 1998. 

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. A 

number of requirements help establish governing structures while required 

public disclosure of information about exempt entities enhances 

transparency. However, recent concerns about abuses in the tax-exempt 

sector have prompted consideration of and support for enhanced 

governance and transparency. 

Good Governance Helps 

Provide Assurance that a 

Tax-Exempt Entity 

Effectively Manages 

Funding and Programs

Governance can be viewed as the collective policies and oversight 

mechanisms in place to establish and maintain sustainable and accountable 

organizations that achieve their missions while demonstrating stewardship 

over resources. Good governance helps ensure that tax-exempt entities are 

well run and that abusive behavior is minimized. Generally, an 

organization’s board of directors has a key role in governance through its 

oversight of executive management, corporate strategy, risk management 

and audit processes, and communications with external stakeholders. This 

is implicitly recognized in some of the statutory and regulatory 

requirements for the tax-exempt sector. 

For example, to obtain federal tax-exempt recognition, applying entities 

must include charters and bylaws with their application. The states in 

which they are established specify what must be included in the charters 

and/or bylaws and the states’ requirements help create a basic governance 

structure for exempt entities. Some states, for instance, have requirements 

for audited financial statements of tax-exempt entities. For example, in 

one state, charities with gross revenue in excess of $100,000 and not more 

than $250,000 are required to file financial statements accompanied by a 

11IRS does not transcribe data on the numbers of paid workers and volunteers. The 

Independent Sector issued a nonprofit almanac with data through 1998 on volunteers at 

entities classified as 501(c) (3) charities, 501(c) (4) social welfare and civic organizations, 

and religious congregations. 
Page 12 GAO-05-561T 

report from a licensed certified public accountant. If gross revenues 

exceed $250,000, the state requires an audited financial statement with an 

independent auditor’s report. 

In addition, Congress and IRS have various requirements to help ensure 

that tax-exempt entities do not engage in activities that are inconsistent 

with their exempt purpose and to promote stewardship over the use of the 

funds. For instance, to ensure that tax-exempt assets are for public rather 

than private benefit, IRS has issued regulations affecting tax-exempt 

entities on “excessive compensation” to officers, directors, or other 

employees. IRS requires market comparability studies and a review of 

compensation by boards of directors. If excessive compensation is found, 

excise taxes under section 4958 for charities and section 4941 for private 

foundations can be levied against the overpaid individual and certain 

managers who knowingly approved the payments. (See app. V for an 

explanation of such excise taxes imposed against private foundations and 

other tax-exempt entities.)

The federal government also has certain accountability requirements that 

affect some tax-exempt entities. OMB Circular A-133, for instance, requires 

those entities, including tax-exempt entities that receive federal awards of 

$500,000 or more per year, to perform an audit of federal funds received 

and expended and of the programs for which the funds were received.

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. Recognizing 

the importance of transparency for tax-exempt entities, Congress provided 

for substantial transparency regarding tax-exempt entities by making their 

Forms 990 publicly available documents. This is in stark contrast to the 

strong protections for the privacy of individuals’ tax returns. 

Since tax exemptions are granted to entities so that they can carry out 

particular missions or activities that Congress judged to be of special value, 

the public availability of the entities’ Forms 990 is one means to help ensure 

that the public has information to judge whether those missions are carried 

out properly. Presumably, when “sunshine” is let in, inappropriate 

activities are less likely to occur. In the particular case of charitable 

organizations, the availability of their Forms 990 provides some 
Page 13 GAO-05-561T 

information for individuals to use in judging whether to make a donation. 

Thus, publicly available information helps establish a “free market” in 

which charities compete for donations, which should encourage efficiency 

and effectiveness. 

At various times, Congress has reinforced the commitment to transparency 

over the operations of tax-exempt entities. For instance, when some 

exempt entities were found to be imposing inappropriate fees or other 

requirements on those seeking to obtain a copy of their Form 990, Congress 

modified the law to provide that copies must be provided without charge to 

the individual other than a reasonable fee for any reproduction and mailing 

costs.12

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. 

Among the proposals being considered for improved governance are 

enhancing the controls and processes for determining executive 

compensation, guarding against other misuse of charitable assets, and 

forestalling tax-exempt entities’ participation in tax avoidance schemes. 

Proposals for enhanced transparency include requiring more information 

in a more timely and user-friendly fashion on the Form 990. 

In recent years, media accounts have publicized certain alleged abuses in 

the tax-exempt sector that speak to failures in tax-exempt entities’ 

governance. For example, a series of articles in 2003 highlighted possible 

misuse of foundations and trusts, citing numerous cases of excess 

compensation, insider loans, self-dealing, extravagant perks, and other 

questionable activities.13 The articles cited, for instance, alleged abuses 

such as:

• A foundation in New York more than tripled its president's 

compensation to over $900,000 between 1997 and 2001. 

12 See IRC Section 6104(d) and changes made by the Tax and Trade Relief Extension Act of 

1998, P.L. 105-277.

13 The Boston Globe ran a series of articles between October and December of 2003 that 

uncovered questionable practices among foundations and trusts. 
Page 14 GAO-05-561T 

• A family-based foundation in Chicago paid two family members over $1 

million during a 5-year stretch and donated only $175,000 to charities. 

Another series of articles pointed to the apparent misuse of easements.14

An easement is when an owner voluntarily restricts changes to real 

property, such as to preserve historic buildings and the environment. 

Donation of the easement to an exempt entity provides an income-tax 

break to the donor. In some cases, insiders at the charities charged with 

policing the restrictions imposed by the easements on development may 

have benefited the most. In other cases, individuals may have claimed tax 

deductions for easement donations even though local or other laws already 

required preservation of the property.

Concerns about excessive compensation and whether some tax-exempt 

entities provide sufficient services to justify their exempt status have 

surfaced regarding nonprofit hospitals. An example of concerns in these 

areas has been offered by the Minnesota Attorney General who recently 

testified on such abuses.15 Among other things, his office found that certain 

tax-exempt health care systems paid for trips to vacation resorts by 

executives and board members without a clear business purpose, and that 

some nonprofit hospitals provided inadequate levels of “charity” care to 

patients without the resources to pay. Across the United States, little is 

known about the extent to which these potential abuses involving excess 

compensation and the level of services provided by nonprofit hospitals 

occur. 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.

Even as these abuses were surfacing, some organizations within the taxexempt sector were seeking to improve the governance and transparency 

within the sector. For example, in recent years, the National Association of 

State Charity Officials (NASCO), the Independent Sector, and the National 

Committee for Responsive Philanthropy, among others, have called for 

revisions to the Form 990. 

14 The Washington Post has been running periodic articles about alleged abuses within the 

tax-exempt sector. The most recent series, in December 2004, concerned the alleged 

donation of historic facade easements to obtain inflated charitable contributions.

15 Testimony of Mike Hatch, Attorney General for State of Minnesota, before the Senate 

Committee on Finance, April 5, 2005.
Page 15 GAO-05-561T 

Others have taken the initiative to establish self-regulatory standards 

independent of those set by IRS. For example, the Better Business Bureau 

has established a seal of approval program to help donors make informed 

decisions and foster public confidence in charities. Charities participating 

in the program are to provide documentation that the bureau uses to 

determine whether its 20 standards have been met. These standards 

address governance and oversight, effectiveness, finances, and public 

information materials. For example, 5 standards are used to measure 

governance and oversight such as through an active and independent 

governing board, and 7 standards are used to ensure that spending is 

honest, prudent, and in accordance with fund-raising appeals.

Concerns about abuses in the tax-exempt sector also have spurred 

congressional interests. This House Committee on Ways and Means’ 

hearing exemplifies that interest. In June 2004, the Senate Committee on 

Finance released a discussion draft of proposals for tax-exempt reforms. 

The draft discussed more than three dozen proposals to generate 

comments about possible legislation. The proposals addressed conflict of 

interest, federal-state coordination, transparency, governance, best 

practices, funding for enforcement, among many others. Such proposals 

mirror similar types of recent requirements to increase accountability and 

oversight of other types of large public and private organizations, such as 

corporations, in which ethical, financial, and other abuses have occurred.

The Panel on the Nonprofit Sector responded to such proposals in its 

March 2005 interim report. In discussing governance and ethical conduct, 

the report pointed to the need for best practices, accepted standards, selfregulation, and education. To improve governance, the report 

recommended that charities enforce a conflict-of-interest policy, select 

board members with some financial literacy, and encourage disclosure of 

illegal practices. The report also advocated more transparency to enable 

public oversight and confidence in tax-exempt entities. It concluded that 

IRS should promote transparency while recognizing the burdens that 

reporting more data can place on exempt entities that are small and lack 

resources. The report supported revising the Form 990, mandating 

electronic filing in coordination with the states for the Forms 990 and 1023, 

and increasing the sanctions for not filing an accurate or timely Form 990. 

The report acknowledged that these steps would not fully dissuade those 

who want to violate standards, and concluded that some government 

oversight is necessary. 
Page 16 GAO-05-561T 

More specifically, among the proposals being considered to improve 

governance and transparency are:

• Governance proposals: 

• Require that compensation for all management positions at a charity 

must be approved annually and in advance, and must be justified in a 

manner that can be understood by those with a basic business 

background.

• Require the board of directors of a charity to establish a conflict-ofinterest policy, a compliance program to address regulatory and 

liability concerns, and program objectives and performance 

measures, among other duties.

• Prohibit board membership to those not permitted to serve on the 

board of a publicly traded company.

• Establish a prudent investor rule for the investment activities of 

charities. 

• Transparency proposals:

• Require the chief executive officer of a tax-exempt entity to sign 

under penalty of perjury that the Form 990 and other forms filed 

comply with the Internal Revenue Code and that reasonable 

assurances were given of the accuracy and completeness of the 

information reported.

• Require disclosure of relationships of a tax-exempt entity with other 

exempt and nonexempt entities, including the formation of taxable 

subsidiaries and transactions with these other entities.

• Require disclosure of annual performance goals and measures by 

charities with over $250,000 in gross receipts.

• Require disclosure of investments by public charities.
Page 17 GAO-05-561T 

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 taxexempt sector. IRS is in the midst of increasing tax-exempt staffing in 

fiscal year 2005 and improving its data on tax-exempt entities as well as 

enhancing its ability to analyze data to help in targeting compliance efforts. 

IRS has identified compliance problems it deems critical and is taking 

actions to address them. 

IRS Oversight Resources 

Have Been Relatively Flat 

Until Recently

Based on a 1997 IRS memorandum and more recent data, it is apparent that 

the staffing level for the functions that are now within the Tax Exempt and 

Governmental Entities (TE/GE) division has been essentially flat since 

1974—2,075 in 1974 versus 2,122 in 2004. These are total staffing levels for 

all of the work done within the current TE/GE, which includes reviewing 

employee pension plan issues and certain other matters. Although we did 

not obtain a measure of the overall change in TE/GE workload from 1974 to 

2004, the number of 501(c) tax-exempt entities increased from around 

670,000 to over 1.5 million. 

From fiscal year 2000 through 2004, IRS staffing for overseeing tax-exempt 

entities stayed relatively flat as measured by the number of FTE staff 

assigned to oversee tax-exempt entities.16 For fiscal year 2005, IRS 

increased the number of FTEs assigned for such work. The assigned FTEs

dropped about 4 percent from fiscal years 2000 through 2004 but increased 

about 11 percent for fiscal year 2005, resulting in a 7 percent increase in 

assigned FTEs overall (see fig. 4). This 2005 increase is due to the FTEs 

assigned to do examinations since the FTEs assigned to do determinations 

of exempt status stayed relatively flat. As of 2005, IRS assigned 467 FTEs to 

examine the hundreds of thousands of entities who generally file Forms 

990 (see table 6 in app. IV).

16 An FTE equals 2,087 hours in a year. IRS did not have comparable FTE data for its exempt 

activities back to 1998 due to its reorganization in 2000. FTEs assigned are what IRS 

budgets for this work. We were unable to obtain reliable data on the FTEs used for taxexempt oversight in time for this testimony. However, because IRS may not use the FTEs 

assigned to examination or determinations for those purposes, the number of hours that 

staff charge to these oversight tasks may be a better indicator of the level of effort.
Page 18 GAO-05-561T 

Figure 4: Assigned FTEs by Type of IRS Activity, Fiscal Years 2000-2005 

Note: “Other FTE” includes technical staff who issue rulings, the Director’s staff, and education and 

outreach.

Competition within IRS for resources helps explain why resources for taxexempt oversight have not increased much until fiscal year 2005. IRS has 

many other priorities in collecting the proper amount of tax from tens of 

millions of individuals and businesses. IRS’s budget emphasizes areas that 

produce tax revenue rather than areas that are regulatory. IRS oversight of 

the exempt sector is primarily regulatory rather than revenue producing. 

IRS exempt officials also said that an ongoing issue is the proper mix of 

resources budgeted for oversight versus other activities such as providing 

guidance or education. Beyond tax-exempt entities, TE/GE must also 

budget resources to deal with pension plans, Indian tribal governments, 

and other types of government entities. 

0

100

200

300

400

500

600

700

800

900

2000 2001 2002 2003 2004 2005

Fiscal year

FTE

Total FTE

Examination FTE

Determination FTE

Other FTE

Source: IRS Exempt Organization officials.
Page 19 GAO-05-561T 

Congressional tax-writing committees have attempted to provide dedicated 

funding for exempt oversight. For example, in 1969, Congress added 

section 4940 to the Internal Revenue Code, which imposes an excise tax on 

the net investment income of private foundations (see app. V for an 

explanation of this tax and tax rates). The legislative history indicates that 

the tax committees intended for the amounts collected from the excise 

taxes would operate as user fees to fund IRS oversight of exempt entities. 

To date, congressional appropriation committees, which have jurisdiction 

over annual funding, have not earmarked these tax collections for this 

purpose.17

IRS has not maintained data on how much excise tax it has assessed or 

collected under Section 4940 (or any other excise tax that can be assessed 

against tax-exempt entities either overall or by type of excise tax). 

However, IRS did have data that showed tax-exempt entities reported 

owing (i.e., self-assessed), in 2004 constant dollars, at least $247 million in 

this excise tax annually (about $1.5 billion overall) for 2000 through 2003 

(see table 10 in app. V). For comparison, the fiscal year 2003 budget for all 

of TE/GE (i.e., not just tax-exempt oversight functions) was around $205 

million. 

IRS’s Oversight Caseload 

Has Been Increasing in 

Recent Years and IRS Has 

Had Difficulties Sustaining 

Its Oversight

For section 501(c) entities, IRS’s oversight caseload has been increasing. In 

its determinations’ work involving applications for tax-exempt status, in 

fiscal years 1998 through 2004, applications increased about 17 percent 

from 78,358 to 87,080, with some annual fluctuations (see table 7 in app. 

IV). IRS officials said that IRS must review each application to make a 

determination of exempt status. IRS’s potential tax-exempt examination 

universe has grown more slowly. As mentioned earlier, the number of 

exempt entities filing a Form 990 grew from about 450,000 to 465,000 

during tax years 1998 through 2002—or about 3 percent. 

IRS has had difficulty sustaining a consistent examination rate for taxexempt entities. As figure 5 shows, the rate at which IRS examined filed 

Forms 990 fell from 1.8 percent in 1998 to 1.1 percent in 2002 before rising 

to 1.3 percent in 2003 (see table 8 in app. IV). 

17The Nonprofit Sector Panel interim report concluded that Congress should increase 

resources, and earmark some penalty, fee, and excise tax amounts for IRS exempt oversight 

and education. 
Page 20 GAO-05-561T 

Figure 5: IRS Examination Rates for Section 501(c) Entities, Fiscal Years 1998-2003

IRS officials said that the declining examination rates primarily resulted 

from a decline in FTEs for examinations and an increase in the average 

hours spent per examination. The number of tax-exempt entities that IRS 

examined decreased from 8,290 in fiscal year 1998 to 5,889 in 2004, or about 

29 percent, after dropping as low as 5,423 examinations in 2002. IRS 

officials said that they have examined more returns since 2002 because 

they used more of their examiners to examine Forms 990 rather than help 

elsewhere such as with determinations, and expedited examinations, such 

as by limiting their scope and depth.

In terms of determinations’ results, during fiscal years 1998 through 2004, 

IRS annually denied about 1 percent of the applications while the approval 

rate was 74-80 percent (see table 7 in app. IV).18 Denials occur when IRS 

determines that an applicant has not met the statutory requirements for 

18The rest of the applications included those for which IRS had not made a determination for 

reasons such as applications that were withdrawn or incomplete. 

0

1

2

3

4

5

6

1998 1999 2000 2001 2002 2003

Year

Exam rate percentage

Exam rate of noncharities

Overall exam rate

Exam rate of charities

Source: GAO tabulation of IRS’s Audit Information Management System and IRS’s Return Inventory Classification System, 

1997-2002.
Page 21 GAO-05-561T 

exemption. In accordance with the statutory guidance on qualifying for 

tax-exempt status, IRS is not likely to deny the recognition of tax-exempt 

status as long as the applicant provides all required documents, files a 

complete Form 1023, and provides an appropriate statement about its 

intent to serve an approved exempt purpose. 

Regarding examination results, during fiscal years 1998 through 2003, IRS 

revoked exempt status in 1.2 percent of its examinations. Revocations 

occur when IRS determines that the entity omitted or misstated a material 

fact, operated materially different from its stated exempt purpose, or 

engaged in a prohibited transaction in conflict with its exempt purpose. IRS 

does not often revoke tax-exempt status because the need for revocation 

often does not arise and when it does, IRS focuses more on getting the taxexempt entity to comply with federal laws rather than on taking away its 

exempt status. 

Beyond revocations, IRS examinations can produce one or more other 

changes19 such as in the section 501(c) paragraph,

20 foundation status of a 

501(c)(3) entity,21 and assessed tax.22 Changes in paragraph are important 

because of rules governing permissible activities. For example, a taxexempt entity classified as a charity under 501(c)(3) can accept donations 

that are tax deductible for the donor, unlike those classified as a social 

welfare entity under Section 501(c)(4). However, such charities are more 

restricted in their ability to lobby and engage in political activity compared 

to social welfare entities. Changes in foundation status are important 

because foundations generally are subjected to more requirements than 

19IRS examiners can make 12 “other” types of changes such as those involving related 

returns, delinquent returns, appeals, closing agreements, referrals to other IRS divisions, 

and claims. 

20 “Paragraph” refers to the types of 501(c) entities such as (c)(3) or (c)(4). When an entity 

applies for exempt status, it must tell IRS the section 501(c) paragraph under which it 

qualifies. 

21 An entity that qualifies under section 501(c)(3) is a private foundation unless it meets the 

criteria for a public charity, such as having broad public support. Beyond an examination, 

status can be changed when (a) an entity requests an IRS determination letter on its status, 

and (b) 5 years have elapsed for an entity that has been permitted to be a public charity for 

its first 5 years. 

22 Tax-exempt entities could owe employment taxes, various types of excise taxes, or 

income taxes if they operate a business activity not related to their exempt purpose. 
Page 22 GAO-05-561T 

public charities, such as in the requirement to annually distribute a 

minimum amount of income towards its exempt purpose.

Figure 6 shows that the percentage of examinations that produced no 

change rose from 31 percent in fiscal year 1998 to 39 percent in 2004, with 

higher rates in 2002 and 2003 (see table 9 in app. IV). In general, IRS is not 

likely to find a change in every examination given the focus on getting 

exempt entities into compliance and the need for better data to select the 

most noncompliant entities for examination. Higher no-change rates mean 

that IRS spends resources examining compliant entities. IRS officials said 

that they are working to reduce the no-change rate to or below the 1998 

level.

Figure 6: No-Change Rate for Examinations of Forms 990, Fiscal Years 1998-2004 

IRS Has Had Insufficient 

Reliable Information to 

Guide Oversight Efforts but 

Is Working to Obtain Better 

Information

IRS has acknowledged that it lacks sufficient data to effectively find and 

address noncompliance among tax-exempt entities. At the same time, IRS 

is aware that improvement to the Form 990 data made available to the 

public could better support public, media, and others’ oversight of taxexempt entities. To better enable it to collect and analyze such data, IRS is 

0

10

20

30

40

50

60

1998 1999 2000 2001 2002 2003 2004

Fiscal year

No-change rate

Examinations resulting in no change

Source: Tabulation of data from IRS's Audit Information Management System, 1998-2004.
Page 23 GAO-05-561T 

taking a number of steps. IRS is also trying different actions to enhance its 

ability to address critical and other types of noncompliance.

To help identify noncompliance, IRS is revising the data requested on the 

Form 990. IRS has determined that the Form 990 does not provide 

sufficient data to identify tax-exempt entities that merit an examination 

due to noncompliance. Nor can IRS easily compare Form 990 data with 

data reported on the Form 1023.23 For example, the current Form 1023 

requests data on hospitals and low-income housing that are not captured in 

the Form 990. Being able to compare similar data on both forms would 

better enable IRS to see whether the stated exempt purpose is being 

pursued and met. 

To enhance the usefulness and ease of preparation of the Form 990, IRS 

officials stated that the IRS is undertaking a large-scale revision. IRS 

officials said that the revision process has key steps to be taken before IRS 

shares the specific changes. However, IRS officials identified some general 

changes being developed. To ease preparation, IRS is attempting to write 

all questions in plain English and group questions related to an issue. 

Further, IRS officials explained that the revised Form 990 is to consist of 

one form applicable to all tax-exempt entities and a series of organization 

and activity schedules. The organization schedules would be tailored to 

filers such as hospitals or veteran’s organizations while the activity 

schedules would be tailored to issues such as compensation packages and 

grant making that may be financing terrorism. 

An IRS team completed a first draft of the revised Form 990 in December 

2004. Before setting milestones for publishing the Form 990, IRS wants to 

allow for review by various parties inside and outside IRS. IRS also plans 

to consider recommendations on the Form 990 of the Nonprofit Sector 

Panel to be presented in its final report in June 2005. Finally, IRS plans to 

make the revised Form 990 suitable for electronic filing in a cost-effective 

manner. 

IRS has also recognized that it has insufficient data on the extent or causes 

of noncompliance for segments of the tax-exempt sector. IRS has done a 

few studies to measure the compliance of exempt entities filing Forms 990 

23IRS revised Form 1023 in 2004 to provide information that helps identify potential 

problems early in the application process, including potentially abusive situations involving 

tax-exempt entities such as those claiming to provide credit counseling.
Page 24 GAO-05-561T 

and reporting items such as the unrelated business income tax owed. IRS 

did these studies in the 1970s, except for a smaller compliance study done 

during the 1980s. 

To alleviate such data shortcomings, in 2002, IRS began over 30 studies of 

“market segments,” which are homogeneous groups of tax-exempt entities 

such as charities, social clubs, and business leagues, or of exempt issues 

such as business income unrelated to an exempt purpose. These studies 

were to develop reliable data on the types and extent of compliance 

problems. IRS planned to use the data to refine selection criteria for 

identifying noncompliant returns for examination as well as help identify 

other strategies to improve compliance such as through improved guidance 

or instructions. However, IRS has had to delay most of these studies due to 

higher priorities (such as dealing with abusive tax transactions). 

Given its concern about insufficient data, IRS also is taking steps in fiscal 

year 2005 to improve its capabilities to analyze data. IRS has been 

establishing a Data Analysis Unit to provide trend analysis intended to 

improve the selection of tax-exempt entities for examination and the 

identification of compliance issues to pursue. The unit is to make better 

use of internal and external databases.24 A driving force in creating the unit 

was the lack of research tools and staff trained in using data. As described 

below, IRS has several other efforts underway or planned to improve the 

use of electronic data on the tax-exempt sector. 

24 The Data Analysis Unit plans to use data-mining techniques to identify patterns and 

establish relationships to uncover compliance issues. For example, by comparing state 

bingo databases to IRS files, IRS could identify entities with gross receipts in excess of the 

$25,000 filing threshold that failed to file a required Form 990. 
Page 25 GAO-05-561T 

• IRS plans to expand electronic filing of returns, which could help IRS to 

more quickly identify noncompliance and improve public access to 

Form 990 data.25 IRS began accepting the Form 99026 electronically on a 

voluntary basis in 2004, and plans to expand voluntary electronic filing 

to Form 990-PF filed by private foundations in 2005 and to create a 

single point for electronic filing of federal and state returns in 2006. IRS 

plans to require electronic Form 990 filing for exempt organizations 

with assets in excess of $100 million for 2006 and in excess of $10 

million for 2007. Private foundations would be required to file 

electronically for 2007 regardless of the amount of their assets. 27 

• IRS’s Exempt Organizations Electronic Initiatives Office28 is developing 

a “Better Data Initiative” intended to synthesize IRS’s electronic data for 

compliance purposes, such as examination selection and compliance 

trend analysis. The goal is to have an effective database management 

infrastructure in place by 2007. This office also is to help find and use 

electronic data sources that would be useful for trend analysis. 

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 also is attempting to build a stronger enforcement presence 

during 2005 through new processes to supplement examinations of 

compliance among exempt entities. 

25 IRS has a network to image the paper Forms 990 filed by charities. The imaged forms, 

minus sensitive data such as social security numbers and donor names, are sold to groups 

that want such data. Due to resource limitations, IRS transcribes little data from Forms 990 

into electronic databases. To have more electronic data from Forms 990, IRS has a contract 

to have the imaged Form 990 data keypunched.

26 IRS is developing electronic filing for Form 1023, which is used to apply for tax-exempt 

status. IRS hopes to begin accepting the electronic Form 1023 by 2007.

27 Consistent with IRC section 6011(e), only large organizations, including exempt 

organizations and private foundations, that are required to file 250 or more returns with IRS 

will be required to file their Form 990 electronically. Such returns include Forms 990, 

annual employee wage and tax statements (Form W-2), quarterly payroll tax returns (Form 

941), and annual information returns, such as payments to vendors for services (Form 1099 

MISC).

28 The Electronic Initiatives Office manages the development and implementation of 

automation efforts on exempt organizations in support of the strategic plan.
Page 26 GAO-05-561T 

IRS has identified four critical compliance problems, which it plans to 

address through enforcement during fiscal year 2005, as follows. 

• Anti-terrorism—examine a sample of exempt entities that make foreign 

grants to ensure that the funds are used for the charitable purpose and 

not for terrorist activity. 

• Credit counseling—examine credit counseling and consumer credit 

organizations that appear to operate as businesses rather than provide 

the educational or charitable services required under tax-exempt status. 

• Excessive compensation—conduct compliance checks and 

examinations of charities and private foundations to identify potential 

excessive compensation paid to insiders. 

• Abusive tax avoidance transactions—focus on four types of 

transactions that are intended to exploit tax-exempt status for personal 

gains, including: 

• using non-life mutual insurance companies29 and producer-owned 

reinsurance companies30 to earn tax-free profits;

• establishing donor-advised funds31 to generate questionable 

deductions, benefits to donors, or management fees for promoters; 

• misusing tax-exempt entities that are to support other exempt 

entities by, for example, making large loans to the founder of the 

supported entity or by not providing the required tax-exempt 

support; and

• abusing Department of Housing and Urban Development programs 

such as through personal use of program property.

29 Insurance companies or associations that provide other than life insurance are generally 

tax exempt under IRC section 501(c)(15) if their gross receipts do not exceed $600,000 and 

more than 50 percent of their receipts consist of premiums.

30 A producer-owned reinsurance company provides reinsurance for a producer group’s 

business; reinsurance transfers part or all of the risk from one insurer to another.

31 Donor-advised funds allow donors to advise how the charitable contribution is to be used.
Page 27 GAO-05-561T 

IRS plans to address other compliance problems as well. The problems to 

be addressed involve charitable gaming, disaster relief organizations whose 

distributions result in private benefit or fraud, tax-exempt political 

organizations that fail to annually report all required information, and 

prohibited political intervention by charities.32 In addition, IRS is 

addressing excess deductions for conservation easements, vehicle 

donations, and other noncash contributions, as well as abuses involving 

charitable trusts, and a “corporation sole”.33

To enhance enforcement overall, IRS has been developing new units or 

processes. For example, IRS created the Exempt Organization Compliance 

Unit in 2004 to help deal with growth in the number of tax-exempt entities 

coupled with the limited examination resources. It is to check exempt 

entities’ compliance with record-keeping and information-reporting 

requirements via correspondence rather than a review of books and 

records in an examination. During fiscal year 2004, the unit sent over 2,000 

letters to check compliance and over 8,000 letters to educate the entities 

about how to comply. If an entity does not respond or has questionable 

activity identified in the compliance check, IRS could initiate an 

examination. 

IRS also is developing a Financial Investigations Unit to specialize in 

complex fraud and tax-avoidance schemes involving the exempt sector. 

IRS recognized that it lacked staff in its tax-exempt unit trained to trace 

funds through complex transactions but was being asked to ensure that 

charitable assets are not diverted for illegal purposes. IRS plans to hire 

specialists that can identify fraud and track foreign grants. Furthermore, 

IRS has established a group to review exempt applications for names of 

individuals that appear on a Department of the Treasury Office of Foreign 

Assets Control listing of suspected terrorists or that IRS knows to be taxscheme promoters as well as for types of entities with a history of 

noncompliance, such as in credit counseling. The presence of such names 

or entities would likely result in a referral to the examination group, or for 

a suspected terrorist, to IRS Criminal Investigation group.

32 IRS plans to contact over 100 charities identified as having potentially violated the 

prohibition, to educate the organizations and prevent future violations of the law.

33 A corporation sole is an entity authorized under state law to allow religious leaders to hold 

property and conduct business for the benefit of a religious entity.
Page 28 GAO-05-561T 

States Play an 

Important Role in 

Overseeing TaxExempt 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. 

The states believe that their oversight could be more effective if IRS were 

able to share additional information with them. We have previously 

recommended that IRS work with states on data-sharing proposals that 

Congress could consider.

States Provide Critical 

Oversight 

Many states oversee some aspects of the tax-exempt sector through their 

attorney general and/or state charity offices. Although some overlap in 

responsibility with IRS exists, state oversight differs. IRS focuses on 

whether the tax-exempt entities meet tax-exempt requirements and comply 

with federal laws. States have an interest in whether tax-exempt charities’ 

fund-raising is fraudulent and whether the entity is meeting the purpose for 

which it was created. 

In general, exempt entities are to incorporate in a state or the District of 

Columbia. State attorneys general have broad power to regulate the 

charities that are established or operate in their states. States monitor 

charities for compliance with statutory and common-law standards, and 

can correct noncompliance through litigation and other means. 

States can impose requirements on tax-exempt entities incorporated or 

operating in their jurisdictions that specifically affect governance or 

transparency. For example, some states require fund-raisers to register and 

file information regarding fund-raising or monitor charity solicitations 

through their consumer protection bureaus to protect against fraud. 

Through its Nonprofit Integrity Act of 2004, California established 

governance requirements for financial audits, audit committees, disclosure 

of audited statements, and review and approval by the board of directors of 

compensation paid to the chief executive officer and chief financial officer. 

The act also established requirements related to fundraising.
Page 29 GAO-05-561T 

Coordination between IRS 

and the States in Sharing 

Data About Tax-Exempt 

Entities Could Enhance 

Oversight and the Use of 

Limited Resources

State officials believe, and IRS officials agree, that state oversight of taxexempt entities could benefit if IRS and states coordinated on sharing IRS’s 

data. IRS is working on improved data sharing consistent with 

recommendations we made in 2002.34 First, we recommended that IRS 

consult with state charity officials on how to regularly share IRS data that 

federal law allowed to be shared (e.g., data on denials or revocations of taxexempt status). State charity officials told us that IRS has implemented 

this recommendation and has been open to input from the states on how to 

better share the data on a regular basis.

Second, we recommended that IRS work with state charity officials and the 

Department of the Treasury to identify other types of IRS data that states 

would find useful and provisions to protect the data from improper 

disclosure or misuse, and to develop a legislative proposal that would 

expand state access to such IRS data. State and IRS officials believe that 

revising statutes to allow IRS to share more data, such as about ongoing 

and closed examinations of charities, would help IRS and states to better 

use limited resources and the states to more quickly respond to 

noncompliance. Congress is now considering a proposal to allow IRS to 

share more information with the states, including their charity regulators. 

Concluding 

Observations

Tax-exempt entities provide an incredibly diverse set of services to our 

equally diverse population. Our lives are enriched and improved through 

the work of this sector. In sum, the tax-exempt sector has become an 

indispensable part of American life. Yet, like all organizations run by 

human beings, tax-exempt entities’ operations can at times be flawed. 

Ensuring that tax-exempt entities run as effectively and efficiently as 

possible, and in line with the purposes for which Congress established their 

tax exemption, can best be accomplished through a series of 

complementary controls. At the organization level, a sound governance 

structure can establish the set of checks and balances that help steer an 

entity towards result-oriented outcomes consistent with their purposes 

while also guarding against abuses. Transparency over the operations of 

the exempt entity provides an incentive to help ensure the governance 

practices function as intended and when they do not, transparency helps 

increase the chances that inappropriate behavior will be detected and 

34 See GAO-02-526.
Page 30 GAO-05-561T 

corrected. Oversight by IRS and the states brings to bear the powers of 

government to investigate errors made among tax-exempt entities, to 

change the rules when necessary, and to provide consequences when rules 

are not followed.

Regarding oversight by states, IRS and states believe greater sharing of 

federal data would help states target their enforcement efforts and 

minimize unnecessary overlap with federal oversight of exempt 

organizations. 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.

Ultimately, Congress determines what activities should benefit from tax 

exemption and what organizations must do in exchange for that advantage. 

Periodic congressional oversight is therefore critical to ensuring that the 

exempt sector remains a vibrant contributor to the quality of American 

lives and operates with integrity in achieving results commensurate with 

the tax-favored status it has been granted. As noted earlier, the hearing 

today provides an excellent forum from which to launch a comprehensive 

re-examination of this vital sector as we work to address the challenges 

arising in the 21st century. We stand ready to assist Congress as it 

considers such a re-examination and continues its oversight of this critical 

sector of our national economy.

Mr. Chairman, this concludes my prepared statement. I would be happy to 

respond to any questions you or other Members of the committee may 

have. 

For further information on this testimony, please contact Michael Brostek 

at (202 512-9110) or brostekm@gao.gov. Individuals making key 

contributions to this testimony include Perry Datwyler, George Guttman, 

Shirley Jones, Bob McKay, John Mingus, Jeff Schmerling, and Tom Short. 
Page 31 GAO-05-561T 

Appendix I

Types of Tax-Exempt Entities under Section 

501(c) ApendxiI

The following lists the 28 types of tax-exempt entities under the 

subsections of section 501(c) of the Internal Revenue Code.

1. Corporations organized by Act of Congress; Central Liquidity Facility 

for Federal Credit Unions; Resolution Trust Corporation; Resolution 

Funding Corporation

2. Title-holding corporations

3. Public charities, private foundations, religious, charitable, scientific, 

testing for public safety, literary, or educational, fostering national or 

international amateur sports competition, prevention of cruelty to 

children or animals

4. Civic leagues, social welfare organizations, local associations of 

employees dedicated to charitable, educational, or recreational 

purposes

5. Labor unions, agricultural, or horticultural organizations

6. Trade associations, professional football leagues

7. Social and recreational clubs

8. Fraternal benefit societies providing payment of certain benefits to 

members

9. Voluntary employees’ beneficiary associations providing payment of 

certain employee benefits

10. Domestic fraternal societies whose net earnings are devoted to 

religious, charitable, scientific, literary, educational, and fraternal 

purposes, which do not provide benefits to members

11. Teachers’ retirement fund associations

12. Benevolent life insurance associations, mutual ditch or irrigation 

companies, mutual or cooperative telephone, electric, or water 

companies

13. Cemetery companies
Appendix I

Types of Tax-Exempt Entities under Section 

501(c)

Page 32 GAO-05-561T 

14. Credit unions

15. Small mutual insurance companies

16. Corporations to finance crop operations

17. Supplemental unemployment benefit trusts

18. Pre-June 25, 1959 trusts to fund pension benefits

19. Veterans’ groups

20. Group legal service organizations

21. Black lung benefit trusts

22. Multi-employer pension plan trusts

23. Armed Forces insurance organizations established before 1880

24. ERISA trusts for certain terminated plans

25. Multi-parent holding companies

26. State-sponsored, high-risk insurance organizations

27. State-sponsored worker compensation reinsurance organizations

28. National railroad retirement investment trust
Page 33 GAO-05-561T 

Appendix II

Copy of Form 990 ApendxiI

Part I

OMB No. 1545-0047

Form 990 Return of Organization Exempt From Income Tax

Under section 501(c), 527, or 4947(a)(1) of the Internal Revenue Code (except black lung

benefit trust or private foundation)

Department of the Treasury

Internal Revenue Service  The organization may have to use a copy of this return to satisfy state reporting requirements.

For the 2004 calendar year, or tax year beginning , 2004, and ending , 20

Name of organization D Employer identification number Please

use IRS

label or

print or

type.

See

Specific

Instructions.

Number and street (or P.O. box if mail is not delivered to street address) E Telephone number

City or town, state or country, and ZIP + 4

Check here  if the organization’s gross receipts are normally not more than $25,000. The

organization need not file a return with the IRS; but if the organization received a Form 990 Package

in the mail, it should file a return without financial data. Some states require a complete return.

Revenue, Expenses, and Changes in Net Assets or Fund Balances (See page 18 of the instructions.)

1 Contributions, gifts, grants, and similar amounts received:

a Direct public support 1a

b Indirect public support 1b

c Government contributions (grants) 1c

d Total (add lines 1a through 1c) (cash $ noncash $ ) 1d

2 Program service revenue including government fees and contracts (from Part VII, line 93) 2

3 Membership dues and assessments 3

4 Interest on savings and temporary cash investments 4

5 Dividends and interest from securities 5

6a Gross rents 6a

b Less: rental expenses 6b

c Net rental income or (loss) (subtract line 6b from line 6a) 6c

7 Other investment income (describe  ) 7

(A) Securities (B) Other Gross amount from sales of assets other

than inventory

8a

8a

Revenue

b Less: cost or other basis and sales expenses 8b

c Gain or (loss) (attach schedule) 8c

d Net gain or (loss) (combine line 8c, columns (A) and (B)) 8d

9

Gross revenue (not including $ of

contributions reported on line 1a)

a 9a

b Less: direct expenses other than fundraising expenses 9b

c Net income or (loss) from special events (subtract line 9b from line 9a) 9c

10a Gross sales of inventory, less returns and allowances 10a

b Less: cost of goods sold 10b

c Gross profit or (loss) from sales of inventory (attach schedule) (subtract line 10b from line 10a) 10c

11 Other revenue (from Part VII, line 103) 11

12 Total revenue (add lines 1d, 2, 3, 4, 5, 6c, 7, 8d, 9c, 10c, and 11) 12

13 Program services (from line 44, column (B)) 13

14 Management and general (from line 44, column (C)) 14

15 Fundraising (from line 44, column (D)) 15

Expenses

16 Payments to affiliates (attach schedule) 16

17 Total expenses (add lines 16 and 44, column (A)) 17

18 Excess or (deficit) for the year (subtract line 17 from line 12) 18

19 Net assets or fund balances at beginning of year (from line 73, column (A)) 19

Net Assets

20 Other changes in net assets or fund balances (attach explanation) 20

21 Net assets or fund balances at end of year (combine lines 18, 19, and 20) 21

For Privacy Act and Paperwork Reduction Act Notice, see the separate instructions. Cat. No. 11282Y Form 990 (2004)

A

C

Room/suite

F Accounting method:

K

B Check if applicable:

Final return

Amended return

Address change

Organization type (check only one) 

G

I Group Exemption Number 

501(c) ( ) 4947(a)(1) or 527

H(a) Is this a group return for affiliates? Yes No

If “Yes,” enter number of affiliates 

Is this a separate return filed by an

organization covered by a group ruling?

H(b)

H(d)

(insert no.)

Yes No

Initial return

Name change

Are all affiliates included?

(If “No,” attach a list. See instructions.)

H(c) Yes No

H and I are not applicable to section 527 organizations. ● Section 501(c)(3) organizations and 4947(a)(1) nonexempt charitable

trusts must attach a completed Schedule A (Form 990 or 990-EZ).

Open to Public

Inspection

Check  if the organization is not required

to attach Sch. B (Form 990, 990-EZ, or 990-PF).

M

( )

Application pending

Cash Accrual

Other (specify) 

Website: 

L Gross receipts: Add lines 6b, 8b, 9b, and 10b to line 12 

J

Special events and activities (attach schedule). If any amount is from gaming, check here 

2004
Appendix II

Copy of Form 990

Page 34 GAO-05-561T 

Form 990 (2004) Page 2

Statement of

Functional Expenses

All organizations must complete column (A). Columns (B), (C), and (D) are required for section 501(c)(3) and (4) organizations

and section 4947(a)(1) nonexempt charitable trusts but optional for others. (See page 22 of the instructions.)

Do not include amounts reported on line

6b, 8b, 9b, 10b, or 16 of Part I.

(C) Management

and general

(B) Program

services (A) Total (D) Fundraising

22 Grants and allocations (attach schedule)

23 Specific assistance to individuals (attach schedule)

24 Benefits paid to or for members (attach schedule)

25 Compensation of officers, directors, etc.

26 Other salaries and wages

27 Pension plan contributions

28 Other employee benefits

29 Payroll taxes

30 Professional fundraising fees

31 Accounting fees

32 Legal fees

33 Supplies

34 Telephone 

35 Postage and shipping

36 Occupancy

37 Equipment rental and maintenance

38 Printing and publications

39 Travel

40 Conferences, conventions, and meetings

41 Interest 

42 Depreciation, depletion, etc. (attach schedule)

43 Other expenses not covered above (itemize): a

b

c

d

e

Total functional expenses (add lines 22 through 43). Organizations

completing columns (B)-(D), carry these totals to lines 13—15

44

Statement of Program Service Accomplishments (See page 25 of the instructions.)

Program Service

Expenses What is the organization’s primary exempt purpose? 

(Grants and allocations $ )

Other program services (attach schedule)

Total of Program Service Expenses (should equal line 44, column (B), Program services) 

(Required for 501(c)(3) and

(4) orgs., and 4947(a)(1)

trusts; but optional for

others.)

Part III

Part II

If “Yes,” enter (i) the aggregate amount of these joint costs $ ; (ii) the amount allocated to Program services $ ;

Yes No

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43a

44

43b

43c

43d

43e

Joint Costs. Check  if you are following SOP 98-2.

(cash $ noncash $ )

All organizations must describe their exempt purpose achievements in a clear and concise manner. State the number

of clients served, publications issued, etc. Discuss achievements that are not measurable. (Section 501(c)(3) and (4)

organizations and 4947(a)(1) nonexempt charitable trusts must also enter the amount of grants and allocations to others.)

(iii) the amount allocated to Management and general $ ; and (iv) the amount allocated to Fundraising $

a

b

c

d

e

f

(Grants and allocations $ )

(Grants and allocations $ )

(Grants and allocations $ )

(Grants and allocations $ )

Form 990 (2004)

Are any joint costs from a combined educational campaign and fundraising solicitation reported in (B) Program services? 
Appendix II

Copy of Form 990

Page 35 GAO-05-561T 

Form 990 (2004) Page 3

Balance Sheets (See page 25 of the instructions.)

(B)

End of year

(A)

Beginning of year

Note: Where required, attached schedules and amounts within the description

column should be for end-of-year amounts only.

Assets 45 Cash—non-interest-bearing 45

46 Savings and temporary cash investments 46

47a Accounts receivable 47a

b Less: allowance for doubtful accounts 47b 47c

48a Pledges receivable 48a

b Less: allowance for doubtful accounts 48b 48c

49 Grants receivable 49

50 Receivables from officers, directors, trustees, and key employees

(attach schedule) 50

51a

51a Other notes and loans receivable (attach

schedule)

b Less: allowance for doubtful accounts 51b 51c

52 Inventories for sale or use 52

53 Prepaid expenses and deferred charges 53

54 Investments—securities (attach schedule)  54

Investments—land, buildings, and

equipment: basis

55a

55a

Less: accumulated depreciation (attach

schedule)

b

55b 55c

56 Investments—other (attach schedule) 56

57a Land, buildings, and equipment: basis 57a

57b 57c

Less: accumulated depreciation (attach

schedule)

b

58 Other assets (describe  ) 58

59 Total assets (add lines 45 through 58) (must equal line 74) 59

Liabilities

60 Accounts payable and accrued expenses 60

61 Grants payable 61

62 Deferred revenue 62

63

Loans from officers, directors, trustees, and key employees (attach

schedule)

63

64a Tax-exempt bond liabilities (attach schedule) 64a

65 Other liabilities (describe  ) 65

66 Total liabilities (add lines 60 through 65) 66

Part IV

b Mortgages and other notes payable (attach schedule) 64b

Net Assets or Fund Balances Organizations that do not follow SFAS 117, check here 

67 Unrestricted 67

68 Temporarily restricted 68

69 Permanently restricted 69

70 Capital stock, trust principal, or current funds 70

71 Paid-in or capital surplus, or land, building, and equipment fund 71

72 Retained earnings, endowment, accumulated income, or other funds 72

73

73 Total net assets or fund balances (add lines 67 through 69 or lines

70 through 72;

column (A) must equal line 19; column (B) must equal line 21)

74 Total liabilities and net assets / fund balances (add lines 66 and 73) 74

and

Organizations that follow SFAS 117, check here  and complete lines

67 through 69 and lines 73 and 74.

complete lines 70 through 74.

Form 990 is available for public inspection and, for some people, serves as the primary or sole source of information about a

particular organization. How the public perceives an organization in such cases may be determined by the information presented

on its return. Therefore, please make sure the return is complete and accurate and fully describes, in Part III, the organization’s

programs and accomplishments.

Cost FMV
Appendix II

Copy of Form 990

Page 36 GAO-05-561T 

Form 990 (2004) Page 4

List of Officers, Directors, Trustees, and Key Employees (List each one even if not compensated; see page 27 of

the instructions.)

(B) Title and average hours per

week devoted to position

(C) Compensation

(If not paid, enter

-0-.)

(D) Contributions to

employee benefit plans &

deferred compensation

(E) Expense

account and other

allowances

(A) Name and address

Yes No

Part V

Did any officer, director, trustee, or key employee receive aggregate compensation of more than $100,000 from your

organization and all related organizations, of which more than $10,000 was provided by the related organizations? 

If “Yes,” attach schedule—see page 28 of the instructions.

Reconciliation of Revenue per Audited

Financial Statements with Revenue per

Return (See page 27 of the instructions.)

a

b

c

d

e

(1)

(2)

(3)

Reconciliation of Expenses per Audited

Financial Statements with Expenses per

Return

(4)

(1)

(2)

a

b

c

d

e

(1)

(2)

(3)

(4)

(1)

(2)

Part IV-A Part IV-B

75

Total revenue, gains, and other support

per audited financial statements 

Amounts included on line a but not on

line 12, Form 990:

Net unrealized gains

on investments

Donated services

and use of facilities

Recoveries of prior

year grants

Other (specify):

Add amounts on lines (1) through (4) 

Line a minus line b 

Amounts included on line 12,

Form 990 but not on line a:

Investment expenses

not included on line

6b, Form 990

Other (specify):

Add amounts on lines (1) and (2) 

Total revenue per line 12, Form 990

(line c plus line d) 

a

b

c

d

e

$

$

$

$

$

$

Total expenses and losses per

audited financial statements 

Amounts included on line a but not

on line 17, Form 990:

Donated services

and use of facilities

Prior year adjustments

reported on line 20,

Form 990

Losses reported on

line 20, Form 990

Other (specify):

Add amounts on lines (1) through (4)

Line a minus line b 

Amounts included on line 17,

Form 990 but not on line a:

Investment expenses

not included on line

6b, Form 990

Other (specify):

Add amounts on lines (1) and (2) 

Total expenses per line 17, Form 990

(line c plus line d) 

$

$

$

$

$

$

a

b

c

d

e

Form 990 (2004)
Appendix II

Copy of Form 990

Page 37 GAO-05-561T 

Form 990 (2004) Page 5

Other Information (See page 28 of the instructions.)

76 Did the organization engage in any activity not previously reported to the IRS? If “Yes,” attach a detailed description of each activity 76

77 Were any changes made in the organizing or governing documents but not reported to the IRS? 77

If “Yes,” attach a conformed copy of the changes.

78a Did the organization have unrelated business gross income of $1,000 or more during the year covered by this return? 78a

b If “Yes,” has it filed a tax return on Form 990-T for this year? 78b

At any time during the year, did the organization own a 50% or greater interest in a taxable corporation or

partnership, or an entity disregarded as separate from the organization under Regulations sections

301.7701-2 and 301.7701-3? If “Yes,” complete Part IX

79 Was there a liquidation, dissolution, termination, or substantial contraction during the year? If “Yes,” attach a statement 79

Is the organization related (other than by association with a statewide or nationwide organization) through common

membership, governing bodies, trustees, officers, etc., to any other exempt or nonexempt organization?

80a

80a

If “Yes,” enter the name of the organization 

and check whether it is exempt or nonexempt.

b

81a Enter direct and indirect political expenditures. See line 81 instructions 81a

b Did the organization file Form 1120-POL for this year? 81b

Did the organization receive donated services or the use of materials, equipment, or facilities at no charge

or at substantially less than fair rental value?

82a

82a

If “Yes,” you may indicate the value of these items here. Do not include this amount

as revenue in Part I or as an expense in Part II. (See instructions in Part III.)

b

82b

83a Did the organization comply with the public inspection requirements for returns and exemption applications? 83a

84a Did the organization solicit any contributions or gifts that were not tax deductible? 84a

If “Yes,” did the organization include with every solicitation an express statement that such contributions

or gifts were not tax deductible?

b

84b

85 501(c)(4), (5), or (6) organizations. a Were substantially all dues nondeductible by members? 85a

b Did the organization make only in-house lobbying expenditures of $2,000 or less?

86 501(c)(7) orgs. Enter: a Initiation fees and capital contributions included on line 12

b Gross receipts, included on line 12, for public use of club facilities

87 501(c)(12) orgs. Enter: a Gross income from members or shareholders 87a

Gross income from other sources. (Do not net amounts due or paid to other

sources against amounts due or received from them.)

b

87b

88

List the states with which a copy of this return is filed 

88

90a

91

Located at  

92 Section 4947(a)(1) nonexempt charitable trusts filing Form 990 in lieu of Form 1041—Check here 

and enter the amount of tax-exempt interest received or accrued during the tax year  92

Part VI Yes No

85b

c Dues, assessments, and similar amounts from members 85c

d Section 162(e) lobbying and political expenditures 85d

e Aggregate nondeductible amount of section 6033(e)(1)(A) dues notices 85e

f Taxable amount of lobbying and political expenditures (line 85d less 85e) 85f

g Does the organization elect to pay the section 6033(e) tax on the amount on line 85f?

h If section 6033(e)(1)(A) dues notices were sent, does the organization agree to add the amount on line 85f to its

reasonable estimate of dues allocable to nondeductible lobbying and political expenditures for the following tax

year?

85g

85h

86a

86b

If “Yes” was answered to either 85a or 85b, do not complete 85c through 85h below unless the organization

received a waiver for proxy tax owed for the prior year.

ZIP + 4 

b Did the organization comply with the disclosure requirements relating to quid pro quo contributions? 83b

The books are in care of  Telephone no.  ( )

501(c)(3) organizations. Enter: Amount of tax imposed on the organization during the year under:

; section 4912  ; section 4955 

501(c)(3) and 501(c)(4) orgs. Did the organization engage in any section 4958 excess benefit transaction

during the year or did it become aware of an excess benefit transaction from a prior year? If “Yes,” attach

a statement explaining each transaction

Enter: Amount of tax imposed on the organization managers or disqualified persons during the year under

sections 4912, 4955, and 4958 

89a

b

c

section 4911 

89b

d Enter: Amount of tax on line 89c, above, reimbursed by the organization 

b Number of employees employed in the pay period that includes March 12, 2004 (See instructions.) 90b

Form 990 (2004)
Appendix II

Copy of Form 990

Page 38 GAO-05-561T 

Form 990 (2004) Page 6

Analysis of Income-Producing Activities (See page 33 of the instructions.)

Excluded by section 512, 513, or 514 (E)

Related or exempt function income

Note: Unrelated business income Enter gross amounts unless otherwise

indicated. (C)

Exclusion code

(B)

Amount

(D)

Amount

(A)

Business code 93 Program service revenue:

a

b

c

d

e

f

Fees and contracts from government agencies

94 Membership dues and assessments

95 Interest on savings and temporary cash investments

96 Dividends and interest from securities

97 Net rental income or (loss) from real estate:

debt-financed property

not debt-financed property

98 Net rental income or (loss) from personal property

99 Other investment income

100 Gain or (loss) from sales of assets other than inventory

101 Net income or (loss) from special events

102 Gross profit or (loss) from sales of inventory

103 Other revenue: a

b

c

d

e

104 Subtotal (add columns (B), (D), and (E))

105 Total (add line 104, columns (B), (D), and (E)) 

Note: Line 105 plus line 1d, Part I, should equal the amount on line 12, Part I.

Relationship of Activities to the Accomplishment of Exempt Purposes (See page 34 of the instructions.)

Explain how each activity for which income is reported in column (E) of Part VII contributed importantly to the accomplishment

of the organization’s exempt purposes (other than by providing funds for such purposes).

Line No.



Information Regarding Taxable Subsidiaries and Disregarded Entities (See page 34 of the instructions.)

(E)

End-of-year assets

(D) Total income(C) Nature of activities

(B)

Percentage of

ownership interest

(A)

Name, address, and EIN of corporation,

partnership, or disregarded entity

Part IX

Part VIII

Part VII

a

b

g

%

%

%

%

Medicare/Medicaid payments

Did the organization, during the year, pay premiums, directly or indirectly, on a personal benefit contract?

Did the organization, during the year, receive any funds, directly or indirectly, to pay premiums on a personal benefit contract?

(b)

(a)

Part X Information Regarding Transfers Associated with Personal Benefit Contracts (See page 34 of the instructions.)

Yes No

Yes No

Note: If “ Yes” to (b), file Form 8870 and Form 4720 (see instructions).

Date

EIN 

Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge

and belief, it is true, correct, and complete. Declaration of preparer (other than officer) is based on all information of which preparer has any knowledge.

Please

Sign

Here

Type or print name and title.

Signature of officer Date

Preparer’s

signature

Check if

selfemployed 

Paid

Preparer’s

Use Only Firm’s name (or yours

if self-employed),

address, and ZIP + 4

Preparer’s SSN or PTIN (See Gen. Inst. W)

Phone no.  ( )

Form 990 (2004)








Page 39 GAO-05-561T 

Appendix III

Form 990 Data ApendxiI

The following tables summarize data reported on the annual Form 990 by 

tax-exempt entities under section 501(c) of the Internal Revenue Code. 

The tables cover reported assets, revenues, and expenses overall and, 

where appropriate, broken out by charities and the rest of the section 

501(c) entities (i.e., noncharities). 

Table 1: Form 990 Returns Filed by Section 501(c) Entities, Tax Years 1998-2002

Source: Tabulation of data from IRS’s Return Inventory Classification System, 1998-2002.

Table 2: Assets Reported by Section 501(c) Entities in 2004 Constant Dollars, Tax Years 1998-2002

Source: Tabulation of data from IRS’s Return Inventory Classification System, 1998-2002.

Number of returns filed

Tax year Charities Noncharities All entities

1998 281,228 168,309 449,537

1999 299,204 173,239 472,443

2000 301,612 168,963 470,575

2001 301,359 171,006 472,365

2002 302,464 162,134 464,598

All entities Charities Noncharities

Tax year

Assets (in

millions)

Percent

change

Assets 

(in millions) Percent change

Assets 

(in millions)

Percent

change

1998 $2,208,676 N/A $1,509,209 N/A $699,467 N/A

1999 $2,413,917 9.3% $1,664,857 10.3% $749,059 7.1%

2000 $2,474,471 2.5% $1,696,064 1.9% $778,407 3.9%

2001 $2,552,606 3.2% $1,733,734 2.2% $818,872 5.2%

2002 $2,545,189 -0.3% $1,694,435 -2.3% $850,754 3.9%
Appendix III

Form 990 Data

Page 40 GAO-05-561T 

Table 3: Revenues Reported by Section 501(c) Entities in 2004 Constant Dollars, Tax Years 1998-2002

Source: Tabulation of data from IRS’s Return Inventory Classification System, 1998-2002.

Table 4: Expenses Reported by Section 501(c) Entities in 2004 Constant Dollars, Tax Years 1998-2002

Source: Tabulation of data from IRS’s Return Inventory Classification System, 1998-2002.

Table 5: Section 501(c) Entities’ Reported Expenses as a Percentage of U.S. Gross Domestic Product, 1998 -2002

Source: Tabulation of data from IRS’s Return Inventory Classification System, 1998-2002 and U.S. Department of Commerce figures

All entities Charities Noncharities

Tax year

Revenues (in

millions)

Percent

change

Revenues 

(in millions) Percent change

Revenues 

(in millions)

Percent

change

1998 $1,121,387 N/A 844,224 N/A 277,163 N/A

1999 $1,214,807 8.3% 925,849 9.7% 288,958 4.3%

2000 $1,240,216 2.1% 944,131 2.0% 296,085 2.5%

2001 $1,258,046 1.4% 953,841 1.0% 304,205 2.7%

2002 $1,250,914 -0.6% 941,197 -1.3% 309,718 1.8%

All entities Charities Noncharities

Tax year

Expenses (in

millions)

Percent

change

Expenses 

(in millions) Percent change

 Expenses 

(in millions)

Percent

change

1998 $1,017,582 N/A $768,280 N/A $249,303 N/A

1999 $1,091,788 7.3% $826,572 7.6% $265,215 6.4%

2000 $1,145,280 4.9% $867,063 4.9% $278,217 4.9%

2001 $1,210,670 5.7% $912,200 5.2% $298,470 7.2%

2002 $1,221,859 0.9% $917,528 0.6% $304,330 2.0%

Year U.S. GDP (in Millions)

Section 501(c) entities’

expenses (in millions)

Section 501(c) entities’ expenses as a

percentage of U.S GDP

1998 8,747,000 $1,017,582 11.6%

1999 9,268,000 $1,091,788 11.8%

2000 9,817,000 $1,145,280 11.7%

2001 10,128,000 $1,210,670 12.0%

2002 10,487,000 $1,221,859 11.7%
Page 41 GAO-05-561T 

Appendix IV

IRS Data on Its Tax-Exempt Oversight ApendxiIV

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. The tables cover resources, applications, examinations, 

and examination results. 

Table 6: Assigned FTEs as IRS Budgeted for Exempt Activities, Fiscal Years 2000-

2005

Source: IRS Exempt Organization officials. 

Note: “Other FTE” include technical staff who issue rulings, director’s staff, and education and 

outreach. FTEs assigned are what IRS budgets for this work

Table 7: Actions Taken on Applications for Tax-Exempt Status, Fiscal Years 1998-2003

Source: GAO Analysis of IRS’s Exempt Determination System, 1998-2004.

Note: The “Other” category includes applications withdrawn; applications that did not provide the 

required information; incomplete applications; IRS refusals to rule on applications because the 

information submitted was insufficient to conclude whether to approve the exemption request; and 

applications forwarded to other than the IRS National Office.

Fiscal year Examination FTE Determination FTE Other FTE Total FTE

2000 424 342 32 798

2001 432 347 33 812

2002 421 351 44 816

2003 394 370 38 802

2004 378 348 43 769

2005 467 347 42 856

Fiscal year Total applications Approved Percent approved Denied Other

1998 78,358 58,162 74.2% 593 19,603

1999 73,605 59,264 80.5% 585 13,756

2000 82,707 67,267 81.3% 482 14,938

2001 81,636 65,409 80.1% 646 15,581

2002 87,342 70,214 80.4% 557 16,571

2003 91,439 72,092 78.8% 1,192 18,155

2004 87,080 69,315 79.6% 1,050 16,715
Appendix IV

IRS Data on Its Tax-Exempt Oversight

Page 42 GAO-05-561T 

Table 8: Examination Rate of Section 501(c) Entities, 1998–2003 

Source: GAO Tabulation of IRS’s Audit Information Management System and IRS’s Return Inventory Classification System, 1997-2002.

Table 9: Examinations Resulting in No Change to Forms 990 Filed by Section 501(c) 

Entities, Fiscal Years 1998–2004 

Source: GAO analysis of IRS’s Audit Information Management System, 1998-2004.

Fiscal year

Returns filed in

previous year

Returns examined

in fiscal year Examination rate

1998 458,014 8,290 1.8%

1999 449,537 8,780 2.0%

2000 472,443 6,866 1.5%

2001 470,575 5,471 1.2%

2002 472,365 5,423 1.1%

2003 464,598 5,964 1.3%

Fiscal Year Examinations

Examinations resulting in

no change No-change rate

1998 8,290 2,552 30.8%

1999 8,780 3,191 36.3%

2000 6,866 2,431 35.4%

2001 5,471 2,112 38.6%

2002 5,423 2,445 45.1%

2003 5,964 2,965 49.7%

2004 5,889 2,299 39.0%
Page 43 GAO-05-561T 

Appendix V

Tax-Exempt Excise Taxes by Code Sections ApendxiV

Over the years, Congress has imposed various excise taxes that affect taxexempt entities, particularly private foundations under Section 501(c)(3). 

Private foundations differ in several ways from public charities. Public 

charities have broad public support and tend to provide charitable services 

directly to beneficiaries. Private foundations are often tightly controlled 

and receive a significant portion of their funds from a small number of 

donors, and tend to make grants directly to other entities rather than 

directly provide charitable services. Since these differences create the 

potential for self-dealing or abuse by a small group, private foundations are 

subject to anti-abuse rules not applicable to public charities. In addition, 

public charities and private foundations generally are prohibited from 

engaging in certain types of transactions. Excise taxes are to be levied on 

public charities and private foundations, as well as a few other types of taxexempt entities, that violate the rules. Details on these rules and excise 

taxes follow. 

Section 4940 Excise Tax on 

Private Foundation 

Investment Income 

Section 4940 was added by the Tax Reform Act of 1969, P.L. 91-172. The 

related Senate Report1 described the excise tax as an “audit fee tax” that 

was believed to be necessary to cover IRS’s costs for increased supervision 

over private foundations under the act. Section 4940 imposes a 2 percent 

excise tax on the net investment income of tax-exempt private foundations. 

Net investment income includes income from interest, dividends, and net 

capital gains that is reduced by the expenses incurred to earn it. This tax is 

1 percent if a private foundation meets certain distribution requirements. 

Private foundations that meet the requirements to be an “exempt operating 

foundation” are not subject to this excise tax. Among these requirements 

are stipulations that the foundation be publicly supported for at least 10 

years and that it have a governing body that is broadly representative of the 

general public. Private foundations that are not exempt from taxation are 

subject to this excise tax and unrelated business income tax.

Section 4941 Excise Tax on 

Private Foundation Acts of 

Self-Dealing

Because a tax-exempt entity cannot operate to confer a benefit on private 

parties, Section 4941 was enacted by the Tax Reform Act of 1969. 

According to the Senate Report, generally prohibiting self-dealing 

transactions would minimize the need to apply the subjective arm’s-length 

standard that was used for loans, payments of compensation, and 

1

S. Rep. No. 91-552 (1969).
Appendix V

Tax-Exempt Excise Taxes by Code Sections

Page 44 GAO-05-561T 

preferential availability of services under the 1950 amendments. Section 

4941 imposes a 5 percent excise tax on acts of self-dealing between a 

private foundation and disqualified persons. This tax is to be paid by the 

disqualified person who participated in the self-dealing. An additional tax 

equal to 200 percent of the amount involved is to be imposed if the selfdealing is not corrected during the taxation period. A separate tax equal to 

2-1⁄2 percent of the amount involved is to be imposed on the foundation’s 

manager if that manager knowingly participated in the act of self-dealing. 

If this additional tax has been imposed on the foundation manager and that 

manager refuses to agree to part or all of the correction, an additional tax 

equal to 50 percent of the amount is to be imposed. Acts of self-dealing 

include sales, exchanges, or leases of property; lending of money or other 

extensions of credit; and payment of compensation. Disqualified persons 

include substantial contributors to the foundation, foundation managers, 

an owner of more than 20 percent of a business enterprise that is a 

substantial contributor, and certain government officials. 

Section 4942 Excise Tax on 

Private Foundation Failure 

to Distribute Income

Section 4942 was enacted by the Tax Reform Act of 1969. Prior to it, a 

private foundation could lose its exemption if it failed to make distributions 

towards its charitable purposes instead of just accumulating income. 

According to the Senate report, the committee believed that loss of exempt 

status as the only sanction was often ineffective or harsh, and that 

substantial improvement could be achieved by providing a graduation of 

sanctions if income is not distributed. Section 4942 imposes a 15 percent 

excise tax on the undistributed income of a private foundation for any 

taxable year in which the required amount has not been distributed before 

the first day of the next taxable year. If an initial tax has been imposed 

under section 4942 and the income remains undistributed at the end of the 

taxable period, a tax equal to 100 percent of the remaining undistributed 

amount is to be imposed. This excise tax does not apply to private 

operating foundations that meet distribution requirements or to the extent 

that the failure to distribute is due solely to an incorrect valuation of assets 

as long as other requirements are met.

Excise Tax on Private 

Foundation Excess 

Business Holdings (Section 

4943)

Section 4943 was enacted by the Tax Reform Act of 1969. According to its 

Senate Report, the use of foundations to maintain control of a business 

appeared to be increasing, and some who wished to use a foundation’s 

stock holdings to control a business were relatively unconcerned about 

producing income for charitable purposes. Where the charitable 

ownership predominated, the business could unfairly compete with 
Appendix V

Tax-Exempt Excise Taxes by Code Sections

Page 45 GAO-05-561T 

businesses whose owners were required to pay taxes on their business 

income. The committee concluded that a limit on the extent to which a 

private foundation may control a business was needed. Section 4943 

imposes a 5 percent excise tax on certain excess business holdings of a 

private foundation. Permitted holdings generally include up to 20 percent 

of the voting stock of an incorporated business enterprise (reduced by the 

percentage of the voting stock owned by all disqualified persons). Similar 

holdings are also permitted in partnerships and other unincorporated 

enterprises (except sole proprietorships). If the excise tax has been 

imposed, foundations that fail to make the required divestiture of excess 

holdings above the permitted amounts are subject to an additional tax 

equal to 200 percent of the excess holdings. In certain cases, foundations 

are allowed a 5-year period to dispose of the excess holdings and may 

receive an additional 5-year extension.

Excise Tax on Private 

Foundation Investments 

which Jeopardize Charitable 

Purpose (Section 4944)

Section 4944 was enacted by the Tax Reform Act of 1969. Under prior law, 

a private foundation could lose its exemption if it invested in a manner that 

jeopardized its exempt purpose. In the Senate Report, the committee 

concluded that limited sanctions were preferable to the loss of exemption. 

Section 4944 imposes an initial 5 percent excise tax on the amount involved 

if a private foundation invests in a manner that jeopardizes its exempt 

purpose (e.g., investing with the purpose of income production or property 

appreciation). If such a tax is imposed on the foundation, a separate 5 

percent excise tax is to be imposed on the foundation manager if that 

manager knew that making the investment would jeopardize the 

foundation’s exempt purpose. If an initial tax is imposed, an additional tax 

equal to 25 percent of the amount of the investment is to be imposed on the 

foundation if the investment is not withdrawn within the taxable period. 

An additional tax equal to 5 percent of the amount of the investment is to 

be imposed on the foundation manager if the investment is not withdrawn.

Excise Tax on Private 

Foundation Taxable 

Expenditures (Section 4945)

Section 4945 was enacted by the Tax Reform Act of 1969. Under prior law, 

the only sanction against prohibited political activity by a foundation was 

loss of exemption. The Senate committee report noted that the standards 

for determining the permissible level of political activity were so vague as 

to encourage subjective application of the sanction. As a result, section 

4945 was added to clarify the types of impermissible activities and provide 

more limited sanctions. Section 4945 imposes an initial 10 percent excise 

tax on each taxable expenditure made by the foundation. An additional 2-1⁄2 

percent excise tax is to be imposed on the foundation manager if that 
Appendix V

Tax-Exempt Excise Taxes by Code Sections

Page 46 GAO-05-561T 

manager knowingly participated in the taxable expenditure. Taxable 

expenditures include amounts paid to carry on propaganda or otherwise 

influence legislation or the outcome of a public election, or to directly or 

indirectly carry on a voter registration drive. If the expenditure is not 

corrected within the taxable period, an additional tax equal to 100 percent 

of the amount of the expenditure is to be imposed on the foundation and 

additional tax equal to 50 percent of the amount of the expenditure is to be 

imposed on the foundation manager. 

Excise Tax on Section 

501(C) (3) Political 

Expenditures (Section 4955)

Section 4955 was added by the Revenue Act of 1987, P.L. 100-203. 

According to the House Report2 for the act, the committee believed that the 

excise tax applicable to private foundations for making prohibited political 

expenditures (section 4945) should also apply to a public charity. Section 

4955 imposes an initial 10 percent excise tax on each political expenditure 

of a section 501(c) (3) organization. An additional 2-1⁄2 percent excise tax is 

imposed on the organization’s manager if the manager knew that it was a 

political expenditure. Political expenditures include any amounts paid or 

incurred by the organization in any participation or intervention in any 

political campaign on behalf of any candidate for public office. If an initial 

tax has been imposed regarding a political expenditure and that 

expenditure is not corrected, an additional tax equal to 100 percent of the 

amount is to be imposed on the organization. An additional tax equal to 50 

percent of the amount of the expenditure is to be imposed on the 

organization’s manager if that manager refuses to agree to part or all of the 

correction.

Excise Tax on Section 

501(C) (3) and (4) Excess 

Benefit Transactions 

(Section 4958)

Section 4958 was added in 1996 by the Taxpayer Bill of Rights 2, P.L. 104-

168. According to the related House Report,3

 this excise tax was added to 

ensure that the advantages of tax-exempt status benefit the community and 

not private individuals. The act provided for this intermediate sanction 

(i.e., something short of a loss of tax exemption) to be imposed when 

nonprofit organizations engage in transactions with certain insiders that 

result in private inurement. Section 4958 imposes an initial tax of 25 

percent on each excess benefit transaction entered into between a 

disqualified person and tax-exempt organizations under sections 501(c)(3) 

2

 H. Rep. No. 100-391 (1987).

3

 H. Rep. No. 104-506 (1996).
Appendix V

Tax-Exempt Excise Taxes by Code Sections

Page 47 GAO-05-561T 

and (4). The initial tax is to be paid by this disqualified person, including 

any person who at any time during the 5-year period ending on the date of 

the transaction was in a position to exercise substantial influence over the 

organization, a member of such person’s family, and a 35 percent controlled 

entity. Such an entity exists when a disqualified person owns more than 35 

percent of the voting power of a corporation, more than 35 percent of the 

profit interest of a partnership, or more than 35 percent of the beneficial 

interest of a trust or estate. If an initial tax is imposed on the disqualified 

persons, an additional tax of 10 percent is to be imposed on the 

organization’s manager if that manager participated knowing that it was an 

excess benefit transaction. If the excess benefit transaction is not 

corrected within the taxable period, a tax equal to 200 percent of the 

excess benefit transaction will be imposed on the disqualified person. 

Private foundations are not subject to this excise tax. 

Abatement of Taxes When 

Corrective Action Taken 

(Sections 4961 – 4963)

Sections 4961–4963 provide for abating the various excise taxes described 

above. Section 4961 stipulates that additional taxes shall not be assessed if 

corrective action is taken within the applicable correction period. 

Similarly, it stipulates that if the additional tax is already assessed, it will be 

abated if corrective action is taken. For example, the additional tax of 200 

percent for self-dealing shall not be assessed if corrective action is taken 

within the applicable period. Section 4962 provides that excise taxes shall 

not be assessed if the event that gave rise to the excise tax was (1) due to 

reasonable cause, (2) not due to willful neglect, and (3) corrected within 

the applicable period. If already assessed under these circumstances, the 

excise tax shall be abated. Section 4963 sets out the instances in which the 

abatement provisions apply.

Excise Taxes Owed for IRC 

Violations

IRS did not maintain data on how much excise tax involving tax-exempt 

entities was ultimately assessed or collected either overall or by the various 

types of violations. These assessments can result from IRS examinations 

but IRS’s system did not maintain information on these types of 

assessments. These assessments may also arise from tax-exempt entities 

“self-assessing” excise taxes by reporting the violations to IRS. IRS did 

record excise taxes owed for certain types of IRC section violations as 

reported by tax-exempt entities on Form 4720, Return of Certain Taxes on 

Charities and Other Persons Under Chapters 41 and 42 of the Internal 

Revenue Code and on Form 990-PF, Return of Private Foundation or 

Section 4947(a) (1) Nonexempt Charitable Trust Treated as a Private 

Foundation. 
Appendix V

Tax-Exempt Excise Taxes by Code Sections

Page 48 GAO-05-561T 

As table 10 shows, tax-exempt entities reported self-assessments of at least 

$247 million in 2004 constant dollars each year or about $1.5 billion in 2004 

constant dollars for tax years 2000 through 2003.

Table 10: Excise Tax Amounts That Tax-exempt Entities Self-Assessed on Forms 4720a and 990-PFb by Code Section, Tax Years 

2000-2003 (2004 Constant Dollars in Thousands)

Source: GAO analysis of IRS data.

a

Return of Certain Excise Taxes on Charities and Other Persons Under Chapters 41 and 42 of the 

Internal Revenue Code.

b

Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private 

Foundation.

c

Includes Section 4911 – Excess Lobbying Expenditures and 4912 – Disqualifying Lobbying 

Expenditures. 

Tax year 

Code section 2000 2001 2002 2003 Total

Taxes on organizations

Section 4942 –Undistributed income $2,196 $4,608 $3,802 $2,421 $13,027

Section 4943 –Excess business holdings; 

Section 4944 -- Investments that jeopardize, 

otherc 385 178 196 35 794

Section 4945 –Taxable expenditures 1,112 702 408 316 2,538

Section 4955 –Political expenditures 1 4 8 0 13

Subtotal 3,694 5,492 4,414 2,772 16,372

Taxes on individuals

Section 4941 –Self-dealing 438 665 415 204 1,722

Sections 4944, 4945, 4955, and Section 4958 

–Excess benefits 70 46 35 46 197

Subtotal 508 711 450 250 1,919

Tax on net investment income 

Section 4940 –Investment Income 683,767 320,811 242,187 244,627 1,491,392

Total 687,969 327,014 247,051 247,649 1,509,683

(450383)
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