Political Organizations: Data Disclosure and IRS's Oversight of Organizations Should Be Improved
Published: 2002-07-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Tax-exempt organizations seeking to influence political elections--called Section 527 organizations--are estimated to spend millions of dollars annually in federal elections. These organizations use unregulated "soft money" for issue advocacy, such as sponsoring an advertisement that supports or opposes a candidate's position on an issue. Although all states require these groups to publicly release data on their finances and activities, no central source for such data exists. In July 2000, Congress passed legislation requiring Section 527 organizations to provide data on their purposes, officers, contributors, and expenses to the Internal Revenue Service (IRS) for public disclosure.
section_title: What GAO Found
paragraphs: IRS has established a website for this purpose, but GAO found that the website is difficult to use, and most of the disclosed data are not electronically searchable and downloadable--which can inhibit timely analysis of the relationship between political organizations and the influence of soft money on federal campaigns. IRS has done little to oversee Section 527 organizations' compliance with the law's filing and reporting requirements. As a result, IRS can provide four assurances that the data it disclosed on its website are timely, complete, and correct. IRS officials said that oversight has been limited because of (1) competing demands for resources, (2) the focus on educating Section 527 organizations and on publicly disclosing the data, and (3) having the lack of electronic data on Section 527 organizations. IRS has not developed a strategic plan to ensure that the law's requirements are met.

section_title: Letter
paragraphs: Certain tax-exempt organizations seeking to influence political elections— called Section 527 organizations—are estimated to annually spend  hundreds of millions of dollars. In federal elections, these organizations  have been able to use unregulated “soft money” for indirect or “issue  advocacy,” such as that conducted when an organization sponsors an  advertisement that supports or opposes a candidate’s position on an issue.  Although all states required these organizations to provide some type of  data on their finances and activities to the public, no central source  provided such data. In July 2000, Congress passed P.L. 106-230 to require  Section 527 organizations to provide the Internal Revenue Service (IRS)  with data on their purposes, officers, contributors, and expenses.  Congress established tight time frames for reporting these data to IRS and  the law, or implementing regulations, calls for IRS to then disclose these  data to the public.
You asked us to study three related issues associated with responsibilities  IRS gained in P.L. 106-230. Given the requirements of P.L. 106-230, our  objectives were to determine the extent to which IRS (1) discloses to the  public in an accessible manner the data that Section 527 organizations file  with IRS, (2) oversees Section 527 organizations’ compliance with the  specified filing requirements, and (3) develops a strategic plan for carrying  out its new responsibilities. To meet these objectives, we reviewed P.L.  106-230 and relevant Internal Revenue Code rulings on Section 527  political organizations. We interviewed responsible IRS officials and  obtained documentation about processes, plans, and initiatives for  disclosure and oversight related to Section 527 organizations. We also  interviewed officials at the Federal Election Commission (FEC), which  publicly discloses data about federal election activities, to understand the  similarities and differences in disclosure and oversight processes between  FEC and IRS. On disclosure to the public, we tested IRS’s Section 527  disclosure Web site and spoke with public users of the Web site who also  represent public interest groups. Our scope and methodology are  discussed in more detail in a separate section of this report.
subsections: section_title: Background
paragraphs: In July 2000, P.L. 106-230 was enacted. It created a reporting and public  disclosure process for Section 527 organizations that operate outside FEC  jurisdiction and that engage in political activities at the local, state, or  federal level. Under P.L. 106-230, Section 527 organizations are to notify  IRS of their formation and file periodic reports with IRS. At IRS, the  Exempt Organizations section of the Tax-Exempt and Government  Entities (TE/GE) division is responsible for public disclosure of data on  Section 527 organizations and oversight of them.
IRS developed two forms to collect required data from Section 527  organizations. IRS released Form 8871 within 12 days of the law’s passage  and Form 8872 within 17 days. An entity forming as a Section 527  organization must notify IRS within 24 hours by filing electronically and  in writing, using Form 8871 (Political Organization Notice of Section 527  Status). Section 527 organizations also must file either electronically or in  writing with IRS periodic reports of contributions and expenditures— using Form 8872 (Political Organization Report of Contributions and  Expenditures). In an election year, these reports are required (1) monthly  or quarterly, as selected by the filing organization; (2) not later than 12  days before an election if filing on a quarterly basis; and (3) not later than  30 days after a general election. Appendix II contains copies of these IRS  forms.
Form 8871 on the notification of Section 527 status is to include the    name, address, business address (if a different address), and e-mail    purpose of the organization;    names and addresses of officers, highly compensated employees, contact  person, custodian of records, and members of Board of Directors; and    name and address of, and relationship to, any related organizations.
The Form 8872 on the Section 527 contributions and expenditures is to  include the    name and address of a contributor and amount of each contribution and,  if the contributor is an individual, the occupation and name of the  employer and    name and address of a recipient of an expenditure and amount of the  expenditure and, if the recipient is an individual, the occupation and name  of the employer.
IRS is required—with no specified timeframe—to publicly disclose in its  offices all data reported on Forms 8871. The law mandates that IRS  disclose on the Internet within 5 business days of receipt of the Form 8871  a list of organizations filing the form and data on the name, mailing  address, and electronic mailing address of each organization as well as the  custodian of records and contact person. For Form 8872 data, the law did  not require any disclosure over the Internet, providing the Secretary of the  Treasury with discretion on when and how to publicly disclose such data.
Given such requirements, IRS created a Web site within about 10 weeks  of the law’s passage to publicly disclose data on Forms 8871 and 8872.  Figure 1 shows the timeframe for developing the Web site.
section_title: Objectives, Scope, and Methodology
paragraphs: Our objectives were to determine the extent to which IRS (1) discloses to  the public in an accessible manner the data that Section 527 organizations  file with IRS; (2) oversees Section 527 organizations’ compliance with the  specified filing requirements; and (3) develops a strategic plan for carrying  out its new responsibilities. In addition, you asked us to provide statistical  data on IRS’s oversight of other tax-exempt organizations.
For all three objectives, we reviewed P.L. 106-230 and relevant rulings on  Section 527 organizations. We also reviewed P.L. 107-155, a related law on  campaign finance reform that was passed during our work, and talked  with FEC and IRS officials to determine its potential impacts on IRS  disclosure and oversight.
Specifically, for our objective on disclosure, we interviewed IRS officials  and reviewed documentation to understand how IRS implemented its  disclosure responsibilities immediately after passage of P.L. 106-230, how  implementation of these responsibilities changed over time, and what  plans IRS had. We also sought to understand how IRS officials interpreted  their disclosure responsibilities under the law and implemented their  discretionary authorities provided in the law. We interviewed IRS officials  on the timeliness of IRS’s public disclosure of the Section 527 forms; we  did not verify their statements. To understand similarities and differences  in the IRS’s and FEC’s implementation of their disclosure responsibilities,  we interviewed responsible FEC officials and reviewed FEC  documentation.
To determine whether IRS discloses Section 527 data in a manner  accessible to the public, we tested IRS’s Section 527 disclosure Web site  for accessibility and user-friendliness. We developed the test instrument  by reviewing the literature on Web site accessibility and consulting with  GAO experts. We tested whether the disclosure Web site had (1) a  structure and navigation system that was consistent, intuitive, and  transparent; (2) information content that clearly described the site’s scope,  content, services, and mission; (3) functionality that allowed links within  the site to work well and the site to respond quickly; and (4) interactivity  in which search and retrieval mechanisms on the site worked well for  users. Our test used 12 GAO analysts who were not familiar with the  Section 527 Web site. While the analysts do not represent all public users,  they can serve as a proxy. Appendix IV contains a copy of our test  instructions and results. We also interviewed 18 public users involved in  campaign finance reform issues about the extent to which the Section 527  Web site met their needs. We identified these individuals and groups using  an Internet search and referrals from other public interest groups,  congressional staff, and individuals who are knowledgeable about  campaign finance. Since we did not know the universe of public users, we  could not select a random sample. As a result, the views of those we  interviewed do not represent all users. Appendix V lists the groups we  interviewed.
For our second objective on IRS oversight of Section 527 organizations,  we interviewed responsible IRS officials and reviewed documentation on  IRS’s processes, plans, and initiatives. This included interviewing officials  at the Ogden Service Center, which receives, processes, and reviews  Forms 8871 and 8872, and obtaining documentation on the procedures to  be followed. We analyzed information we obtained on the number of  forms that IRS received from Section 527 organizations and IRS’s actions  to ensure that the forms were timely, complete, and correct. We did not  verify the information provided by IRS. Finally, as with our work on  disclosure, we interviewed responsible FEC officials and reviewed FEC  documentation to understand similarities and differences in the IRS’s and  FEC’s implementation of their oversight responsibilities.
For our third objective on strategic planning, we also reviewed IRS’s  Strategic Planning, Budgeting and Performance Management Process, and  general planning principles, such as those in GPRA, to determine how  such a planning process and principles could guide IRS’s planning on  implementation of its responsibilities for P.L. 106-230. We also talked with  IRS officials about any plans related to Section 527 forms or organizations.
For the statistical data on IRS’s oversight of other tax-exempt  organizations, we analyzed IRS data on the number of applications, audits,  and revocations of tax-exempt status (see app. III). We relied on the  publicly available data on the IRS Web site as well as data provided by IRS  on its audits. We conducted our review from June 2001 to May 2002, in  accordance with generally accepted government auditing standards.
section_title: IRS Disclosed Data Filed by Section 527 Organizations, but the Data Are Not Readily Accessible to Support Public Users
paragraphs: According to IRS officials, IRS has disclosed on its Section 527 Web site all  data reported on Forms 8871 and 8872. However, this Web site falls short  of disclosing data to the public in an accessible manner because the site is  difficult to use and lacks electronically searchable and downloadable data.  According to users we interviewed, these limitations hinder their efforts to  understand how money flows among political organizations. IRS has  begun to address some shortcomings of its disclosure Web site. However,  the changes do not make the site easy to use or increase the amount of  electronically searchable data. Furthermore, IRS has no plans to seek  public users’ views on how to improve disclosure. Enhancing the Section  527 disclosure Web site is not a top IRS priority in part because officials  believe that IRS has fulfilled its public disclosure role as mandated by law.
subsections: section_title: IRS Has Publicly Disclosed Data Filed by Section 527 Organizations
paragraphs: IRS officials said that IRS discloses on the Internet through its Section 527  Web site all of the data reported on Forms 8871 and 8872 by Section 527  organizations. Although IRS is required to disclose all such data to the  public, it is not required to disclose any of the Form 8872 data on the  Internet and is only required to disclose on the Internet a portion of the  data on the Form 8871. IRS officials said that IRS chose to disclose both  forms in their entirety on the Internet to facilitate public access and  minimize the burden that would be created by redacting certain data from  the forms before posting to the Internet.
IRS officials discussed how quickly IRS posts the forms to the Section 527  Web site. The law requires the Form 8871 data to be posted to the Internet  and otherwise made available to the public within 5 business days of  receipt. The law specifies no timeframe for disclosing the Form 8872 data.  IRS officials said that IRS generally posts electronically filed Forms 8871  and 8872 within 48 hours of receipt and paper Forms 8871 within 5  business days. IRS officials said that they post paper Forms 8872 to the  site within, on average, 3 to 4 business days of receipt.
section_title: Accessibility of Data on the Web site Is Hindered Because Site Is Difficult to Use and Lacks Electronically Searchable Data
paragraphs: Accessibility of the data disclosed on the Section 527 disclosure Web site  is impaired. The site is neither easy to use nor provides data on Section  527 organizations in a format that can be readily searched. The disclosure  Web site is difficult to navigate, interact with, and understand. In addition,  much of the Section 527 data on the site is neither searchable nor  downloadable. Representatives of public interest groups said these  shortcomings in IRS’s disclosure Web site seriously hinder their ability to  access and use IRS data to form a complete picture of campaign financing  activities.
subsections: section_title: Section 527 Disclosure Web site is Difficult to Use
paragraphs: Our tests generally indicate that it is difficult to find the Section 527  disclosure Web site within IRS’s overall Web site, and to search and  understand data in the site. For example, of 12 GAO analysts who tested  the site, 10 found it somewhat or very difficult to find the data they sought,  and 11 found it somewhat or very difficult to understand the content. Our  results generally echoed the shortcomings described by public interest  groups although they also note that it is still early in IRS’s implementation  of the law. These difficulties hinder the public’s capacity to effectively use  the data disclosed on the Section 527 disclosure Web site.
IRS officials acknowledged that users had difficulty finding the Section  527 disclosure Web site in part, because the IRS home page initially had no  link to the disclosure Web site, and it often took users at least seven links  to locate the site. Most GAO analysts in our tests could not find the site  without assistance. Noting the absence of a link on its home page, IRS  officials distributed a one-page guide during public education talks that  showed the web address for the Section 527 disclosure welcome page.
IRS provides two options for searching the disclosed data, but both have  shortcomings. The first option, called basic search, enables users to query  names of filing organizations but does not indicate the number of records  found, which prevents users from estimating the time it will take to view  all records. In addition, its keyword search feature can only query the first  part of an organization’s name and does not query data contained on each  form. The second option, called advanced search, can query data by  simultaneously searching up to six fields, but only for electronically filed  forms. According to IRS officials, only 5 percent of the universe of Forms  8872 has been filed electronically as of March 2002. Yet, the Web site does  not inform users that the advanced search cannot query 95 percent of  Forms 8872 filed, which may lead users to misinterpret search results.
The Section 527 disclosure Web site also falls short in helping users  interact with and understand the data disclosed. For example, IRS posts  forms filed by organizations that are exempt from filing under P.L. 106-230,  such as those who file reports with FEC, without indicating that such  forms are unnecessary. In addition, users have had problems  understanding technical terminology used in the site. For example, GAO  analysts in our tests had difficulty deciphering whether “contributions”  refers to donation to or from a Section 527 organization. Some public  interest groups we interviewed expressed frustration over interactions  with the customer service tools, pointing to telephone calls and e-mailed  questions that have gone unanswered; at least one group was told by an  IRS operator that the unit was unable to answer its questions on Section  527 organizations.
Furthermore, IRS’s Web site does not post information to distinguish  between forms, such as those initially filed versus those filed after being  amended. In contrast, FEC officials said that they post written contacts  with the organizations, such as when a form is amended. Nor does IRS  indicate when it has contacted Section 527 organizations, such as when it  asks for clarifications on filed data, as does FEC. Some public users told  us that Forms 8871 and 8872 appear on the Section 527 disclosure Web site  months after they were due without explanation. As a result, they cannot  tell whether IRS was late in posting forms, these forms were filed late, or  IRS re-posted the forms after making corrections. For example, of 50 new  postings identified by one public interest group during 1 day in January  2002, only 10 forms were being posted for the first time, and 40 forms  appeared to be re-posted after corrections.
section_title: IRS Lacks Electronically Searchable Data
paragraphs: Although not required by law, many of the forms filed by Section 527  organizations are not available to the public in an electronically searchable  and downloadable format. As of March 2002, only about 700 of the 14,500  Forms 8872 received, or 5 percent, were filed electronically. Only the   Web-based electronic forms are electronically searchable and  downloadable, while filed paper forms appear in a non-searchable,  photograph-like format. Unlike FEC, IRS can receive only its Web-based  forms and not electronic forms generated by software packages used by  the large Section 527 organizations to file with states and FEC. As a result,  these organizations cannot electronically file Forms 8872 without  reentering data from their system into IRS’s Web-based system.
The usefulness of IRS’s Section 527 Web site is limited by this lack of  electronically searchable data. Public interest groups told us that real  disclosure requires the data to be in an electronically searchable format,  rather than a photograph-like format, to be useful and timely for their  analyses of campaign financing and the relationships among organizations.  They cannot readily integrate photograph-like images into their databases  to identify the big donors in an election, the connections between  organizations, or the flow of funds. These groups said that without prompt  access to electronically searchable and downloadable data, they are  unable to effectively follow the flow of funds in campaigns for public  office and on specific legislative issues.
Given the scarcity of electronically filed Forms 8872, users are left to  manually review one paper form at a time. To create an electronic  database, IRS or the public user would have to manually transcribe the  data from paper forms, which many public interest groups have described  as time-consuming and costly. At least one public interest group gave up  trying to manually transcribe data from paper Forms 8872 due to the time  and resources required.
section_title: IRS’s Improvements to Disclosure Web site Do Not Address Key Limitations
paragraphs: IRS officials believe IRS has fulfilled its disclosure responsibility under the  law. Even so, IRS has begun to address some known shortcomings on its  disclosure Web site. However, such efforts do not address key limitations  in the site’s accessibility—how easy the site is to use and the amount of  electronically searchable data in the site.
IRS has made some enhancements to improve electronic filing, expand the  search capacity, and better integrate the paper and electronic forms on the  site. For example, in January 2002, IRS established a new link on the IRS  home page that more directly leads users to data on Section 527 political  organizations. However, neither this new link nor Web pages in  subsequent links clearly direct users to the Section 527 disclosure Web  site. The welcome page and the search page for the Web site lack clear  titles indicating the user’s location. Furthermore, the new links bypass the  welcome page, thus depriving users of the orientation to the search site.  Figure 2 shows the link system from the IRS home page to the Section 527  disclosure Web site.
Nor do the improvements increase the amount of electronically searchable  data. For example, IRS is exploring ways to add data to the Web site, such  as data from the annual Forms 990 on the income and expenditures of tax- exempt organizations. According to IRS officials, IRS is considering  posting portable document format (PDF) images (which can not be  electronically searched) of the Forms 990 filed by Section 527  organizations to the Section 527 Web site to provide the public a more  complete picture. IRS has a separate effort to allow optional electronic  filing of Forms 990 by 2004, which could increase the amount of  electronically searchable data reported by Section 527 organizations.
While IRS officials have expressed an interest in making the site easier to  use and in increasing the electronically searchable data, they do not see  these as top priorities. For example, officials working on the Section 527  disclosure Web site have requested funds to make the site’s search  features more user-friendly, including an expanded keyword search to  allow for “wildcard operators” and queries whereby a user could type in  any word to find all filers whose names contain that word. However, such  a request must compete for resources with other IRS priorities and IRS has  not funded the request.
Despite IRS’s emphasis on measuring its success in meeting the  expectations of customers, IRS has not identified the actual and potential  users of the disclosure Web site. Nor does IRS plan to survey whether  users can effectively access the disclosed data on Section 527  organizations or believe that the Web site can be enhanced to better meet  their needs. Such outreach efforts would be consistent with the first goal  in IRS’s current Strategic Plan that emphasizes meeting the expectations  of its customers.
section_title: IRS Provides Limited Oversight to Ensure that Section 527 Organizations Meet Filing Requirements
paragraphs: IRS’s oversight of Section 527 organizations’ compliance with the law’s  filing and reporting requirements has been very limited and has included  checks on whether some of the reported data is correct and little proactive  effort to determine whether all filings are timely and all organizations that  should file have done so. Accordingly, IRS has provided little assurance to  the public that data disclosed on the Section 527 Web site are timely,  complete, and correct. In part, due to these limited oversight efforts, IRS  has not imposed any penalties that P.L. 106-230 created for failing to meet  the filing and reporting requirements. IRS officials say that the lack of  available resources and other higher priorities, have affected the oversight  they have given to Section 527 organizations. IRS has recognized the need  to improve its oversight and started a study in 2002 to gauge the extent  that compliance issues might exist for Section 527 organizations.
Congress created a penalty structure, which IRS is to administer, for  failures by Section 527 organizations to adhere to P.L. 106-230’s  requirements. These penalties for not filing complete and correct Forms  8871 and 8872 on time, and for not making the data available to the public  are:    For failure to file Form 8871: If a Section 527 organization does not  notify IRS of its formation, including specified identifying information, it  will not be treated as exempt and the highest corporate tax rate, currently  35 percent, is to be applied to all exempt function income less any  expenses generating the income.
For failure to file Form 8872: Upon failure to make the required  disclosures at the time and in the prescribed manner, to include any of the  required information, or to show the correct information, the highest  corporate tax rate is to be applied to the amount of the contributions and  expenditures that were not so disclosed.
For failure to allow inspection or furnish a copy of the Form 8871  or 8872 to the public: A penalty of $20 may be assessed for each day that  an organization fails to allow public inspection or provide a copy of the  Form 8871 or Form 8872 upon request. For the Form 8872, the maximum  penalty is $10,000, but the law does not specify a maximum penalty for  Form 8871.
subsections: section_title: IRS Does Not Fully Check Section 527 Forms When Received to Ensure Data Quality
paragraphs: IRS does not fully check whether all required data are included on the  Forms 8871 and 8872 it receives and that the data are correct. Also, IRS  performs limited checks on the timeliness of filings and does not perform  checks to determine whether all Section 527 organizations that should file  have done so.
When Forms 8871 are filed, IRS employees are to review each form for  completeness and correctness. Table 1 shows the specific items that are to  be checked. IRS procedures call for employees to check three items  against IRS records to determine whether the Form 8871 data are correct:  valid name and employer identification number, whether an amended  form has been filed, and the organization’s tax-exempt status. For  remaining items that are to be checked, employees simply check whether  the data has been provided.
Table 2 shows the specific items that are to be checked for Forms 8872.  For this form, employees are to check two items against IRS records: valid  name and employer identification number and the organization’s tax- exempt status. Other items that are checked are only reviewed to  determine if something has been provided on the form.
As tables 1 and 2 show, IRS procedures do not require checks for the  completeness of all data. For Form 8871, employees are not required to  check whether data on related organizations and the names of officers,  directors, and highly compensated employees have been provided. These  data can help public users see relationships between Section 527  organizations and others. For Form 8872, no check is required of the  names of employers for contributors and recipients, or contribution and  expenditure amounts. Such data can help users find contributions made by  donors to Section 527 organizations and the related use of funds.
Based on its checks, IRS will correct certain data, such as an EIN, on the  forms or in its computers without contacting a filing organization  according to IRS officials. For other discrepancies, such as forms that are  clearly incomplete or lack a signature, IRS will correspond with a Section  527 organization. IRS posts Forms 8871 and 8872 as received on its  disclosure site while discrepancies are resolved and then re-posts  corrected forms.
In addition, IRS’s procedures do not include checks to determine whether  it receives both electronic and paper versions of the Forms 8871 as   P.L. 106-230 requires. Data on forms filed between July 2000, when the law  became effective, and March 2002 suggest that many organizations are not  meeting this requirement. As of March 2002, IRS had received 11,586  electronic and 13,752 paper Forms 8871. An IRS official said IRS is aware  of this discrepancy of nearly 2,000 more paper forms than electronic  forms.
Although the P.L. 106-230 penalties cover timeliness of filings, IRS does  not check the timeliness of Forms 8871 and only checks timeliness for one  aspect of Forms 8872. For Forms 8871, IRS officials said that they did not  check whether Section 527 organizations filed within the required 24  hours. For Forms 8872, IRS monitored the filing timeframes that govern  the required pre- and post-election periods for federal general elections,  but not other timeframes.
Finally, IRS does not perform checks to determine whether Section 527  organizations have filed all required Forms 8871 and 8872. Our analysis of  IRS data indicates that some Section 527 organizations may not be meeting  the filing requirements. Between July 2000 and March 2002, IRS data show  that 12,756 organizations had filed Forms 8871 on paper (which all are  required to do) but only 3,817 organizations had filed Forms 8872 (233  electronically and 3,584 on paper). Thus, almost 9,000 more Section 527  organizations have notified IRS of their formation than have reported any  contributions or expenditures. Some of this discrepancy may not be a  problem because, for instance, some organizations do not have to file a  Form 8871 or a Form 8872 in certain circumstances. However, as of May  2002, IRS had not determined which organizations unnecessarily filed  Forms 8871, filed Forms 8871 but were not required to file Forms 8872, or  did not file required Forms 8872. IRS also has no process to check  whether organizations have not filed required Forms 8871.
section_title: IRS Does Not Use Tools to Ensure the Quality of Section 527 Data After Forms Are Filed
paragraphs: IRS did not have a program to regularly audit (i.e., ask for documented  support on data reported) or match Form 8871 and 8872 data with other  data reported by Section 527 or other organizations to help ensure timely,  complete, and correct data. Nor has IRS imposed penalties for filing  problems with Forms 8871 and 8872.
subsections: section_title: IRS Audits Have Not Focused on Section 527 Forms
paragraphs: IRS did not have criteria for selecting forms filed by Section 527  organizations for audit to check whether the filed forms were complete  and correct. Nor did IRS track how often its audits of tax-exempt  organizations for non-Section 527 issues nevertheless may have addressed  Forms 8871 and 8872 issues. As a result, IRS could not identify any audits  that began because of IRS concerns about the Forms 8871 and 8872.
Between July 2000 and March 2002, IRS only audited these forms in two  situations—as part of an investigation of an allegation submitted to IRS or  an audit of other tax-exempt organizations during which a Section 527  issue arose. For example, in fiscal year 2001 and the first week of fiscal  year 2002, IRS received five allegations of noncompliance by Section 527  organizations. IRS audited two allegations involving one Section 527  organization; the audit had not been completed as of March 2002. IRS did  not audit one allegation because preliminary investigation showed that it  was unfounded and it has not acted on the remaining two.
section_title: IRS Did Not Match Existing Data for Section 527 Filing and Reporting Compliance
paragraphs: IRS has no program to match data on Forms 8871 and 8872 with data that  IRS already receives from Section 527 and other tax-exempt organizations.  Such matches could be used to help identify organizations that did not file  required Forms 8871 and 8872 or to verify the completeness and  correctness of data on filed Forms 8871 or 8872.
Data matching programs may be able to help IRS identify certain  organizations that are tax-exempt under Section 501(c) of the Internal  Revenue Code and that should file Forms 8871 because they spend  significant amounts on political activities. These organizations are to  annually file Forms 990 to list their activities, income, and expenses— including those for political activities. By first analyzing Forms 990 to  identify any organizations reporting significant expenditures for political  activity, and then matching to a database of Forms 8871, IRS could  determine whether these organizations had created a Section 527  organization for their political activities and filed Forms 8871. If not, IRS  would be able to follow up to determine whether a Section 527  organization should have been created and a Form 8871 should have been  filed. Similarly, Forms 990 are to include data reported by charitable  organizations about relationships with other tax-exempt organizations,  including Section 527 organizations. If IRS found a charitable organization  that reported a relationship with a Section 527 organization, a match could  identify whether such a Section 527 organization filed Forms 8871 and  8872, and reported the relationship.
However, IRS would face challenges in developing a full-scaled matching  program that uses the Form 990 data. Matching organizations’ or  individuals’ names is prone to error given possible variations in spelling  and in the use of abbreviations for the same name. Thus, matching would  be facilitated if IRS had unique identifying numbers associated with  specific names. Right now, IRS receives such unique numbers from tax- exempt organizations that file Forms 990, 8871, and 8872. IRS does not  necessarily have such numbers for other third parties that might have a  relationship with a Section 527 organization, such as their contributors  and recipients of their funds. Appendix VII describes possible matches  with existing data and options for overcoming challenges, such as  ensuring valid matches if organizations or individuals have similar names.
section_title: IRS Has Not Penalized Section 527 Organizations
paragraphs: Without programs to identify potential nonfilers of the Forms 8871 and  8872 and to identify incomplete or incorrect data on forms that are filed,  IRS has little ability to identify potentially noncompliant organizations,  audit them, and impose any relevant penalties. As a result, IRS has not  imposed any penalties authorized by P.L. 106-230. According to IRS  officials, these penalties could not be imposed automatically. They said  that some staff involvement, such as through an audit, would be needed to  justify any penalties.
Even so, IRS has learned that some organizations might not be filing the  Forms 8871 and 8872 as required and thus could be subject to the  penalties. IRS recently announced that it would not assess taxes, interest,  and penalties against Section 527 organizations that file or correct earlier  filings, if the filings are made by July 15, 2002. On May 2, 2002, IRS issued a  notice implementing this program for filings that were due after July 1,  2000. As a result, missing forms can be filed and already filed forms could  be amended without IRS taking adverse action against Section 527  organizations.
IRS officials believe that this program is likely to achieve the  congressional goal of maximum disclosure to the public and that the  deadline will ensure public disclosure before 2002 general elections. Data  were not available as this report was being prepared to verify that the  desired disclosures were being achieved. Because IRS has no systematic  means for identifying organizations that do not file required Section 527  forms, it is not clear how IRS can judge whether the program succeeds.
section_title: Various Factors Contribute to Limited Oversight of Section 527 Organizations
paragraphs: IRS officials cited several factors for the current limited oversight of  Section 527 organizations. One factor cited is that IRS has only had  responsibility for disclosing data from Forms 8871 and 8872 since July  2000. IRS officials said they first focused on educating Section 527  organizations about their responsibilities under P.L. 106-230 and on  publicly disclosing the data. An IRS official said she attended meetings— such as FEC events—to speak about the law’s requirements, and is  planning to continue outreach by publicizing the law’s requirements, and  required forms to file. Also, IRS is preparing a publication to distribute on  Section 527 organizations as part of its educational outreach.
In addition, IRS officials said that their resources to address Section 527  organizations’ compliance have to compete with many other tax-exempt  priorities. Section 527 organizations account for about 1 percent of all  exempt organizations. In 2001, IRS staffing for the exempt function  totaled 811. These staff are to educate and guide, process forms, oversee  activities, and enforce the law for over 1 million exempt organizations of  all types, such as charities, in addition to Section 527 organizations.
Finally, IRS officials said that checking for compliance with the filing  requirements on paper Forms 8872 would be burdensome, in part, due to  the lack of electronic data. IRS officials said that IRS transcribes about 20  percent of the Forms 990 data into electronic format. Unlike for Forms  990, filers can choose to file their Forms 8872 electronically and have done  so for about 10 percent of the data on the Forms 8872 filed. To obtain  more electronic data, IRS would have to transcribe more data from these  forms or organizations would have to be required to file electronically.
As for transcription, IRS officials said that transcribing the data into an  electronic format would be challenging and conflicts with IRS’s goal to  increase voluntary electronic filing. IRS transcribes data from other forms,  such as the Form 1040 filed by individual taxpayers, into an electronic  format, but such data are predominantly numeric. Most of the Forms 8872  data is text, such as names and addresses. Transcribing these types of data  generally results in a higher error rate and requires more costly  verification than numeric data. Although not measured, the cost of  transcribing textual data into an electronic format would be high,  according to IRS officials.
As for electronic filing, IRS is developing optional electronic filing of  Forms 990 for all tax-exempt organizations, including Section 527  organizations, which is slated to be available by January 2004. However,  IRS cannot accept electronic Forms 8872 generated by commercial  software. IRS officials said that completing Forms 8872 on the Web site  burdens Section 527 organizations that use such software to manage  contribution and expenditure data. To use the Web site, the organizations  must manually re-enter the data; organizations that do not use such  software would not face an increased burden because they would  manually enter their Forms 8872 data regardless. IRS officials also said  that some Section 527 organizations are reluctant to file electronically  because IRS does not provide proof of filing through a date-time stamp or  e-mail, as FEC does. Although IRS favors the capability to accept  electronic Forms 8872 generated by the software, it has not identified its  resource needs. Even with this capability, IRS may see a low electronic  filing rate. FEC allowed organizations to electronically file, even with the  software packages, but the majority did not file electronically until  Congress mandated it.
section_title: IRS Is Starting a Study to Improve Oversight of Section 527 Organizations
paragraphs: To improve oversight, IRS recently convened a task group to study the  consistency and correctness of data reported on Forms 8871 and 8872 by  Section 527 organizations. The task force will study known areas of  noncompliance by auditing random samples of filed forms, such as Forms  8871 and 8872. The study will focus on whether the filed forms complied  with the requirements and whether contributors and contributions are  properly reported on Forms 8872. According to an IRS official, the study  might look at those not filing the required forms with IRS, but not until IRS  develops a reliable means to identify nonfilers. The study is expected to  begin in summer 2002 and take 6 months or longer to finish. IRS expects  the results of the study to provide insights on the amount and types of  oversight needed.
section_title: IRS Planning for New Responsibilities Not Adhering to Accepted Principles
paragraphs: IRS has not developed a strategic plan to carry out its Section 527  responsibilities. The principles for strategic planning are articulated in  GPRA and IRS’s strategic planning process, which call for planning that   (1) defines the results to be achieved over several years, (2) outlines the  strategy and necessary resources to achieve the intended results, and   (3) establishes measures that will be used to assess progress in achieving  intended results. Although GPRA and IRS’s strategic planning process  address planning at levels higher than specific programs, such as Section  527 responsibilities, their principles are useful for managing at the  program level. IRS has a plan for tax-exempt activities overall and has  initiatives planned to address specific Section 527 issues, but IRS has not  defined what type and amount of disclosure and oversight it intends to  provide, how it would achieve such disclosure and oversight levels, and  how it would measure progress. The importance of following accepted  planning principles is heightened by the recent passage of campaign  finance reform legislation.
subsections: section_title: IRS Plans Do Not Define Future Results To Be Achieved
paragraphs: Planning principles in GPRA and incorporated into IRS’s Strategic  Planning, Budgeting, and Performance Management process call for  agencies to define the results they are attempting to achieve, generally  over several years. This approach is intended to ensure that agencies have  thought through how their activities and initiatives contribute to a  meaningful result that was intended. Furthermore, GPRA and IRS’s  strategic planning process call for managers to develop a strategy for  achieving the results they have defined for their programs and to assess  the types and amounts of resources they will need to carry out the  strategy. Finally, GPRA’s and IRS’s processes call for managers to develop  measures they will use to assess progress in achieving results. Although  GPRA applies at a department or agency level and IRS’s strategic planning  process applies at the operating unit level, such as a division within IRS,  the planning principles can be applied at a specific program level, such as  planning for how IRS will execute its responsibilities related to Section  527 organizations.
Although planning is an ongoing management responsibility, the  assumption of new duties, like those IRS has for Section 527 organizations,  should trigger such planning. IRS’s Management Controls Accountability  Program: MCAP Handbook for Managers (Feb. 23, 2001) notes that  assumption of a new responsibility, organization, or program should cause  a manager to review the management controls to administer the program.  The handbook defines a significant control deficiency to include situations  that “may deprive the public of needed services.” If a review identifies  significant deficiencies, the guidance calls for a corrective action plan. A  corrective action plan is to include all actions, listed chronologically and  including those completed, needed to correct a deficiency. The plan is to  be updated to reflect revised or actual completion dates.
Neither IRS’s plan for tax-exempt activities nor the specific initiatives IRS  is planning to improve its disclosure and oversight activities define what  level of disclosure and oversight it hopes to achieve, how it will achieve  those levels of performance, and how progress will be measured for  Section 527 organizations. For example, this IRS plan focuses on activities,  such as audits, for all types of tax-exempt organizations. The plan  specifies, for instance, the number of employees to be assigned to each  activity, the number of actions (e.g., audits) to be done, how long such  actions take, the quality of work to be achieved and the satisfaction of tax- exempt organizations and of IRS employees.
Although the plan provides an understanding of what IRS intends to do  with its staff and other resources, the plan provides little basis for  understanding longer-range results IRS intends to achieve for Section 527  organizations. It does not, for instance, indicate whether, how, and when  IRS plans to provide electronically searchable Section 527 data. The plan  also does not provide goals for improving the compliance levels of Section  527 organizations. In short, the plan does not provide a vision for the level  of service to provide to the public relative to Section 527 organizations or  a clear strategy that identifies the results desired, the steps and resources  to be used in achieving results, or measures to gauge success in meeting  its Section 527 responsibilities.
IRS officials said that the exempt organization function operates with  resource constraints that require difficult choices due to competing  priorities. Following planning principles like those in GPRA and IRS’s own  processes can enable IRS to provide decision makers within IRS, the  executive branch, and Congress with a more informed basis for  prioritizing and allocating resources for Section 527 responsibilities based  on a clearer understanding of expected accomplishments if identified  resources are provided.
In the absence of an overall plan for the levels of disclosure and oversight  of Section 527 organizations, IRS has begun to develop initiatives that  could improve some aspects of the services it provides or that could  develop data to use as a baseline in determining additional efforts it  should undertake to, for instance, improve Section 527 organizations’  compliance. Although these initiatives may individually be useful, in the  absence of an overall definition of what IRS intends to accomplish, it is  difficult to determine how the initiatives move IRS forward or how they  align with IRS’s goals.
For example, IRS has begun an initiative to disclose Forms 990 data from  Section 527 organizations on its 527 disclosure Web site but the data will  be not be disclosed in an electronically searchable format, which public  users said they need. IRS officials said that they would like to increase  searchable and downloadable data on the Section 527 disclosure Web site.  However, IRS has not developed a plan or estimated the resources needed  to do so. When asked the cost of one option—keypunching data from  paper Forms 8872—officials said that they did not estimate the costs  because the option was not consistent with IRS’s desire to increase  voluntary electronic filing by Section 527 organizations. These officials  could not tell us when and how IRS would begin efforts or what resources  IRS would need to increase voluntary electronic filing of Forms 8872.
In addition, it is not clear how this initiative aligns with one of IRS’s  agencywide strategic goals—to provide “top-quality service to each  taxpayer in every interaction.” IRS’s goal states that “the ultimate measure  of success in  first strategic goal is whether or not our customers  believe we are meeting their expectations.” IRS cannot know how its  public users would judge its initiative to disclose Form 990 information on  its Web site because IRS has not identified public users and their needs  and has no plans to do so.
section_title: Recent Actions Could Heighten Need for Results- Oriented Planning
paragraphs: The need for IRS to develop a strategic plan to address its Section 527  responsibilities could be heightened by recent actions. For example, it is  not clear how IRS’s initiative to suspend penalties for Section 527  organizations that have not filed correct, complete, or timely forms will be  coupled with other efforts to ensure that acceptable compliance levels are  achieved and maintained. Even after the notice announcing the penalty  suspension was publicly released in May 2002, IRS officials could not  provide written plans for this initiative, including how it would deal with a  possible increased workload of filed forms, would educate organizations  about their filing requirements, or would monitor and enforce filing  compliance after July 15, 2002, so that suspensions of penalties will not  again be needed.
Similarly, the Bipartisan Campaign Reform Act of 2002 (P.L. 107-155)  could affect disclosure and oversight responsibilities for Section 527  organizations, heightening the need for IRS planning to meet its  responsibilities. The law could change how these organizations report to  FEC or IRS, and how these agencies disclose reported data and oversee  Section 527 organizations. With such changes, IRS would have a greater  need to ensure that its oversight allows quick identification of nonfilers,  late filers, and those no longer needing to file. Appendix VI describes areas  of the law that could affect IRS.
section_title: Conclusions
paragraphs: Effective public disclosure of data on the activities of Section 527  organizations can enable the public to make more informed choices when  voting. These organizations, however, may exist for brief periods  preceding elections, or concentrate their activities during such brief  periods. Congress created reporting and disclosure requirements for  Section 527 organizations that can provide the public with timely data  before elections.
IRS developed a Web site to disclose reported data. However, the Web site  has shortcomings that inhibit the public’s ability to access and understand  the disclosed data in a timely manner. Among these shortcomings, the lack  of electronically searchable and downloadable data challenges the public  in quickly accessing data about Section 527 organizations. Although IRS’s  goal is to provide top-quality service to each taxpayer in every interaction,  IRS has not identified public users of the Section 527 disclosure site and  their needs.
Enhanced Web site features would be of limited value unless Section 527  organizations file timely, complete, and correct forms as required.  Discrepancies between the number of Section 527 organizations that have  reported their formation to IRS and reported subsequent activities suggest  that many Section 527 organizations are not filing timely, as required.  Furthermore, IRS’s oversight provides little assurance that Section 527  organizations comply with the law. IRS was sufficiently concerned about  possible noncompliance that it announced in May 2002 a waiver of  penalties to encourage noncompliant Section 527 organizations to comply  before July 15, 2002.
Although IRS officials acknowledge that the Section 527 Web site and its  oversight practices could be improved, they have not defined the levels of  disclosure and oversight to be obtained over time, developed a strategy to  achieve those results, and identified the resources to execute it. Such  results-oriented planning would adhere to principles articulated in  statutory guidance and IRS’s Strategic Planning, Budgeting, and  Performance Management Process. Such a plan would also provide  decision makers within the executive branch and Congress a more  informed basis to determine the priority to give to IRS’s Section 527  responsibilities as well as related amounts and types of resources. IRS  officials face many challenges in attaining higher levels of disclosure and  oversight that may limit what can be achieved over a given time. These  issues should be taken into consideration in developing a results-oriented  plan for IRS’s Section 527 responsibilities.
section_title: Recommendations for Executive Action
paragraphs: To improve public disclosure of data filed by Section 527 organizations  and IRS’s oversight of their compliance with P.L. 106-230, we recommend  that the Commissioner of Internal Revenue develop results-oriented plans,  including timeframes and resources needed, for  improving the usability of the disclosure Web site after consulting with  the full range of users of the data;    overseeing whether Section 527 organizations fulfill their filing  requirements; and  increasing the availability of electronic data on Section 527 organizations  to improve the public accessibility of disclosed data as well as to support  IRS’s oversight efforts.
section_title: Agency Comments and Our Evaluation
paragraphs: We obtained written comments from the IRS Commissioner on a draft of  this report. (See app. VIII). IRS agreed with our recommendation on  developing results-oriented plans to oversee whether Section 527  organizations fulfill their filing requirements. IRS said that it will increase  such oversight now that it has developed the filing system, educated the  organizations, and provided a last chance to comply with the  requirements.
IRS’s written comments took no position on our recommendations to  develop results-oriented plans to improve the disclosure Web site and to  increase the availability of electronic data. IRS officials told us that they  need more time to develop specific positions on the degree and method  for implementing these recommendations. Even so, IRS generally agreed  that improving the usability of its disclosure Web site and increasing the  availability of electronic data would be useful to the public and helpful to  IRS enforcement. However, IRS said that such actions face competing  resource priorities in its budget allocation process. IRS’s agreement that  improvement in these areas is needed is encouraging. We continue to  believe that results-oriented plans to do so are the appropriate foundation  to ensure that IRS has a well-thought out strategy and a supportable basis  for determining how many and what type of resources will be needed.   Such plans would provide decision makers a basis to make informed  judgments about the priority to give to IRS’s Section 527 responsibilities  and what level of budgetary support to allocate to them.
IRS also provided comments to expand on points that we raised in our  report. Because these comments emphasized or expanded on material in  the report, we made no changes to our report based on these comments.   In general, these comments expanded on our discussion about the speed  in which IRS met the challenges of creating systems for filing and  disclosing data about Section 527 organizations, the barriers to obtaining  Section 527 data in an electronic format, and efforts to improve the filing  compliance of Section 527 organizations as well as IRS’s oversight. For  example, although our report describes what the law required and what  IRS did in creating the Section 527 forms and Web site, IRS said that our  report understated the steps necessary to implement the law and the  difficult challenges IRS faced. IRS elaborated on its initial effort to  implement the law and noted that disclosures on the Web site go beyond  what the law required, which our report acknowledges by describing that  IRS posts more information to the Web site than the law requires.
In addition, IRS said that our report should make clear that unlike the  statutory penalties for late filing of the Form 1120-POL and Form 990, no  late filing penalties exist for the Form 8871 or 8872. For example, IRS said  that if an organization files a late or incomplete Form 8871, it does not  incur a penalty but rather must recalculate its taxable income or have IRS  do so. A similar provision applies for organizations that do not file Forms  8872 in the time and manner required. IRS did not dispute that it has not  recalculated any Section 527 organizations’ taxes under the provisions of  P.L. 106-230 that authorize it do so. Although we agree that the “penalty”  for late or incomplete filing does not have the same characteristics as the  penalties for late filing of Forms 1120-POL or 990, we believe we are  correct in indicating that having to pay tax on what had previously been  tax-exempt income is a penalty for noncompliance with the requirement to  file timely, complete and correct Forms 8871 and 8872. P.L. 106-230 refers  to the requirement that taxes be paid on previously tax-exempt income for  failure to properly file Forms 8872 as a penalty, although it does not label  the provision on failure to properly file Forms 8871 as a penalty. We  describe the penalty structure in the report and made no changes based on  IRS’s comments.
We also received oral comments from IRS officials on technical aspects of  the report. Similarly, FEC officials provided some technical comments. In  both cases, we made changes on the basis of these comments where  appropriate.
As we agreed with your office, unless you publicly announce the contents  of this report earlier, we will make no further distribution of this report  until 30 days from the report date. At that time, we will send copies of this  report to the Ranking Minority Member, House Committee on Ways and  Means, Commissioner of Internal Revenue, Secretary of the Treasury,  Chairman, Federal Election Commission, Director, Office of Management  and Budget, and other interested parties. In addition, the report will be  available at no charge on the GAO Web site at http://www.gao.gov. If you  have questions, please call me on (202) 512-9110. Key contributors to this  report are listed in appendix IX.
section_title: Appendix I: Political Activity and Section 527 Organizations
paragraphs: Section 527 of the tax code has allowed the formation of tax-exempt  political organizations. Such organizations that collect contributions and  make expenditures to directly influence elections of candidates are to  register and file reports with the Federal Election Commission (FEC) once  they meet the Federal Election Campaign Act’s (FECA) definition of  “political committee.” Political committees established by corporations  and unions must register when they form while other political  organizations must register when their contributions or expenditures  exceed $1,000 in a calendar year. Once registered, the political  organizations are to report their receipts and disbursements to FEC, which  discloses the data to the public and oversees the organizations.
In private letter rulings since 1996, the Internal Revenue Service (IRS) has  clarified the political activities allowable under Section 527. The letter  rulings interpreted the law as allowing tax-exempt organizations to collect  contributions and make expenditures to indirectly influence the election  of candidates through issue advocacy. Such organizations have sponsored  advertisements that support or oppose a candidate’s position on an issue  without expressly advocating the election or defeat of that candidate.   Tax-exempt organizations engaging only in these types of issue ads are  generally not subject to FECA, and until July 2000, not required to report  their activities to a federal agency or publicly disclose data under federal  law.
Public disclosure of data about Section 527 organizations involved in issue  advocacy allows voters to see the contributions to and expenditures of  these organizations. P.L. 106-230 created a federal source of public data at  IRS on Section 527 organizations at local, state, and federal levels. Even  so, identifying all individuals or groups that seek to influence an issue can  be difficult because of complex relationships. Section 527 organizations  can make contributions to each other and between federal and state  levels, creating a web of relationships among the organizations.
Other types of tax-exempt organizations may conduct political activities if  the political activities are secondary to their tax-exempt activities. Table 3  shows four types of tax-exempt organizations that may engage in political  activities and the allowable activities.
With the exception of charities, tax-exempt organizations can choose  among three ways to manage the funds for political activities: (1) keep  such activities within the organizational budget if that activity is secondary  to its exempt purpose, (2) create a separate bank account called a  separate segregated fund (SSF) within its organization, or (3) establish a  distinct but related Section 527 organization. Charities may not create a  related Section 527 organization.
In a 1996 letter ruling, IRS said that it considered a SSF to be a tax-exempt  Section 527 organization. According to IRS officials, Section 527(f)  encouraged Section 501(c)(4-6) organizations to create SSFs or Section  527 organizations instead of keeping their political activities within the  organization and paying tax on the money flowing through for political  activities. IRS officials said that P.L. 106-230 created an incentive to push  the political activities back within the Section 501(c)(4-6) organizations to  avoid the disclosure requirements of P.L. 106-230.
section_title: Appendix II: IRS Forms Mentioned in Report
subsections: section_title: The following pages show the forms used by Section 527 organizations.
paragraphs: Because IRS has not identified how many Section 501(c) organizations have ceased activity, the  number of organizations that are currently active is likely to be overstated. The Treasury Inspector  General for Tax Administration has recommended that IRS take steps to improve such data.  “Other” refers to Section 501(c)(1-27) except 3, 4, 5, and 6.  501(c)(3)
501(c)(4)
501(c)(5)
501(c)(6)
All other 501(c)
Percent of approvals assumes no carry-over of applications from previous year(s) and includes  Other.
Approved/Deny Ratio = For every 1 denial, there were X approvals.
Application withdrawn and failure to furnish required information, refusals to rule, information  forwarded to other than national office, correction, disposal, and others.
subsections: section_title: Total number of returns for tax-exempt organizations filed in previous calendar yearAudit Rate (overall) Tax-exempt organizations and related taxable returns audited Tax-exempt returns audited Forms 990 and 990-EZ Forms 990PF, 5227, and 1041A Form 990-C Form 1120-POL Forms 8038, 8038G, 8038GC, 8038T, and 8028 Total Related taxable returns audited Forms 940, 941, 942, and 943` Form 990-T Form 4720 Forms 1040 and 1120 adjusted Total
section_title: Appendix IV: IRS Section 527 Disclosure Web Site Accessibility Evaluation
section_title: Appendix V: Groups Interviewed for this Report
paragraphs: To obtain the perspectives of public users, we spoke with representatives  involved in campaign finance reform issues about their experiences,  including public interest groups and those who represent them, with IRS’s  Section 527 disclosure web site and the extent to which it met their needs.  We also discussed these public users’ work on issues related to campaign  finance reform, Section 527 organizations, and the IRS. We did not identify  and survey all public users; thus, the opinions of the public interest groups  we interviewed may not reflect the views of all users of the Section 527  disclosure web site. We spoke with several individuals active in this area  and from those organizations listed below.
section_title: Appendix VI: Selected Provisions of P.L. 107- 155, the Bipartisan Campaign Reform Act of 2002
paragraphs: Provisions in the Bipartisan Campaign Reform Act of 2002, P.L. 107-155,  can affect whether Section 527 organizations report to IRS or FEC, and  how these agencies disclose the reported data and oversee Section 527  organizations. IRS and FEC are reviewing the law to determine how to  implement it, but as of March 2002, officials at those agencies could not  say what changes will be required. The impact of the law will be  influenced by the regulations that FEC develops, and according to FEC  counsel, will only be known over several years. Our review of P.L. 107-155  indicates that several provisions might affect IRS’s disclosure and  oversight responsibilities, as discussed below.
subsections: section_title: Public Disclosure of Data on the Internet
paragraphs: The legislation requires FEC to maintain a central site on the Internet for  all publicly available election-related reports and information. The  provision draws a distinction between the “election-related reports” that  FEC is to disclose under FECA and “election-related information” that IRS  is to disclose under P.L. 106-230. FEC officials said their preliminary  reading indicates that this provision requires FEC to coordinate disclosure  efforts with any federal agency disclosing election-related information,  including IRS. The extent of this coordination has yet to be determined.  Coordination could be as limited as providing links on each other’s web  sites that direct users to both sites, or as comprehensive as a fully  integrated web site of FEC and IRS disclosed data for all Section 527- related election reports and information.
A central Internet disclosure site presents challenges because FEC and  IRS do not have compatible Web sites. For example, Section 527  organizations that report to FEC on contributions received over $50,000  and expenditures made, generally are required to electronically file while  those that report to IRS are not and usually file paper forms. As a result,  data on FEC’s web site are largely electronically searchable whereas data  on IRS’s web site are largely not electronically searchable.
section_title: Determining Responsibility for Disclosure and Oversight
paragraphs: Under P.L. 107-155, determining the level of IRS and FEC disclosure or  oversight of a Section 527 organization depends on the activities of the  organization. These include the timing, operations, and parties involved in  the activities. According to FEC officials, this raises the possibility that  Section 527 organizations will report some activities to IRS and others to  FEC, even during the same time in an election cycle. The overlapping  agency responsibilities for Section 527 organizations raises questions  about the degree and type of coordination that will be needed for future  Section 527 disclosure and oversight efforts by IRS and FEC.
For example, Section 501(c)(5) unions will be prohibited from spending  their treasury funds for newly defined electioneering communications.  FEC will need to oversee union activities to enforce this prohibition while  IRS will continue to have responsibility for overseeing whether Section  501(c)(5) unions engage in political activities that exceed those  permissible for tax-exempt organizations. Similarly, if a Section 527  organization runs a “promote or attack” advertisement as defined by P.L.  107-155, disclosure and oversight responsibility depends on whether the  organization coordinated with a candidate’s committee. Thus, both  agencies will need to know whether the advertisements run by Section 527  organizations include such advertisements.
section_title: Appendix VII: Opportunities for Data Matching to Improve Oversight
paragraphs: IRS does not use existing data, such as from the Form 990, that it receives  from Section 527 and other tax-exempt organizations to identify Section  527 organizations that might not be filing required Forms 8871 and 8872, or  Section 501(c)(4-6) organizations that should have established a separate  segregated fund for their political activities and filed Forms 8871 and 8872.  Some options exist for starting to match these data to identify  noncompliance such as unfiled Forms 8871 and 8872.
IRS could use the Form 990 data to calculate the ratio of a Section 501(c)  organization’s political activity expenditures to its total expenses. This  would give IRS information on the amount of reported political activity.  High amounts of political activity might merit follow up to determine  whether the organization should have notified IRS of its activities under  Section 527.
IRS could use the Form 990 data to check the completeness and  correctness of reporting on relationship between Section 527 and  charitable organizations. These relationships are to be reported on the  Form 990 and Form 8871. These matches could identify Section 527  organizations that may have filed incomplete or incorrect data. In addition,  such matches could help to identify Section 527 organizations that did not  file the required Forms 8871 or 8872.
A barrier to matching data across forms is the uncertainty that would exist  about whether IRS is matching the right names for people and  organizations listed on the forms. The Form 8871 and Form 990 require  organizations to list the names of related organizations. If a tax-exempt  organization were to list a Section 527 organization as the “Clean Water  Initiative” but that organization identifies itself by a different name such as  the “Clean Water PAC,” IRS could not match the names electronically to  determine whether these organizations are in fact the same. Also, similar  problems arise with common names of individuals such as “John Smith” in  assuring that IRS is matching or, public users are analyzing, the same  person versus someone else with the same name. Without the capability to  match names with the right organizations or people across forms, IRS  could not determine whether organizations have met the legal requirement  to file complete and correct data.
One option that would allow IRS to match individual and organization’s  names would require IRS to collect social security numbers and employer  identification numbers (EINs) for each individual or organization listed on  the forms filed by Section 527 and 501(c)(3-6) organizations. This option is  not without complications. According to IRS officials, IRS cannot protect  sensitive privacy information since IRS discloses Forms 8871 and 8872 in  their entirety. In addition, current law would compel filing organizations to  disclose such sensitive data whenever requested to provide copies of  forms filed with IRS. Furthermore, IRS officials said that unless the data  on the Forms 8871 and 8872 is filed electronically, IRS would face an  administrative burden to redact these data in time to meet its disclosure  requirements.
Another option that would allow IRS to match individual and  organization’s names entails establishing a system similar to one used by  FEC. FEC standardizes names of political committees and candidates who  file with them by manually assigning unique identification numbers. In  addition, if a political committee or candidate appears as a contributor or  recipient on the filings of another entity, FEC standardizes the names. For  example, when a PAC reports a contribution from “Smith for Congress,”  the FEC generates a list from its database of all organizations identified as  “Smith for Congress.” By manually comparing the submission with the  names and addresses of all “Smith for Congress” organizations, FEC can  determine whether that contributor is already in its database with a unique  identification number.
section_title: Appendix VIII: Comments from the Internal Revenue Service
section_title: Appendix IX: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to those named above, Rodd Hobbs, Shirley Jones, Anne  Laffoon, Kristeen McLain, Dan Mesler, Cheryl Peterson, and Tama  Weinberg made key contributions to this report.