Tax-Exempt Sector: Governance, Transparency, and Oversight Are Critical for Maintaining Public Trust
Published: 2005-04-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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) tax-exempt 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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 tax- exempt 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.  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.
Today’s hearing provides an excellent forum to launch such a re- examination.   Some of the more specific issues that may merit re- examination 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?
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 reports 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  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  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.
subsections: section_title: Background
paragraphs: 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.   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.  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.
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.
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; 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  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 Sector convened a Nonprofit Sector Panel in October  2004, which includes 24 nonprofit and philanthropic leaders.  It provided  an interim report of findings and recommendations in March 2005 and  plans to issue a final report in June 2005.
section_title: Tax-Exempt Assets, Revenues, and Expenses Have Grown, Making It A Significant Sector In The Nation’s Economy
paragraphs: 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 tax- exempt 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.
subsections: section_title: Tax-Exempt Entities Have Reported Increased Assets, Revenues, and Expenses
paragraphs: 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  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.)
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).
section_title: Tax-Exempt Sector Is a Significant Part of the Economy and Civilian Workforce
paragraphs: 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.  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).   (See table 5 in app. III.)  Because the tax- exempt 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.
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.
In addition to paid workers, one study 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.
section_title: Strong Self-governance And Transparency Are Essential Elements For A Thriving And Effective Exempt Sector
paragraphs: 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.
subsections: section_title: Good Governance Helps Provide Assurance that a Tax-Exempt Entity Effectively Manages Funding and Programs
paragraphs: 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  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.
section_title: Transparency Complements Good Governance
paragraphs: 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  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.
section_title: Recent Concerns about Abuses Have Led to Support for Enhanced Governance Processes and Transparency
paragraphs: 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.  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.
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.  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.  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 tax- exempt 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.
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, self- regulation, 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.
More specifically, among the proposals being considered to improve  governance and transparency are:  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-of- interest 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.
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.
section_title: IRS Has Been Challenged to Oversee Tax-Exempt Entities and Is Beginning Steps to Enhance Its Oversight Capacity
paragraphs: Staffing and insufficient data have constrained IRS’s oversight of the tax- exempt 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.
subsections: section_title: IRS Oversight Resources Have Been Relatively Flat Until Recently
paragraphs: 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.  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).
Competition within IRS for resources helps explain why resources for tax- exempt 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.
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.
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.
section_title: IRS’s Oversight Caseload Has Been Increasing in Recent Years and IRS Has Had Difficulties Sustaining Its Oversight
paragraphs: 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 tax- exempt 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).
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).  Denials occur when IRS  determines that an applicant has not met the statutory requirements for  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 tax- exempt entity to comply with federal laws rather than on taking away its  exempt status.
Beyond revocations, IRS examinations can produce one or more other  changes such as in the section 501(c) paragraph, foundation status of a  501(c)(3) entity, and assessed tax.   Changes in paragraph are important  because of rules governing permissible activities.  For example, a tax- exempt 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  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.
section_title: IRS Has Had Insufficient Reliable Information to Guide Oversight Efforts but Is Working to Obtain Better Information
paragraphs: 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 tax- exempt entities.  To better enable it to collect and analyze such data, IRS is  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.   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  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.  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.
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.  IRS began accepting the Form 990 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.
IRS’s Exempt Organizations Electronic Initiatives Office 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.
section_title: IRS Has Identified Priority Compliance Issues and Is Working to Address Them
paragraphs: 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.
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).
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 companies and producer-owned  reinsurance companies to earn tax-free profits;  establishing donor-advised funds 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.
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.  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”.
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 tax- scheme 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.
section_title: States Play an Important Role in Overseeing Tax- Exempt Entities and May Benefit from Additional Coordination With IRS
paragraphs: 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.
subsections: section_title: States Provide Critical Oversight
paragraphs: 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.
section_title: Coordination between IRS and the States in Sharing Data About Tax-Exempt Entities Could Enhance Oversight and the Use of Limited Resources
paragraphs: State officials believe, and IRS officials agree, that state oversight of tax- exempt 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.  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 tax- exempt 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.
section_title: Concluding Observations
paragraphs: 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  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.
section_title: Types of Tax-Exempt Entities under Section 501(c)
section_title: Copy of Form 990
paragraphs: Under section 501(c), 527, or 4947(a)(1) of the Internal Revenue Code (except black lung benefit trust or private foundation) 䊳 The organization may have to use a copy of this return to satisfy state reporting requirements.
Number and street (or P.O. box if mail is not delivered to street address) )
Other (specify) ● Section  501(c)(3)  organizations  and  4947(a)(1)  nonexempt  charitable trusts must attach a completed Schedule A (Form 990 or 990-EZ).
H and I are not applicable to section 527 organizations. H(a)Yes Is this a group return for affiliates?
H(b)
H(c)
Are all affiliates included? (If “No,” attach a list. See instructions.)
Organization type (check only one) 䊳 501(c) ( ) (insert no.)
H(d) if  the  organization’s  gross  receipts  are  normally  not  more  than  $25,000.  The Check  here 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.
Is this a separate return filed by an organization covered by a group ruling?
subsections: section_title: Revenue, Expenses, and Changes in Net Assets or Fund Balances (See page 18 of the instructions.)
section_title: Contributions, gifts, grants, and similar amounts received: Direct public support Indirect public support Government contributions (grants) Total (add lines 1a through 1c) (cash $noncash $) Program service revenue including government fees and contracts (from Part VII, line 93) Membership dues and assessments Interest on savings and temporary cash investments Dividends and interest from securities Gross rents6a Less: rental expenses6b Net rental income or (loss) (subtract line 6b from line 6a) Other investment income (describe 䊳
paragraphs: )
Gross amount from sales of assets other than inventory Less: cost or other basis and sales expenses Gain or (loss) (attach schedule) Net gain or (loss) (combine line 8c, columns (A) and (B)) Special events and activities (attach schedule). If any amount is from gaming, check here  䊳 Gross revenue (not including $ contributions reported on line 1a) Less: direct expenses other than fundraising expenses Net income or (loss) from special events (subtract line 9b from line 9a) Gross sales of inventory, less returns and allowances10a Less: cost of goods sold10b Gross profit or (loss) from sales of inventory (attach schedule) (subtract line 10b from line 10a) Other revenue (from Part VII, line 103) Total revenue (add lines 1d, 2, 3, 4, 5, 6c, 7, 8d, 9c, 10c, and 11)
Program services (from line 44, column (B)) 14 15 16Management and general (from line 44, column (C)) Fundraising (from line 44, column (D)) Payments to affiliates (attach schedule) Total expenses (add lines 16 and 44, column (A)) 18 19 20 Other changes in net assets or fund balances (attach explanation) Net assets or fund balances at end of year (combine lines 18, 19, and 20)
Excess or (deficit) for the year (subtract line 17 from line 12) Net assets or fund balances at beginning of year (from line 73, column (A))
For Privacy Act and Paperwork Reduction Act Notice, see the separate instructions.
Form (2004)
section_title: Statement of Functional Expenses
paragraphs: 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.)
section_title: Do not include amounts reported on line
paragraphs: 6b, 8b, 9b, 10b, or 16 of Part I.
Total functional expenses (add lines 22 through 43). Organizations completing columns (B)-(D), carry these totals to lines 13—15 Joint Costs. Check 䊳 if you are following SOP 98-2. Are any joint costs from a combined educational campaign and fundraising solicitation reported in (B) Program services? 䊳 If “Yes,” enter (i) the aggregate amount of these joint costs $; (ii) the amount allocated to Program services $ (iii) the amount allocated to Management and general $; and (iv) the amount allocated to Fundraising $ Statement of Program Service Accomplishments (See page 25 of the instructions.)
What is the organization’s primary exempt purpose? 䊳 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.) (Required for 501(c)(3) and (4) orgs., and 4947(a)(1) trusts; but optional for others.) ) ) )
Other program services (attach schedule) Total of Program Service Expenses (should equal line 44, column (B), Program services) (Grants and allocations (Grants and allocations ) )
Form (2004)
section_title: Balance Sheets (See page 25 of the instructions.)
paragraphs: (A) (B) column should be for end-of-year amounts only. 45 46 Savings and temporary cash investments Accounts receivable Less: allowance for doubtful accounts Pledges receivable Less: allowance for doubtful accounts Grants receivable Receivables  from  officers,  directors,  trustees,  and  key  employees (attach schedule) 51a Other  notes  and  loans  receivable  (attach Less: allowance for doubtful accounts 52 53 Prepaid expenses and deferred charges Investments—securities (attach schedule)
Inventories for sale or use Investments—land, equipment: basis Less:  accumulated  depreciation  (attach schedule) Investments—other (attach schedule) Land, buildings, and equipment: basis Less:  accumulated  depreciation  (attach schedule) Other assets (describe 䊳  )
Total assets (add lines 45 through 58) (must equal line 74)
Accounts payable and accrued expenses Grants payable Deferred revenue Loans  from  officers,  directors,  trustees,  and  key  employees  (attach schedule) Tax-exempt bond liabilities (attach schedule) Mortgages and other notes payable (attach schedule) Other liabilities (describe 䊳)
Total liabilities (add lines 60 through 65)
Organizations that follow SFAS 117, check here 䊳 67 through 69 and lines 73 and 74.
Unrestricted Temporarily restricted Permanently restricted Organizations that do not follow SFAS 117, check here 䊳 complete lines 70 through 74.
Capital stock, trust principal, or current funds Paid-in or capital surplus, or land, building, and equipment fund Retained earnings, endowment, accumulated income, or other funds 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) Total liabilities and net assets / fund balances (add lines 66 and 73)
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.
Reconciliation of Revenue per Audited Financial Statements with Revenue per Return (See page 27 of the instructions.)
Total  expenses  and  audited financial statements䊳 Amounts  included  on  line  but  not on line 17, Form 990: (1)
Donated  services and use of facilities (2)
Prior year adjustments reported  on  line  20, Form 990 (3) (4)
Add amounts on lines (1) through (4)䊳 Line minus line 䊳 Amounts included on line 17, Form 990 but not on line a: (1) (2)
Add amounts on lines (1) and (2) 䊳 Total  revenue  per  line  12,  Form  990 (line plus line )
Add amounts on lines (1) and (2) 䊳 Total expenses per line 17, Form 990 (line plus line )
List of Officers, Directors, Trustees, and Key Employees (List each one even if not compensated; see page 27 of the instructions.) (D) Contributions to (A) Name and address (B) Title and average hours per (C) Compensation (If not paid, enter -0-.)
section_title: 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? 䊳 If “Yes,” attach schedule—see page 28 of the instructions.
paragraphs: Form (2004)
section_title: Other Information (See page 28 of the instructions.)
paragraphs: Did the organization engage in any activity not previously reported to the IRS? If “Yes,” attach a detailed description of each activity Were any changes made in the organizing or governing documents but not reported to the IRS?
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?
If “Yes,” has it filed a tax return on Form 990-T for this year?
Was there a liquidation, dissolution, termination, or substantial contraction during the year? If “Yes,” attach a statement 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? If “Yes,” enter the name of the organization 䊳 and check whether it is nonexempt.
81a Enter direct and indirect political expenditures. See line 81 instructions Did the organization file Form 1120-POL for this year?
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?
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.) Did the organization comply with the public inspection requirements for returns and exemption applications? Did the organization comply with the disclosure requirements relating to quid pro quo contributions? Did the organization solicit any contributions or gifts that were not tax deductible?
If “Yes,” did the organization include with every solicitation an express statement that such contributions or gifts were not tax deductible? 501(c)(4), (5), or (6) organizations. Were substantially all dues nondeductible by members? Did the organization make only in-house lobbying expenditures of $2,000 or less? 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.
Dues, assessments, and similar amounts from members Section 162(e) lobbying and political expenditures Aggregate nondeductible amount of section 6033(e)(1)(A) dues notices Taxable amount of lobbying and political expenditures (line 85d less 85e) Does the organization elect to pay the section 6033(e) tax on the amount on line 85f?
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? 501(c)(7) orgs. Enter: Initiation fees and capital contributions included on line 12 Gross receipts, included on line 12, for public use of club facilities 501(c)(12) orgs. Enter: Gross income from members or shareholders Gross  income  from  other  sources.  (Do  not  net  amounts  due  or  paid  to  other sources against amounts due or received from them.)
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 501(c)(3) organizations. Enter: Amount of tax imposed on the organization during the year under: section 4911 䊳; section 4955 䊳; section 4912 䊳 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䊳 Enter: Amount of tax on line 89c, above, reimbursed by the organization䊳 List the states with which a copy of this return is filed 䊳 Number of employees employed in the pay period that includes March 12, 2004 (See instructions.)
The books are in care of 䊳 Located at 䊳  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䊳 Telephone no. 䊳 ( ZIP + 4 䊳 )
Form (2004)
section_title: Analysis of Income-Producing Activities (See page 33 of the instructions.)
paragraphs: Excluded by section 512, 513, or 514 (E) (A) (B) (C) (D)
section_title: Medicare/Medicaid payments Fees and contracts from government agencies
paragraphs: Membership dues and assessments Interest on savings and temporary cash investments Dividends and interest from securities Net rental income or (loss) from real estate: 98 99 100 101 Net income or (loss) from special events Gross profit or (loss) from sales of inventory Other revenue: debt-financed property not debt-financed property Net rental income or (loss) from personal property Other investment income Gain or (loss) from sales of assets other than inventory Subtotal (add columns (B), (D), and (E)) Total (add line 104, columns (B), (D), and (E))
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).
Information Regarding Taxable Subsidiaries and Disregarded Entities (See page 34 of the instructions.) (B)
Name, address, and EIN of corporation, (C) (D) (E)
section_title: Information Regarding Transfers Associated with Personal Benefit Contracts (See page 34 of the instructions.)
paragraphs: Did the organization, during the year, receive any funds, directly or indirectly, to pay premiums on a personal benefit contract? Did the organization, during the year, pay premiums, directly or indirectly, on a personal benefit contract?
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.
Type or print name and title.
Preparer’s SSN or PTIN (See Gen. Inst. W)
Firm’s name (or yours if self-employed), address, and ZIP + 4 )
Form (2004)
section_title: Form 990 Data
paragraphs: 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).
section_title: IRS Data on Its Tax-Exempt Oversight
paragraphs: 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.
section_title: Tax-Exempt Excise Taxes by Code Sections
paragraphs: Over the years, Congress has imposed various excise taxes that affect tax- exempt 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 tax- exempt entities, that violate the rules.  Details on these rules and excise  taxes follow.
subsections: section_title: Section 4940 Excise Tax on Private Foundation Investment Income
paragraphs: Section 4940 was added by the Tax Reform Act of 1969, P.L. 91-172.  The  related Senate Report 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_title: Section 4941 Excise Tax on Private Foundation Acts of Self-Dealing
paragraphs: 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  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 self- dealing is not corrected during the taxation period.  A separate tax equal to  2-½ 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_title: Section 4942 Excise Tax on Private Foundation Failure to Distribute Income
paragraphs: 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.
section_title: Excise Tax on Private Foundation Excess Business Holdings (Section 4943)
paragraphs: 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  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.
section_title: Excise Tax on Private Foundation Investments which Jeopardize Charitable Purpose (Section 4944)
paragraphs: 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.
section_title: Excise Tax on Private Foundation Taxable Expenditures (Section 4945)
paragraphs: 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 2-½  percent excise tax is to be imposed on the foundation manager if that  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.
section_title: Excise Tax on Section 501(C) (3) Political Expenditures (Section 4955)
paragraphs: Section 4955 was added by the Revenue Act of 1987, P.L. 100-203.   According to the House Report 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 2-½ 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.
section_title: Excise Tax on Section 501(C) (3) and (4) Excess Benefit Transactions (Section 4958)
paragraphs: Section 4958 was added in 1996 by the Taxpayer Bill of Rights 2, P.L. 104- 168.  According to the related House Report, 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)  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.
section_title: Abatement of Taxes When Corrective Action Taken (Sections 4961 – 4963)
paragraphs: 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.
section_title: Excise Taxes Owed for IRC Violations
paragraphs: 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.
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.