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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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 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. 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. 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. 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. 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. 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. 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. 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.

Summary: 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. 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.