IRS Toothless When It Comes to Policing Nonprofits, Report Says

The Internal Revenue Service is losing ground in its effort to regulate nonprofits, according to an independent study released by the agency today.

The study, which was first presented to the agency June 8 by the Advisory Committee on Tax Exempt and Government Entities, warns that a lack of funding, loss of institutional memory, and a change in oversight strategy could render the agency toothless.

The advisory committee is a panel of tax experts who work with nonprofits, government-bond issuers, and tribal governments. It offers annual recommendations to the agency on how it can improve its performance.

The report bemoans the IRS’s “stark shift” from regulating tax-exempt organizations to a “nearly exclusive focus on tax administration.”

One example: the introduction of the 1023-EZ form, a short application for nonprofit status that was introduced in 2014. The three-page form, which is available to smaller organizations, does not receive as much scrutiny from the agency as the longer 26-page form and was introduced mainly to provide efficiency in the application process. The report states that the agency does not put enough effort into auditing the new forms, diminishing its role as a gatekeeper.

The study also criticized changes in the advisory committee’s focus. Beginning this month, the independent panel will no longer focus on recommendations related to exempt organizations, employee plans, Indian tribal governments, and federal, state, and local government tax-exempt bonds. Instead of delving into regulatory issues related to those subject areas, the committee will focus exclusively on tax processing tax documents more efficiently.

“A lack of visibility on the part of the [exempt-organization division] is not a neutral position — it is detrimental to the sector it regulates,” the report states. “A lack of responsiveness or guidance inexorably leads to an undermining of public trust.”

This week, the agency did release electronically filed 990 forms, which nonprofits file each year, in machine-readable format, making them easier for researchers, journalists, and nonprofit leaders to search for data on nonprofits’ finances, executive pay, board members, and fundraising expenses.