Thursday, October 6, 2022
TIGTA, Review of the IRS’s Enforcement Program for Tax-Exempt Organizations That Participate in Illegal or Nonexempt Activities
The Treasury Inspector General for Tax Administration (TIGTA) last week issued a report titled Review of the IRS’s Enforcement Program for Tax-Exempt Organizations That Participate in Illegal or Nonexempt Activities. Here are the highlights:
What TIGTA Found
TIGTA found that both the IRS and State charity regulators are limited by their respective laws and procedures for coordinating with each other as a means to identity tax-exempt organizations potentially engaging in illegal or other nonexempt activities. Currently, no State Attorneys General Offices have formal disclosure agreements with the IRS.
TIGTA identified 3,726 closed EO function referrals alleging potential fraudulent or illegal activities during Fiscal Years 2018 through 2020. For these referrals, classifiers inaccurately recorded the results for 42 cases on the referral database. In addition, for the 15,522 unique referral cases closed during Fiscal Years 2018 through 2020, our analysis identified 980 closed cases for which two referral database fields included conflicting information about the final dispositions of the referrals. TIGTA also determined that 2,934 data fields were missing required information because referral database system controls do not require these fields to be completed prior to the case closing.
TIGTA reviewed two judgmental samples consisting of 46 referral cases closed between Fiscal Years 2018 and 2020 that alleged potentially fraudulent or illegal activities to determine whether the IRS’s assessments of the referrals were sufficiently researched and properly documented. All 46 referral cases sampled were sufficiently researched. However, five of the 46 referrals did not have sufficient documentation to justify the decision to not pursue an examination.
Finally, during this review and as in prior reviews, TIGTA found that the IRS has processes in place to identify whether a tax-exempt organization engages in substantial activities that do not further their tax-exempt purpose.
What TIGTA Recommended
TIGTA recommended that the IRS should: 1) ensure that Classification managers periodically emphasize to classifiers the importance of including supporting documentation in the case files for selecting or not selecting referrals for examination; 2) implement referral database system controls to ensure that complete and accurate data is input into the database; and 3) review the fields on the referral database and determine if any may be eliminated to avoid confusion, conflicting information in similar fields, and redundancy.
The IRS agreed with our recommendations and plans to take corrective actions.