Additional
Actions Are Needed to Ensure Section 527 Political Organizations Publicly
Disclose Their Activities Timely and Completely
August 2005
Reference Number: 2005-10-125
This report has cleared the Treasury
Inspector General for Tax Administration disclosure review process and
information determined to be restricted from public release has been redacted
from this document.
August
10, 2005
MEMORANDUM FOR
COMMISSIONER, TAX EXEMPT AND GOVERNMENT ENTITIES DIVISION
FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner
Deputy Inspector General for
Audit
SUBJECT: Final Audit Report - Additional Actions
Are Needed to Ensure Section 527 Political Organizations Publicly Disclose
Their Activities Timely and Completely (Audit # 200410024)
This
report presents the results of our review assessing the effectiveness of the Exempt
Organizations (EO) function’s efforts to ensure political organizations file
timely and complete Political Organization Notices of Section 527 Status
(Form 8871) and Political Organization Reports of Contributions and
Expenditures (Form 8872).
With
certain exceptions, Internal Revenue Code (I.R.C.) Section (§) 527 requires
each political organization that desires to be tax exempt to notify the
Internal Revenue Service (IRS) using Form 8871 that it is to be treated as a
Section 527 political organization. An
organization must also file a Form 8872 if it has filed Form 8871, has not
claimed Qualified State or Local Political Organization (QSLPO) status, and has
received contributions or made expenditures during the calendar year. The Center for Public Integrity reported that
Section 527 political organizations raised approximately $535 million during
the 2004 election cycle, compared to approximately $268 million raised by
Section 527 political organizations during the 2002 election cycle. Given this situation, proper disclosure of
the financial activities of Section 527 political organizations is a concern to
both regulators and the general public. Without timely and complete contribution and
expenditure information, the public cannot gain a true understanding of a
Section 527 political organization’s financial information or track the flow of
funds related to legislative issues and political campaigns.
In
summary, we identified some degree of noncompliance by both new and existing Section
527 political organizations in filing their applicable public disclosure
reports. Our audit tests showed that an
estimated 580 Section 527 political organizations may have started receiving
contributions or making expenditures before notifying the IRS of their
existence. We estimate these
organizations may have received $26.8 million that should have been reported as
taxable income, and as a result, may be subject to approximately $9.4 million
in tax. In addition, Section 527
political organizations did not timely or completely report their contributions
and expenditures by filing Forms 8872.
We estimate that Section 527 political organizations filed 248 untimely or
incomplete Forms 8872. As a result, these
organizations may be subject to over $7.5 million in penalties.
In
addition, legislative changes to reporting requirements increased the risk
QSLPOs may not disclose information as required, for several reasons. First, the IRS is not required to determine
if QSLPOs are in compliance with State reporting requirements. Second, the IRS does not know the degree to
which the States are ensuring compliance with State reporting
requirements. Third, EO function management
stated there was little coordination between the IRS and the States regarding
this issue. As a result, the potential
exists that organizations claiming QSLPO status may avoid filing documents
detailing contributions and expenditures with either the IRS or the applicable
State, and the public may not receive timely data regarding contributions and
expenditures by State or local Section 527 political organizations.
We
recommended the Director, EO, clarify instructions on Form 8872; develop plans
for periodically reviewing the timeliness and completeness of Forms 8871 and
8872 if implementation of computer changes are delayed beyond January 1, 2006;
and ensure taxes and penalties are assessed, as appropriate, on noncompliant Section
527 political organizations filing late or incomplete Forms 8871 and 8872. Further, we recommended the Director, EO, research
State laws to determine if the statutes related to the reporting of political
contributions and expenditures by State and local political organizations have
at least the same dollar thresholds as those required by Public Law 107-276 for
QSLPOs and take appropriate action to ensure Section 527 political
organizations file Forms 8872, as required.
Finally, we recommended the Director, EO, initiate a compliance project to
identify a process to address QSLPOs operating beyond the scope of their
authorized activities and identify areas in which coordination with the States
can be improved.
Management’s Response: The Tax
Exempt and Government Entities (TE/GE) Division agreed with the findings and
recommendations contained in the report.
EO function management agreed to clarify the instructions for Form 8872
to more clearly explain the information required in Schedules A and B; develop
plans for reviewing the timeliness and completeness of Forms 8871 and 8872, if
implementation of changes to IRS computer systems are delayed beyond January 1,
2006; ensure taxes and penalties are assessed, as appropriate, for Section 527
political organizations that file late and incomplete Forms 8871 and 8872; and
recommended that guidance on reasonable cause for Section 527 filings be
included in next year’s Treasury Guidance Plan.
In addition, the EO function will propose a project to identify a
process to address QSLPOs operating beyond the scope of their authorized
activities and will include a review of relevant State laws to determine if the
States have the same reporting thresholds for contributions and expenditures.
While TE/GE management
agreed with our findings and recommendations, they did not agree with the $17
million reported as outcome measures (additional tax and penalties for Section
527 political organizations that either received contributions before filing
Form 8871 with the IRS or filed an incomplete or late Form 8872 with the IRS). The Commissioner, TE/GE Division, responded
that based upon the results of the Section 527 Compliance Project completed by the
TE/GE Division, most of the penalties we calculated would be waived or abated
due to the existing general reasonable cause standard. In addition, EO function management informed us
that although the Section 527 Compliance Project did not include untimely Forms
8871, the additional taxes owed based on late Forms 8871 could also be subject
to being waived due to reasonable cause and, therefore, may not be as much as
we estimated. Management’s complete
response to the draft report is included as Appendix VI.
We believe the $17 million
in Outcome Measures is still an accurate reflection of the amount of additional
taxes and penalties that could be assessed for noncompliant Section 527
political organizations. Until
appropriate enforcement action is taken on noncompliant Section 527 political
organizations, there is an increased risk that these organizations may continue
to submit untimely and incomplete Forms 8871 and 8872. The Director, EO, recommended to IRS Counsel
and the Department of the Treasury that specific guidance on reasonable cause for
Section 527 filings be included for consideration in next year’s Treasury
Guidance Plan. As noted in management’s
response, this will allow the IRS to ensure the appropriate assessment of taxes
and penalties for noncompliant Section 527 political organizations.
Copies of this
report are also being sent to the IRS managers affected by the report
recommendations. Please contact me at
(202) 622-6510 if you have questions or Daniel R. Devlin, Assistant Inspector
General for Audit (Headquarters Operations and Exempt Organizations Programs),
at (202) 622-8500.
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix IV
– Outcome Measures
Appendix VI – Management’s Response to the Draft Report
Political organizations are organized and operated primarily to accept contributions and make expenditures to influence the selection, nomination, election, or appointment of any individual to Federal, State, or local public office. There are a variety of political organizations, including political parties; campaign committees for candidates for Federal, State, or local office; and political action committees.
With certain exceptions, Internal Revenue Code (I.R.C.)
Section (§) 527 requires political organizations
that desire to be tax exempt to notify the Internal Revenue Service (IRS) that
it is to be treated as a Section 527 political organization. Additional information on who is required to
file is included in Appendix V. To
notify the IRS, the political organization must electronically file a Political Organization Notice of Section 527 Status (Form
8871).
In addition, Section 527 political organizations must file an amended
Form 8871 within 30 days of the occurrence of a material change to the
organization and file a final Form 8871 within 30 days of termination.
A Section 527 political organization must also file a
Political Organization Report of Contributions and Expenditures (Form 8872) if
it has filed Form 8871, has not claimed
The Bipartisan Campaign Reform Act of 2002 (BCRA)
significantly changed Federal campaign law.
The BCRA prohibits the raising and spending of “soft money” by Federal Government officeholders and
candidates and severely restricts the use of soft money by State and local
parties related to Federal Government election activities. Experts suggested the BCRA would result in
increased contributions to Section 527 political organizations. News reports seem to have confirmed the
expectations of increased activity by Section 527 political organizations. The Center for Public Integrity reported that
Section 527 political organizations raised approximately $535 million
during the 2004 election cycle, compared to approximately $268 million raised
by Section 527 political organizations during the 2002 election cycle. Given this situation, proper disclosure of the financial activities of Section 527
political organizations is a concern to both regulators and the general public.
This concern has also been raised by the media. For example, reports released by public interest groups and various media sources during 2004 have indicated Section 527 groups are not reporting all contributions and expenditures to the IRS. This incomplete information includes accounts of Section 527 political organizations filing returns late and filing amended returns with additional contributions of at least $100,000, including 9 specific instances in which the total gap was $1 million or more. It was also reported that 1 organization filed 7 Forms 8872 at the same time to cover a 3-year period that included over $300,000 in contributions and expenditures.
On November 2, 2002, Public Law 107-276 was enacted, amending the I.R.C. § 527. The Congress implemented Public Law 107-276 to improve the quality of information disclosed by Section 527 political organizations and to enable the public to review information that political groups disclose to the IRS. In addition, the law retroactively changed the filing requirements for certain State and local political organizations. In response to the legislation, the IRS Tax Exempt and Government Entities (TE/GE) Division implemented a new Political Organization Filing and Disclosure (POFD) web site. The POFD web site allows political organizations to electronically file Forms 8871 and 8872 and allows the public to view, search, or download the entire database of electronic filings by political organizations. The TE/GE Division is responsible for ensuring compliance with the requirements of I.R.C. § 527.
This review was performed in the TE/GE Division Headquarters
Office in
We identified some degree of noncompliance by both new and existing Section 527 political organizations in filing their applicable public disclosure reports. Specifically, based on our statistically valid samples of Forms 8871 and 8872 filed during the period January 1, 2002, through July 2, 2004, we determined:
Exempt Organizations (EO) function management generally agreed with the untimely and incomplete Forms 8871 and 8872 in our sample. We researched the Section 527 political organizations’ accounts included in our samples on the IRS’ database and did not identify any penalties assessed against these organizations. However, management disagreed with the amount of the potential penalties because they believed the results of their 2004 compliance project showed most of the penalties would not be applicable due to the reasonable cause provision of the law, which allows the penalty to be waived if the omission was due to reasonable cause and not due to willful neglect. In addition, although EO function management did not include untimely Forms 8871 in the compliance project, they advised us the additional taxes owed based on late Forms 8871 would also be subject to being waived due to reasonable cause and therefore may not be as much as we estimated.
Without timely and complete contribution and expenditure information, the public cannot gain a true understanding of a Section 527 political organization’s financial information or track the flow of funds related to legislative issues and political campaigns. Timely and complete information will ensure the public’s ongoing confidence regarding the funding of our nation’s elections.
Public Law 106-230 was passed in July 2000. This law established requirements for certain political organizations to notify the IRS that they were Section 527 organizations and disclose their contributions and expenditures to the IRS. EO function management stated many Section 527 political organizations were not aware of these requirements, and as a result, there was a need to educate these organizations of the filing requirements established by Public Law 106-230. This educational effort continued when the law was amended in November 2002. However, EO function management indicated this lack of awareness was still evident in the 2004 compliance project and further education and outreach, combined with compliance efforts, is needed to bring Section 527 political organizations into compliance.
The EO function started to focus on compliance issues in late 2003. In 2004, EO function management requested enhancement of the IRS computer system to more effectively identify Section 527 political organizations that are not filing necessary information as required. As previously mentioned, EO function management initiated a compliance project in August 2004 in an effort to improve reporting and disclosure by Section 527 political organizations. Additional details about EO function management’s actions to address noncompliance are discussed later in the report.
Forms 8871 were not always submitted timely
We determined that Forms 8871 were not submitted timely in 19 (7 percent) of the 277 cases in our sample. Applying this error rate to the population of 8,458 Forms 8871 filed for the period January 1, 2002, through July 2, 2004, we estimate there were 580 Forms 8871 (new and amended) not submitted timely by Section 527 political organizations.
If a political organization does not file a Form 8871 timely, it will not be treated as a tax-exempt organization until the date the Form 8871 is filed. In addition, if a political organization does not timely file an amended Form 8871 to provide notice of a material change, it will not be considered a tax-exempt Section 527 political organization for the period beginning when the change occurred until the amended Form 8871 is filed. As a result, a political organization will need to include any contributions received during this time as taxable income on the Form 1120-POL.
Forms 8872 were not always submitted timely and completely
Based on our statistical samples, we determined Section 527 political organizations did not always
file Forms 8872 timely or neglected to file the Forms 8872 as required. Specifically, Forms 8872 were not submitted
timely in 15 (5 percent) of the 299 cases in our Form 8872 sample. In addition, in 36 (13 percent) of the
277 cases in our Form 8871 sample, Section 527 political organizations did not submit
1 or more required Forms 8872.
We also determined electronic Forms 8872 were not always complete. Specifically, 65 (22 percent) of 299 Forms 8872 in our sample did not always include the required information. The missing information usually involved contribution information reported on Form 8872, Schedule A, such as contributor’s employer and occupation (47 instances) , or expenditure information reported on Form 8872, Schedule B, such as recipient’s employer, occupation, and purpose of the expenditure (39 instances). In many instances, these fields included the words “N/A,” “unknown,” or “information requested.” Instructions for Form 8872 do not currently address what an organization should do if it does not have the required information for Schedules A and B. We recognize Section 527 political organizations may not always receive the information required for the Form 8872 from contributors, if they choose not to provide it to the Section 527 political organization. However, Section 527 political organizations should know and report the employers and occupations of individuals to whom they make expenditures.
In addition, Section 527 political organizations did not always include all contributions and expenditures on the original Forms 8872. In some cases, organizations submitted amended Forms 8872 after the due dates of the original Forms 8872 (ranging from 8 to 281 days later) with additional contributions and expenditures. The amended amounts would be subject to the 35 percent penalty for late filing.
Based on our results, we estimate, from the population of 2,100 Forms 8872 filed during the period January 1, 2002, through July 2, 2004, there were 74 Forms 8872 not submitted timely by tax-exempt organizations that may be subject to $3.5 million in penalties. We also estimate 174 Forms 8872 filed during this period did not contain complete information and may be subject to $4 million in penalties.
We also analyzed a judgmental sample of 30 Forms 8872 filed on paper by Section 527 political organizations and determined that 4 (13 percent) of the 30 were untimely. These Forms 8872 included contributions and expenditures of almost $120,000 for which the IRS could assess penalties of approximately $42,000.
Due dates for filing a Form 8872 vary depending on whether the Form is due during a calendar year that includes a regularly scheduled election, general election, primary election, or nominating convention for a Federal Government office. During a calendar year that includes a regularly scheduled Federal election (e.g., 2000, 2002, and 2004), a Section 527 political organization can choose to file its Form 8872 either on a quarterly or monthly basis, but it must file on the same basis for the entire calendar year. In addition, a Section 527 political organization must file a preelection report and postelection report during calendar years that include regularly scheduled elections. The preelection report is generally filed 12 to 15 days before the election, and the postelection report is required to be filed within 30 days after the election. In nonelection years (e.g., 2001, 2003), Form 8872 must be filed either semi-annually or monthly.
The IRS has the legal authority to impose penalties if a Section 527 political organization fails to file Form 8872 by the due date. Penalties may also be assessed if the organization reports incorrect information or fails to report all of the information required on the Form. This could include information such as identity of contributor, contributor’s address, date/amount of contribution, contributor’s employer/occupation, recipient’s identity, recipient’s address, date/amount of expenditure, and recipient’s employer/occupation. The penalty is 35 percent of the total amount of contributions and expenditures not properly reported. The penalty can be waived if the Section 527 political organization establishes reasonable cause that the late or incomplete filing was not due to willful neglect.
The EO function initiated actions to improve oversight of Section 527 political organizations’ compliance with I.R.C. § 527 filing requirements
As stated previously, EO function management has initiated actions to improve the reporting and disclosure of information by Section 527 political organizations. In May 2002, the IRS issued Notice 2002-34, which stated the IRS would not assert any tax, penalty, or interest that arose solely because the political organization failed to file or filed an incorrect return, as long as the political organization filed a return or corrected return by July 15, 2002. EO function management officials stated, due to resource limitations and changes in the law in November 2002 that required the IRS to redesign the POFD web site, their priority was to finish work on the POFD web site before focusing on compliance activities. After the update to the POFD web site was finished in July 2003, the EO function resumed focus on I.R.C. § 527 compliance issues. To date, EO function management has initiated two significant activities in this area:
In late 2003, the EO function began work on an action plan to address potentially noncompliant political organizations and issued a project proposal in February 2004. In July 2004, EO function officials started developing three Requests for Information Services (RIS) to more effectively identify Section 527 political organizations that have not filed Forms 8871 and 8872 as required. Collectively, these RISs will modify the Business Master File (BMF) to allow the posting of information from Forms 8871 and 8872 to this computer system. Currently, these Forms are entered only on the POFD web site. In addition, these RISs will enable IRS management to identify organizations not meeting their filing obligations and issue notices to these organizations. EO function management stated updates to the BMF are major programming changes that require substantial Modernization and Information Technology Services staff resources. EO function management added that a structured process has been established to control and prioritize system changes; however, this process requires substantial lead time for implementation. EO function personnel indicated these RISs were approved for implementation on January 1, 2006. If implementation of the requests are delayed due to the complexity involved in requesting changes to IRS computer systems, the possibility exists that another election cycle may proceed without automating the process to verify that Section 527 political organizations are complying with Public Law 107-276.
As part of the IRS’ renewed emphasis on enforcement of the tax laws, the EO function initiated a project to identify the noncompliance issues related to late-filed returns, incomplete returns, and amended returns filed by Section 527 political organizations. Specifically, the EO function analyzed the POFD web site and contacted 30 organizations that appeared not to have fully met their filing and disclosure requirements relating to contributions. These 30 organizations were identified based on the following criteria:
For each organization included in the project, the EO function identified all areas of potential noncompliance (late, amended, and missing information) and included a review of contributions and expenditures. The project’s preliminary results indicate 22 of the 30 organizations established reasonable cause for not filing and disclosing the information timely and completely. As a result, no penalties were assessed. For the eight remaining organizations, the IRS:
According to the EO function, there is currently no specific reasonable cause standard in I.R.C. § 527 for failure to comply with the filing and disclosure requirements of Public Law 107-276. As a result, EO function management stated they will not assess a penalty under I.R.C. § 527(j) if the organization can show the cause of the untimeliness or incompleteness was not due to willful neglect. This appears easy for Section 527 political organizations to meet and has effectively prevented the IRS from assessing penalties for noncompliance. As of January 2005, IRS management has indicated this penalty has been assessed only twice (as part of the compliance project).
Our research of the IRS Penalty Handbook showed there is one reasonable cause standard applicable to all taxpayers. Reasonable cause relief is generally granted when taxpayers exercise ordinary business care and prudence but nevertheless were unable to comply with the law because of circumstances beyond their control. EO function management informed us the Penalty Handbook was used to determine if relief was appropriate for the compliance project cases.
EO function management should continue to focus on noncompliant Section 527 political organizations to identify the reasons for the late/incomplete filings and to address noncompliance through a combination of enforcement actions and education and outreach. The assessment of taxes and penalties for incomplete or untimely filing of Forms 8871 and 8872, when appropriate, could lead to increased accountability and disclosure by Section 527 political organizations. Without the use of penalties, the IRS’ ability to ensure more accurate and complete filing of contribution and expenditure information for Section 527 political organizations is severely limited.
The Director, EO, should:
1. Clarify the instructions for Form 8872 to more clearly explain what information is required in Schedules A and B of Form 8872.
Management’s Response: The instructions to the Form 8872 are being amended to more clearly explain what information is required based on the results of the Section 527 Compliance Project, particularly relating to the occupation and employer information for individuals. The Director, EO, will request the amended instructions be included in the next revision of the Form 8872.
2.
Develop plans for periodically
reviewing the timeliness and completeness of Forms 8871 and 8872 if implementation
of the RISs related to the Forms 8871 and 8872 are delayed beyond January 1,
2006.
Management’s Response: If
implementation of the RISs is delayed, the Director, EO, Rulings and Agreements,
will develop a plan for reviewing the timeliness and completeness of
Forms 8871 and 8872. EO function
management will monitor the anticipated implementation of the RISs and if
potential problems arise will establish an appropriate action plan for reviewing
the timeliness of the forms.
3. Ensure taxes and penalties are assessed, as appropriate, for Section 527 political organizations that file late and incomplete Forms 8871 and 8872.
Management’s Response: The Director, EO, agrees taxes and penalties should be assessed, as appropriate, and will take steps to address compliance in this area. To ensure appropriate assessment, the Director, EO, has recommended to IRS Counsel and the Department of the Treasury that guidance on reasonable cause for Section 527 filings be included for consideration for next year’s Treasury Guidance Plan.
However, the Commissioner, TE/GE Division, disagreed with the $17 million reported as Outcome Measures based upon the results of the Section 527 Compliance Project, that showed most of the penalties we calculated would be waived or abated due to the existing general reasonable cause standard.
Office of Audit Comment: We believe the $17 million in Outcome Measures is still an accurate reflection of the amount of additional taxes and penalties that could be assessed for noncompliant Section 527 political organizations. Until appropriate enforcement action is taken on noncompliant Section 527 political organizations, there is an increased risk that these organizations may continue to submit untimely and incomplete Forms 8871 and 8872. The Director, EO, recommended to IRS Counsel and the Department of the Treasury that specific guidance on reasonable cause for Section 527 filings be included for consideration in next year’s Treasury Guidance Plan. As noted in management’s response, this will allow the IRS to ensure the appropriate assessment of taxes and penalties for noncompliant Section 527 political organizations.
Public Law 107-276 created a new category of Section 527 political organization called a QSLPO. A QSLPO is required to notify the IRS of its existence by filing Form 8871, but it is required to report its contribution and expenditure information to its respective State instead of to the IRS. This change increased the risk that QSLPOs may not disclose information as required, for several reasons. First, the IRS is not required to determine if QSLPOs are in compliance with State reporting requirements. Second, the IRS does not know the degree to which the States are ensuring compliance with State reporting requirements. Third, EO function management stated there was little coordination between the IRS and the States regarding this issue. As a result, the potential exists that organizations claiming QSLPO status may avoid filing documents detailing contributions and expenditures with either the IRS or the applicable State, and the public may not receive timely data regarding contributions and expenditures by State or local Section 527 political organizations. Without proper disclosure, the IRS and the public may not know if the QSLPOs are operating beyond the scope of their authority, such as by participating in Federal election campaigns.
We determined some of the Section 527 political organizations at the State or local level did not always file the required reports of contributions and expenditures with their States, operated beyond the scope of authorized QSLPO activities, or improperly claimed QSLPO status. Based on our audit results, we estimate, with 90 percent confidence from the population of 8,458 Forms 8871 filed during the period January 1, 2002, through July 2, 2004, there were 366 Section 527 political organizations improperly claiming QSLPO status or not filing Forms 8872 with the IRS as required.
Section 527 political organizations may not be meeting the
requirements for a QSLPO
Based on our review of the Form 8871 statistical sample, we determined 39 of the 277 Section 527 political organizations claimed QSLPO status on the Form 8871. Of these 39 cases, we determined 12 (31 percent) did not meet the requirements of Public Law 107-276 as a QSLPO organization and should file Forms 8872 with the IRS. Specifically:
Public Law 107-276 defines QSLPOs as political organizations with the following characteristics:
However, EO function management informed us they do not review or verify whether Section 527 political organizations qualify for QSLPO status when their Forms 8871 are received. The Forms 8871 are electronically filed and are automatically entered on the POFD web site without going through a manual screening by the IRS. In addition, EO function management explained it is not easy to determine if Section 527 political organizations are valid QSLPOs because the reporting laws in each State are different. Consequently, the EO function would need to research each State’s laws regarding the reporting of political contributions and expenditures to determine if the State statutes meet the requirements of Public Law 107-276. For example, one organization in our sample was from a State in which political action committees receiving contributions totaling less than $750 in a calendar year do not need to report to the State, whereas I.R.C. § 527 requires political organizations to report contributions of more than $500 to the State to qualify for QSLPO status. Since the State statute has a higher reporting requirement than that required in I.R.C. § 527, the organization would not qualify for QSLPO status and should file Forms 8872 with the IRS.
A more significant limitation on the IRS is the limited coordination between the IRS and the States regarding QSLPO compliance with State reporting guidelines. EO function management informed us they have not been advised by any States that a political organization has not been reporting its contributions and expenditures as required. We believe the IRS should evaluate this issue to identify potential ways to improve coordination with the States and ensure QSLPOs are complying with reporting guidelines.
The Director, EO, should:
4.
Management’s Response: The Director, EO, will include a review of relevant State laws as part of the Fiscal Year 2007 project discussed in the management response to Recommendation 5.
5.
Initiate
a compliance project to identify a process to address QSLPOs operating beyond
the scope of their authorized activities and identify areas in which
coordination with the States can be improved.
Management’s Response: The Director, EO, has proposed a project to
improve the quality of information regarding the number of QSLPOs on the PODF
web site, which EO function management believes needs to be completed
first. For FY 2007, the Director, EO, will
propose a project to identify a process to address QSLPOs operating beyond the
scope of their authorized activities and identify areas in which coordination
with the States can be improved.
Appendix I
Detailed Objective,
Scope, and Methodology
The overall audit objective was to determine the effectiveness of the Exempt Organizations (EO) function’s efforts to ensure political organizations file timely and complete Political Organization Notices of Section 527 Status (Form 8871) and Political Organization Reports of Contributions and Expenditures (Form 8872). To accomplish this objective, we:
I. Assessed the EO function’s process for ensuring compliance with Internal Revenue Code (I.R.C.) Section (§) 527 filing requirements for Forms 8871 and 8872.
A.
Interviewed EO function management to obtain background information on I.R.C.
§ 527
filing requirements.
B.
Identified controls in place since January 1, 2002, that are designed to
determine whether Forms 8871 and 8872 are timely and complete when
submitted/processed.
C.
Identified the EO function’s efforts since January 2002 to monitor and
enforce filing compliance and determine if noncompliance is addressed.
D.
Determined if the EO function makes use of compliance cases contained on
the Federal Election Commission (FEC) and/or State web sites for political
organizations to identify potential leads about nonfiling, the filing of inaccurate
information, and the filing of incomplete information with the FEC or States
that could be related to Section 527 political organizations.
II. Determined if the EO function received timely and complete Forms 8871 and 8872. If Forms 8871 and 8872 were not timely or complete, we determined if the EO function took appropriate action to address the noncompliance.
A.
Downloaded filing data from the Internal Revenue Service Political
Organization Filing and Disclosure web site for Forms 8871 and 8872 received
during the period January 1, 2002, through July 2, 2004.
B.
Consulted with the
Treasury Inspector General for Tax Administration Office of Chief Counsel on
issues discussed in the report.
C.
Selected a statistically valid sample of 277 electronically
filed Forms 8871 from a universe of 8,458 Forms 8871 filed for the period January
1, 2002, through July 2, 2004, to determine if the sampled political
organizations filed a timely and complete Form 8871, paid any additional tax
due, and filed Forms 8872. We also
determined if political organizations claiming
D.
Selected a statistically valid sample of 299 electronically
filed Forms 8872 (stratified by the total dollar amounts of the contributions
and expenditures reported) from the universe of 2,100 Forms 8872 filed for the
period January 1, 2002, through July 2, 2004, to determine if the sampled
political organizations filed a timely and complete Form 8872, paid any penalty
due, and filed a Form 8871. Our
estimates were made at 90 percent confidence with an actual error rate of .03524
for the untimely Forms 8872 and .08292 for the incomplete Forms 8872. Based on this value, we determined the
precision levels of our projections to be the following:
1.
For the number of untimely Forms 8872 (+1.2
percent), for contributions received and expenditures made ($7 million to $13.3
million), and for potential penalties ($2.4 million to $4.7 million).
2.
For the number of incomplete Forms 8872 (+1.7
percent), for contributions received and expenditures made ($10.8 million to
$12.1 million), and for potential penalties ($3.7 million to $4.2 million).
E.
Selected a judgmental sample of 30 electronically filed amended Forms 8872
from a universe of 222 amended Forms 8872 filed during the period January 1,
2002, through July 2, 2004, to determine if the sampled political organizations
filed timely and complete Forms 8872. We
selected a judgmental sample due to resource considerations.
F.
Selected a judgmental sample of 30 paper-filed Forms 8872 from a universe
of 18,484 paper Forms 8872 filed during the period January 1, 2002, through
July 2, 2004, to determine if the sampled political organizations filed timely
and complete Forms 8872. We
selected a judgmental sample due to resource considerations.
Appendix II
Major Contributors to This
Report
Daniel R. Devlin,
Assistant Inspector General for Audit (Headquarters Operations and Exempt
Organizations Programs)
Nancy A. Nakamura,
Director
Jeffrey M. Jones,
Audit Manager
Thomas F. Seidell,
Lead Auditor
Margaret A. Anketell,
Senior Auditor
Kenneth C. Forbes, Senior
Auditor
Michael R. Van Nevel,
Senior Auditor
Donald J. Martineau,
Auditor
Jeffrey E. Williams,
Information Technology Specialist
Appendix III
Commissioner C
Office of the
Commissioner – Attn: Chief of Staff C
Deputy Commissioner
for Services and Enforcement SE
Deputy
Commissioner, Tax Exempt and
Government Entities Division SE:T
Director, Exempt
Organizations, Tax Exempt and Government Entities Division SE:T:EO
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis RAS:O
Office of Management Controls OS:CFO:AR:M
Audit Liaison: Director, Communications and Liaison, Tax Exempt and Government Entities Division SE:T:CL
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. This benefit will be incorporated into our Semiannual Report to the Congress.
Type and Value of Outcome Measure:
· Increased Revenue/Revenue Protection – Potential; $17 million in additional tax and penalties for Section 527 political organizations that met either of the following conditions: 1) received contributions before filing Political Organization Notice of Section 527 Status (Form 8871) with the Internal Revenue Service (IRS) or 2) filed an incomplete or late Political Organization Report of Contributions and Expenditures (Form 8872) with the IRS (see page 3).
Methodology Used to Measure the Reported Benefit:
We selected two statistically valid samples and one judgmental sample and projected the results of the statistical samples. The size of each universe and sample is shown in the following table. The first statistical sample consisted of 277 Forms 8871 electronically filed between January 1, 2002, and July 2, 2004, that were randomly selected from a Political Organization Filing and Disclosure (POFD) web site data extract. The second statistical sample consisted of 299 Forms 8872 electronically filed between January 1, 2002, and July 2, 2004, that were randomly selected from a POFD web site data extract. We stratified this sample by the total amounts of contributions and expenditures reported into 3 strata - low (total contributions and expenditures less than $50,000), medium (total contributions and expenditures from $50,000 to less than $500,000), and high (total contributions and expenditures equal to and over $500,000). The third sample was a judgmental sample of 30 paper Forms 8872 filed between January 1, 2002, and July 2, 2004, that were randomly selected from a POFD web site data extract.
Sample |
Strata |
Size of Universe |
Attribute Sample Size |
|
Sample 1 (Forms 8871) |
|
8,458 |
277 |
|
Sample 2 (Forms 8872) |
Strata 1 (low) |
1,509 |
88 |
|
|
Strata 2 (medium) |
508 |
128 |
|
|
Strata 3 (high) |
83 |
83 |
|
Sample 3 (Forms 8872) |
|
18,484 |
30 |
We estimated these Section 527 political organizations may owe $17 million in additional tax and penalties. To arrive at our estimates, we:
The estimated amount of penalties that Section 527 political organizations may be subject to for the untimely filing of Forms 8872 was calculated by multiplying the average weighted penalty dollars for untimely Forms 8872 by the universe of Forms 8872 ($1,687.22207 * 2100 @ $3,543,166). The estimated amount of penalties that Section 527 political organizations may be subject to for filing incomplete Forms 8872 was calculated by multiplying the average weighted penalty dollars for incomplete Forms 8872 by the universe of Forms 8872 ($1,891.35552 * 2,100 @ $3,971,847). The total estimated penalties for Section 527 political organizations that filed late or incomplete Forms 8872 was calculated by adding the estimated penalty amount for untimely Forms 8872 to the estimated penalty amount for incomplete Forms 8872 ($3,543,166 + $3,971,847 = $7,515,013).
Organizations
Required to Notify the Internal Revenue Service of Section 527 Status and
Report Contributions and Expenditures
Every political organization that is to be treated as a tax-exempt political organization under Internal Revenue Code (I.R.C.) Section (§) 527 must electronically file a Political Organization Notice of Section 527 Status (Form 8871), except:
Every Section 527 political organization that accepts a contribution or makes an expenditure for an exempt function during a calendar year must file a Political Organization Report of Contributions and Expenditures (Form 8872), except: a political organization that is not required to file Form 8871, a political organization that is subject to tax on its income because it did not file or amend a Form 8871, or a Qualified State or Local Political Organization (QSLPO).
Public Law 107-276 defines QSLPOs as political organizations with the following characteristics:
Management’s Response
to the Draft Report
The response was removed due to its
size. To see the response, please go to
the Adobe PDF version of the report on the TIGTA Public Web Page.