TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Office of Audit

Highlights

MANY ORGANIZATIONS ARE NOT NOTIFYING THE INTERNAL REVENUE SERVICE OF THEIR INTENT
TO OPERATE UNDER INTERNAL REVENUE CODE SECTION 501(c)(4) AS REQUIRED BY LAW

Final Report issued on January 6, 2020

Highlights of Reference Number:† 2020-10-001 to the Commissioner of Internal Revenue.

IMPACT ON TAXPAYERS

On December 18, 2015, the President signed into law the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), requiring Internal Revenue Code (I.R.C.) Section 501(c)(4) organizations to notify the IRS of their existence within 60 days of establishment.† The PATH Act also includes the assessment of penalties on late filers and nonfilers and, in some cases, on the officials responsible for filing the notification.† Implementation of the new notification requirement involved development of new forms and changes to information technology systems as well as new guidance to help taxpayers comply with the notification requirement.

WHY TIGTA DID THE AUDIT

This audit was initiated to assess the IRSís efforts to implement the PATH Act provision imposing a new notification requirement for certain I.R.C. Section 501(c)(4) tax-exempt organizations.

WHAT TIGTA FOUND

The IRS has not taken sufficient actions to identify noncompliant I.R.C. Section 501(c)(4) organizations despite having various sources of information that would allow it to do so. †Once an organization notifies the IRS of its existence, the IRS can use this information to enforce filing compliance of the required annual return.

TIGTA identified 9,774 organizations that were potentially required to file a notification but did not.† These organizations and their responsible officials were potentially subject to assessment of more than $48.4 million and $47.5 million in delinquency penalties, respectively.† However, many of these organizations may not have understood or even been aware of the notification requirement because many of them filed other documents that informed the IRS of their existence.

The IRS recently began assessing delinquency penalties on organizations that file their notifications untimely, but it did not assess penalties on organizations that were untimely prior to February 2019.† TIGTA identified 1,719 organizations that filed untimely notifications before the IRS started assessing the penalty.† These organizations and the responsible officials were potentially subject to more than $4.8 million and $3.1 million in delinquency penalties, respectively.† However, some of these organizations may have reasonable cause for filing untimely notifications and may not be subject to the penalty.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the Exempt Organizations function determine the feasibility of working with State Governments to identify new organizations required to file a notification with the IRS; conduct research on organizations identified by TIGTA and determine if any compliance actions are necessary; use available information to enforce compliance of notification requirements; determine if untimely filers had reasonable cause for filing untimely or if assessing delinquency penalties is warranted; and update notices and procedures to fully implement the law.

In their response, IRS management agreed to use available information to enforce compliance and update notices and procedures.† The IRS did not agree to work with State Governments, take actions to bring organizations identified by TIGTA into compliance, and determine the applicability of penalties for untimely filers.

Notwithstanding the IRSís disagreement with certain recommendations, TIGTA believes that the recommended actions would improve the detection of noncompliant activity and ensure more consistency in how the IRS enforces the law on similarly situated organizations.

 

READ THE FULL REPORT

To view the report, including the scope, methodology, and full IRS response, go to:

https://www.treasury.gov/tigta/auditreports/2020reports/202010001fr.pdf.

 

Phone Number ††/† 202-622-6500

E-mail Address †/TIGTACommunications@tigta.treas.gov

Website†††††† ††††††/https://www.treasury.gov/tigta