    Political Organizations: Data Disclosure and IRS's Oversight of
    Organizations Should Be Improved (17-JUL-02, GAO-02-444).

    Tax-exempt Section 527 organizations are estimated to spend
    millions of dollars annually in federal elections. These
    organizations use unregulated "soft money" for indirect or "issue
    advocacy," such as sponsoring an advertisement that supports or
    opposes a candidate's position on an issue. Although all states
    required them to provide data on their finances and activities to
    the public, no central source for such data existed. In July
    2000, Congress passed P.L. 106-230, that requires Section 527
    organizations to provide data on their purposes, officers,
    contributors, and expenses to the Internal Revenue Service (IRS)
    for public disclosure. IRS established a web site for this
    purpose, but GAO found that the Section 527 Web site has
    shortcomings in making the disclosed data accessible to the
    public. Based on discussions with public users and GAO's tests,
    the Web site 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 performed limited oversight of Section 527
    organizations' compliance with the law's filing and reporting
    requirements and as a result, has provided little assurance that
    the data it disclosed on the Section 527 web site are timely,
    complete and correct. IRS officials said that oversight has been
    limited because of competing demands for resources, a focus on
    educating Section 527 organizations, on publicly disclosing the
    data, and having little electronic data on Section 527
    organizations. IRS has not developed a strategic plan to carry
    out its responsibilities for ensuring that the requirements of
    the law are met.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-02-444
        ACCNO:   A03999
      TITLE:     Political Organizations: Data Disclosure and IRS's
    Oversight of Organizations Should Be Improved
         DATE:   07/17/2002
      SUBJECT:   Disclosure law
    	     Information disclosure
    	     Noncompliance
    	     Reporting requirements
    	     Strategic planning
    	     Tax exempt organizations

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    GAO-02-444

    Report to the Honorable Bill Thomas, Chairman, Committee on Ways and Means,
    House of Representatives

    United States General Accounting Office GAO

    July 2002 POLITICAL ORGANIZATIONS

    Data Disclosure and IRS?s Oversight of Organizations Should Be Improved

    GAO- 02- 444

    Page i GAO- 02- 444 Political Organizations Letter 1 Results in Brief 2

    Background 4 Objectives, Scope, and Methodology 6 IRS Disclosed Data Filed
    by Section 527 Organizations, but the

    Data Are Not Readily Accessible to Support Public Users 8 IRS Provides
    Limited Oversight to Ensure that Section 527

    Organizations Meet Filing Requirements 14 IRS Planning for New
    Responsibilities Not Adhering to Accepted

    Principles 22 Conclusions 25 Recommendations for Executive Action 26 Agency
    Comments and Our Evaluation 27

    Appendix I Political Activity and Section 527 Organizations 29

    Appendix II IRS Forms Mentioned in Report 31

    Appendix III Data About Section 501( c)( 3- 6) Organizations 44

    Appendix IV IRS Section 527 Disclosure Web Site Accessibility Evaluation 49

    Appendix V Groups Interviewed for this Report 55

    Appendix VI Selected Provisions of P. L. 107- 155, the Bipartisan Campaign
    Reform Act of 2002 56

    Public Disclosure of Data on the Internet 56 Determining Responsibility for
    Disclosure and Oversight 56 Contents

    Page ii GAO- 02- 444 Political Organizations Appendix VII Opportunities for
    Data Matching to Improve

    Oversight 58

    Appendix VIII Comments from the Internal Revenue Service 60

    Appendix IX GAO Contacts and Staff Acknowledgments 64 GAO Contacts 64 Staff
    Acknowledgments 64

    Tables

    Table 1: Items IRS Checks on Forms 8871, Electronic and Paper 16 Table 2:
    Items IRS Checks on Forms 8872, Electronic and Paper 16 Table 3: Allowable
    Political Activities of Section 501( c)( 3- 6) TaxExempt Organizations 30
    Table 4: Filing Requirements for Section 527 Organizations 31 Table 5:
    Number of Section 501( c) Tax- Exempt Organizations,

    Fiscal Years 1995- 2001 44 Table 6: Disposition of Applications for Section
    501( c)( 3- 6) Tax

    Exemption Status, Fiscal Years 1995- 2001 44 Table 7: Types of Returns of
    Tax- Exempt Organizations Audited,

    Fiscal Years 1995- 2001 46 Table 8: Recommended and Average Additional Tax
    from Audits of Tax- Exempt Organizations, Fiscal Years 1995- 2001 47

    Table 9: Revocations of Section 501( c)( 3- 6) Tax- Exempt Status, Fiscal
    Years 1995- 2001 48

    Figures

    Figure 1: Time Line of the Development of the Section 527 Disclosure Web
    site 6 Figure 2: Links to Section 527 Disclosure Web site and Welcome Page
    from Home Page 13

    Page iii GAO- 02- 444 Political Organizations Abbreviations

    EIN employer identification number FEC Federal Election Commission FECA
    Federal Election Campaign Act GPRA Government Performance and Results Act

    IRS Internal Revenue Service PAC Political Action Committee PDF portable
    document format SSN Social Security Number

    Page 1 GAO- 02- 444 Political Organizations

    July 17, 2002 The Honorable Bill Thomas Chairman, Committee on Ways and
    Means House of Representatives

    Dear Mr. Chairman: Certain tax- exempt organizations seeking to influence
    political elections- called Section 527 organizations- are estimated to
    annually spend hundreds of millions of dollars. 1 In federal elections,
    these organizations have been able to use unregulated ?soft money? 2 for
    indirect or ?issue advocacy,? such as that conducted when an organization
    sponsors an

    advertisement that supports or opposes a candidate?s position on an issue. 3
    Although all states required these organizations to provide some type of
    data on their finances and activities to the public, no central source
    provided such data. In July 2000, Congress passed P. L. 106- 230 to require
    Section 527 organizations to provide the Internal Revenue Service (IRS) with
    data on their purposes, officers, contributors, and expenses. 4 Congress
    established tight time frames for reporting these data to IRS and the law,
    or implementing regulations, calls for IRS to then disclose these

    data to the public. You asked us to study three related issues associated
    with responsibilities IRS gained in P. L. 106- 230. Given the requirements
    of P. L. 106- 230, 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. To meet these objectives, we reviewed
    P. L.

    1 No reliable estimate of this spending has been developed because of the
    lack of a readily available source to fully aggregate the expenditures. IRS
    officials said that they might have enough data during 2003 to compute this
    spending, at least to some degree. 2 Unlike hard money, soft money is not
    spent directly for or against federal candidates. 3 Appendix I describes the
    use of Section 527 organizations to conduct issue advocacy. 4 Section 527
    organizations also may be required to report to the Federal Election

    Commission (FEC), if they raise and spend hard money to be used directly for
    or against federal candidates. United States General Accounting Office
    Washington, DC 20548

    Page 2 GAO- 02- 444 Political Organizations

    106- 230 and relevant Internal Revenue Code rulings on Section 527 political
    organizations. We interviewed responsible IRS officials and obtained
    documentation about processes, plans, and initiatives for disclosure and
    oversight related to Section 527 organizations. We also interviewed
    officials at the Federal Election Commission (FEC), which publicly discloses
    data about federal election activities, to understand the

    similarities and differences in disclosure and oversight processes between
    FEC and IRS. On disclosure to the public, we tested IRS?s Section 527
    disclosure Web site and spoke with public users of the Web site who also
    represent public interest groups. Our scope and methodology are discussed in
    more detail in a separate section of this report.

    IRS has been publicly disclosing the data reported by Section 527
    organizations on a Web site it established for this purpose but our work
    found that this Section 527 Web site has shortcomings in making the
    disclosed data accessible to the public. Based on discussions with public
    users and our tests, the Web site is difficult to use, and most of the
    disclosed data are not electronically searchable and downloadable, which can
    inhibit timely analysis of the relationships between political organizations
    and the influence of soft money on federal campaigns. Although IRS intends
    to make some improvements to its disclosure Web site, such improvements are
    not a top priority because, in part, IRS

    officials believe that IRS has fulfilled its public disclosure
    responsibilities under P. L. 106- 230.

    IRS has performed limited oversight of Section 527 organizations? compliance
    with the law?s filing and reporting requirements and as a result, has
    provided little assurance that the data it disclosed on the Section 527 Web
    site are timely, complete and correct. IRS has made limited efforts to
    determine whether Section 527 organizations filed required forms or that the
    data reported on the forms are complete and correct. P. L. 106- 230 created
    penalties for failing to meet filing requirements but IRS has not imposed
    any penalties because it has not performed the oversight to uncover
    noncompliance, even when IRS?s data on filed forms indicate that thousands
    of Section 527 organizations might not be filing forms as required since
    2000. With this knowledge, IRS announced in May 2002 that it would not
    impose penalties through July 15, 2002, in the belief that this penalty
    waiver would lead noncompliant organizations to file the required forms. IRS
    officials said that oversight

    has been limited because of competing demands for resources, a focus on
    educating Section 527 organizations and on publicly disclosing the data, and
    the workload burden on IRS from having little electronic data on Results in
    Brief

    Page 3 GAO- 02- 444 Political Organizations

    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.

    IRS has not developed a strategic plan to carry out its responsibilities for
    ensuring that the requirements of the law are met. That is, IRS has not
    defined the level of disclosure and oversight it intends to achieve for
    Section 527 organizations. Nor has IRS established a strategy, including

    the resources needed, to accomplish such disclosure and oversight levels, or
    established a set of measures to assess its progress. Developing such a plan
    would be consistent with the principles for strategic planning as
    articulated in the Government Performance and Results Act (GPRA) 5 and IRS?s
    strategic planning process.

    We are making recommendations to IRS to develop results- oriented plans,
    including timeframes and resources needed to improve its disclosure Web
    site, to oversee compliance by Section 527 organizations in fulfilling their
    filing requirements, and to increase the amount of electronically available
    data on Section 527 organizations.

    We obtained written IRS comments on a draft of this report. (See app. VIII).
    IRS agreed with our recommendation to develop results- oriented plans to
    oversee whether Section 527 organizations fulfill their filing requirements
    but took no position on our recommendations to develop such plans to improve
    the disclosure Web site and the availability of

    electronic data. IRS officials told us that they need more time to develop
    positions on implementing these two recommendations. While IRS generally
    agreed with the need for a better Web site and more electronic data, IRS
    said that such actions face competing resource priorities. IRS also provided
    other comments that expanded on our discussion about the speed in which IRS
    created Section 527 filing and disclosure systems, the barriers to having
    more electronic Section 527 data, and IRS?s efforts to improve the filing
    compliance of Section 527 organizations as well as IRS?s

    oversight. Because these comments expanded on material in the report, we
    made no changes to our report based on these comments. The Agency Comments
    and Our Evaluation section of this report discusses IRS?s written comments.
    We also received oral comments from IRS officials and FEC officials on
    technical aspects of the report, which we used to make changes where
    appropriate.

    5 P. L. 103- 62 (1993).

    Page 4 GAO- 02- 444 Political Organizations

    In July 2000, P. L. 106- 230 was enacted. 6 It created a reporting and
    public disclosure process for Section 527 organizations that operate outside
    FEC jurisdiction 7 and that engage in political activities at the local,
    state, or federal level. 8 Under P. L. 106- 230, Section 527 organizations
    are to notify IRS of their formation and file periodic reports with IRS. 9
    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 10 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; 11 and (3) not later
    than

    6 The constitutionality of P. L. 106- 230 is being challenged in National
    Federation of Republican Assemblies, et. al. v. United States of America,
    Civil Action No. 00- 0759- RV- C (S. D. Ala. Filed Aug. 21, 2000). 7 Section
    527 organizations that seek to directly influence elections for federal
    office report their activities to the FEC, which is to oversee the use of
    hard money raised and spent for these activities. 8 Other types of tax-
    exempt organizations may also conduct political activities, provided that
    the political activities are secondary to their tax- exempt activities (see
    app. I). 9 P. L. 106- 230 created some exceptions to these requirements for
    filing with IRS such as for Section 527 organizations already reporting to
    FEC and those anticipating that their annual gross receipts would always be
    less than $25,000. 10 Creating electronic forms is a departure from IRS?s
    policy of not competing with private software developers. The short time
    frames and lack of interest from the private sector necessitated such action
    to meet the law?s requirements.

    11 Under Section 527( j)( 6), an ?election? is for a federal office; a
    political party convention or caucus to nominate a candidate for federal
    office; or a primary election to select delegates to a national nominating
    convention or to express a preference for nomination to the office of
    President. ?Election? does not include a purely state or local election.
    Background

    Page 5 GAO- 02- 444 Political Organizations

    30 days after a general election. Appendix II contains copies of these IRS
    forms. 12 Form 8871 on the notification of Section 527 status is to include
    the

     name, address, business address (if a different address), and e- mail
    address;

     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 13
    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. 14 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.

    12 Section 527 organizations also might be required to file Form 990 (Return
    of Organization Exempt From Income Tax) and Form1120- POL (U. S. Income Tax
    Return for Certain Political Organizations). Appendix II discusses the
    filing requirements for these forms and has copies of the forms to show the
    types of data to be reported. Also, we recently reported our concerns about
    Form 990 expense data reported by charities. See Tax- Exempt Organizations:
    Improvements Possible in Public, IRS, and State Oversight of Charities, GAO-
    02- 526, Apr. 30, 2002 (www. gao. gov). 13 Disclosure is required if the
    aggregated contributions from a person in the calendar year is $200 or more.

    14 Disclosure is required if the aggregated expenditures to a person in the
    calendar year is $500 or more.

    Page 6 GAO- 02- 444 Political Organizations

    Given such requirements, IRS created a Web site 15 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.

    Figure 1: Time Line of the Development of the Section 527 Disclosure Web
    site

    Source: GAO analysis of IRS data. 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. 15 http:// www. irs. gov/ polorgs. Objectives, Scope, and
    Methodology

    July 1, 2000

    Congress passes P. L. 106- 230

    July 12, 2000

    IRS releases electronic and paper

    Form 8871 for filing

    July 17, 2000

    IRS releases paper Form 8872

    for filing

    August 4, 2000

    IRS posts paper Form 8871 to 527 disclosure Web site

    September 12, 2000

    IRS posts paper Form 8872 to 527 disclosure Web site

    November 14, 2000

    IRS makes electronic Form 8872 available on Web site for filing

    Page 7 GAO- 02- 444 Political Organizations

    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 16 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. 16
    Accessibility refers to how easy or difficult the Web site is to use and the
    usefulness of the

    format of data on the Web site. Ease of use, or user- friendliness, includes
    how easily a user can navigate, interact with and understand data on the Web
    site. The usefulness of the format relates to the extent to which data on
    the Web site can be electronically searched and downloaded for independent
    analysis.

    Page 8 GAO- 02- 444 Political Organizations

    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, 17 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

    17 Ogden Service Center also receives and processes all Forms 990 and Forms
    1120- POL. IRS Disclosed Data Filed by Section 527 Organizations, but the

    Data Are Not Readily Accessible to Support Public Users

    Page 9 GAO- 02- 444 Political Organizations

    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, 18 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,

    18 IRS?s Digital Daily Web site is a portal or entry to other Web sites,
    including the Section 527 Web site. IRS Has Publicly Disclosed

    Data Filed by Section 527 Organizations

    Accessibility of Data on the Web site Is Hindered Because Site Is Difficult
    to Use and Lacks Electronically Searchable Data

    Section 527 Disclosure Web site is Difficult to Use

    Page 10 GAO- 02- 444 Political Organizations

    and 11 found it somewhat or very difficult to understand the content. 19 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

    19 In addition, 10 of the 12 GAO staff rated the site as poor overall.
    However, many of the staff rated parts of the Web site more positively. When
    asked to perform four tasks, most of the staff found two of those tasks at
    least somewhat easy to do. Also, the staff tended to have a more positive
    view of how the site functioned in terms of speed and links. The results of
    our test are in appendix IV.

    Page 11 GAO- 02- 444 Political Organizations

    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. 20 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. 21
    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,

    20 According to IRS officials, IRS may publicly disclose IRS correspondence
    on Forms 8871 and 8872 filings, if the correspondence has no ?tax return
    information?. Section 6103 of the Internal Revenue Code prohibits the
    disclosure of tax return information to the public.

    21 Unlike the electronic forms, paper forms are scanned into a portable
    document format (PDF), creating a photograph- like image. In short, PDF
    files cannot function as an electronic database. IRS Lacks Electronically
    Searchable Data

    Page 12 GAO- 02- 444 Political Organizations

    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. IRS?s Improvements to

    Disclosure Web site Do Not Address Key Limitations

    Page 13 GAO- 02- 444 Political Organizations

    Figure 2: Links to Section 527 Disclosure Web site and Welcome Page from
    Home Page

    Source: GAO analysis. 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 taxexempt 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

    The Digital Daily www. irs. gov

    - Individuals - Businesses

    - Charities and non- profits

    - Government entities - Tax professionals - Retirement plans

    Tax Information for charities and

    non- profits - Business league

    organizations - Charitable

    organizations - Employee

    associations - Fraternal societies - Labor and

    agricultural organizations

    - Political organizations

    - Social clubs - Social welfare

    organizations - Veterans?

    organizations - Other tax- exempt

    organizations Tax information for

    political organizations - Exemption

    requirements - Taxable income - Filing requirements - Solicitation notice

    - Notices and reports

    ?Notices and reports filed with the IRS under 527?

    (No title) eforms. irs. gov/ search_ results. asp

    Site for searching Forms 8871 and 8872 submitted to IRS by Sec. 527
    organizations

    (No title) Welcome page for political organizations? electronic filing and
    search site User

    clicks on . . .

    Page 14 GAO- 02- 444 Political Organizations

    allow for ?wildcard operators? 22 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. 23
    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:

    22 A wildcard operator, such as an asterisk, allows the user to find related
    word matches. For example, a search for corp* would return all items with
    the word ?corporation? and other words starting with ?corp.? 23 The first
    goal of the IRS strategic plan is to provide ?Top- Quality service to each
    taxpayer in every interaction? by determining whether customers believe IRS
    is meeting their

    expectations. IRS Provides Limited

    Oversight to Ensure that Section 527 Organizations Meet

    Filing Requirements

    Page 15 GAO- 02- 444 Political Organizations

     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. IRS Does Not Fully Check

    Section 527 Forms When Received to Ensure Data Quality

    Page 16 GAO- 02- 444 Political Organizations

    Table 1: Items IRS Checks on Forms 8871, Electronic and Paper Item
    Electronic form Paper form

    Valid name and employer identification number (EIN) X X Mailing address,
    business address, and e- mail address X Name of custodian of records and
    contact person X Form signed X

    Correspondence received with filed form (requires IRS response) X Amended
    form filed X

    Organization?s tax- exempt status recorded X Name of, address of, and
    relationship to related entities List of all officers, directors, and highly
    compensated employees Source: IRS documents and officials. 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 taxexempt
    status. Other items that are checked are only reviewed to determine if
    something has been provided on the form.

    Table 2: Items IRS Checks on Forms 8872, Electronic and Paper Item
    Electronic form Paper form

    Reason for filing (e. g., initial, amended, or final report) X Valid name
    and EIN X X Date organization formed X X Type of report (e. g., monthly,
    quarterly, semiannual, or annual) X X Form signed X X Organization recorded
    at IRS as exempt X Correspondence received with filed form requires IRS
    response X Date received is shown X Itemized contributions a Itemized
    expenditures b a Includes each contributor?s name, mailing address, and ZIP
    code; employer?s name and contributor?s occupation; aggregate contributions
    year- to- date; and amount of contributions. b Includes each recipient?s
    name, mailing address, and ZIP code; name of recipient?s employer;
    recipient?s occupation; and amount of each expenditure. Source: IRS
    documents and officials.

    Page 17 GAO- 02- 444 Political Organizations

    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

    Page 18 GAO- 02- 444 Political Organizations

    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. 24 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.

    24 Section 527 organizations that are (1) not required to file Forms 8871
    include those with gross receipts under $25,000 or that have to report to
    FEC as political committees and (2) required to file Forms 8871 but are
    exempt from filing Forms 8872 include state or local committees of a
    political party or committee of a state or local candidate. IRS Does Not Use
    Tools to

    Ensure the Quality of Section 527 Data After Forms Are Filed

    IRS Audits Have Not Focused on Section 527 Forms

    IRS Did Not Match Existing Data for Section 527 Filing and Reporting
    Compliance

    Page 19 GAO- 02- 444 Political Organizations

    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 taxexempt

    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 IRS Has Not
    Penalized Section

    527 Organizations

    Page 20 GAO- 02- 444 Political Organizations

    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 25 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. 26 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.

    25 Notice 2002- 34, 2002- 21 I. R. B., accompanied by a News Release
    (IR2002- 57) and Fact Sheet (FS2002- 11). 26 By 2000, IRS master file listed
    1.35 million tax- exempt organizations under Section 501( c). About 12,700
    Section 527 organizations notified IRS of their existence since passage of
    P. L. 106- 230, as of March 2002. Various Factors Contribute

    to Limited Oversight of Section 527 Organizations

    Page 21 GAO- 02- 444 Political 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.

    Page 22 GAO- 02- 444 Political Organizations

    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 IRS Is Starting a Study to

    Improve Oversight of Section 527 Organizations

    IRS Planning for New Responsibilities Not Adhering to Accepted Principles

    IRS Plans Do Not Define Future Results To Be Achieved

    Page 23 GAO- 02- 444 Political Organizations

    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
    taxexempt 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.

    Page 24 GAO- 02- 444 Political Organizations

    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 [this] 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.

    Page 25 GAO- 02- 444 Political Organizations

    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. 27 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

    27 This act affects the financing of political campaigns and includes
    provisions on the disclosure and oversight of campaign activities associated
    with ?soft money? and indirect issue advocacy. Recent Actions Could Heighten
    Need for ResultsOriented

    Planning Conclusions

    Page 26 GAO- 02- 444 Political Organizations

    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. Recommendations for Executive Action

    Page 27 GAO- 02- 444 Political Organizations

    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
    Agency Comments

    and Our Evaluation

    Page 28 GAO- 02- 444 Political Organizations

    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. Sincerely yours,

    Michael Brostek Director, Tax Issues

    Appendix I: Political Activity and Section 527 Organizations

    Page 29 GAO- 02- 444 Political Organizations

    Section 527 of the tax code has allowed the formation of tax- exempt
    political organizations. 1 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, 2 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. 3
    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.

    1 Under Section 527, a political organization is defined as an organization
    operated primarily for the purpose of accepting contributions or making
    expenditures, to influence the selections, nominations, elections, or
    appointments for federal, state, or local public offices, offices in a
    political organization, or Presidential or Vice- Presidential electors. 2
    PLR 9652026 (Oct. 1, 1996), PLR 9725036 (Mar. 24, 1997) and PLR 199925051
    (Mar. 29,

    1999) clarified the law. 3 Section 527 organizations that report to IRS must
    still fulfill any reporting obligations to the states. Appendix I: Political
    Activity and Section 527

    Organizations

    Appendix I: Political Activity and Section 527 Organizations

    Page 30 GAO- 02- 444 Political 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.

    Table 3: Allowable Political Activities of Section 501( c)( 3- 6) Tax-
    Exempt Organizations Type of tax- exemption Type of organization Allowable
    political activities

    501( c)( 3) Charity Educational advocacy a and limited legislative advocacy
    b 501( c)( 4) Social welfare Educational and legislative

    advocacy and limited electioneering c 501( c)( 5) Labor, agricultural, or
    horticultural Same 501( c)( 6) Business league Same a Educational advocacy
    is aimed at educating the public about an issue. b Legislative advocacy is
    aimed at influencing the public to support or oppose specific legislation. c
    Electioneering is aimed at influencing a political campaign such as
    influencing voters to vote for or against a particular candidate. Source:
    IRS officials and GAO analysis. 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.

    Appendix II: IRS Forms Mentioned in Report Page 31 GAO- 02- 444 Political
    Organizations

    According to IRS, political organizations that have tax- exempt status under
    Section 527 of the Internal Revenue Code must file some or all of the four
    forms listed in Table 4. The requirements for filing these forms apply to
    political organizations that are exempt from federal income tax provisions,
    and receive or expect to receive

    $25,000 or more in gross receipts in any taxable year.

    Table 4: Filing Requirements for Section 527 Organizations If a Section 527
    organization is That organization is to file Federal candidate committee,
    political party committee, or PAC required to report to FEC Form 1120- POL
    and Form 990 or Form 990- EZ

    State or local candidate committee or state or local committee of a
    political party Form 8871, Form 1120- POL, and Form 990 or

    Form 990- EZ Any other political organization, including state or local PACs
    and federal political organizations that are not required to report to FEC
    Form 8871, Form 8872, Form 1120- POL, and

    Form 990 or Form 990- EZ Note: A political organization that does not seek
    tax- exempt status or a tax- exempt political organization that does not
    have gross receipts of at least $25,000 but receives more than $100 in
    taxable income in any taxable year is still to file a Form 1120- POL.
    Source: IRS Fact Sheet 2002- 11, May 2002. The following pages show the
    forms used by Section 527 organizations. Appendix II: IRS Forms Mentioned in
    Report

    Appendix II: IRS Forms Mentioned in Report Page 32 GAO- 02- 444 Political
    Organizations

    Appendix II: IRS Forms Mentioned in Report Page 33 GAO- 02- 444 Political
    Organizations

    Appendix II: IRS Forms Mentioned in Report Page 34 GAO- 02- 444 Political
    Organizations

    Appendix II: IRS Forms Mentioned in Report Page 35 GAO- 02- 444 Political
    Organizations

    Appendix II: IRS Forms Mentioned in Report Page 36 GAO- 02- 444 Political
    Organizations

    Appendix II: IRS Forms Mentioned in Report Page 37 GAO- 02- 444 Political
    Organizations

    Appendix II: IRS Forms Mentioned in Report Page 38 GAO- 02- 444 Political
    Organizations

    Appendix II: IRS Forms Mentioned in Report Page 39 GAO- 02- 444 Political
    Organizations

    Appendix II: IRS Forms Mentioned in Report Page 40 GAO- 02- 444 Political
    Organizations

    Appendix II: IRS Forms Mentioned in Report Page 41 GAO- 02- 444 Political
    Organizations

    Appendix II: IRS Forms Mentioned in Report Page 42 GAO- 02- 444 Political
    Organizations

    Appendix II: IRS Forms Mentioned in Report Page 43 GAO- 02- 444 Political
    Organizations

    Appendix III: Data About Section 501( c)( 3- 6) Organizations Page 44 GAO-
    02- 444 Political Organizations

    Table 5: Number of Section 501( c) Tax- Exempt Organizations, Fiscal Years
    1995- 2001 Type of tax- exempt entity a FY1995 FY1996 FY1997 FY1998 FY1999
    FY2000 FY2001

    501( c) 3 626,226 654,186 692,524 733,790 773,934 819,008 865,096 501( c) 4
    139,451 139,512 141,776 139,533 138,927 137,037 136,882 501( c) 5 66,662
    64,955 64,902 64,804 63,716 63,456 62,944 501( c) 6 75,695 77,274 78,406
    79,864 81,493 82,246 82,706 All other 501( c) b 256,755 252,583 252,686
    253,751 354,577 252,656 251,930

    a 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. b
    ?Other? refers to Section 501( c)( 1- 27) except 3, 4, 5, and 6. Source: IRS
    Annual Data Books, 1995- 2002. Table 6: Disposition of Applications for
    Section 501( c)( 3- 6) Tax Exemption Status, Fiscal Years 1995- 2001

    Type of Section 501( c) organization Disposition by fiscal year 501( c)( 3)
    501( c)( 4) 501( c)( 5) 501( c)( 6) All other 501( c) organizations a Total
    FY1995

    Approved 42,324 1, 717 341 2,003 2,175 48,560

    % Approved b 75.0% 75.2% 78.9% 80.4% 70.0% 75.0%

    Denied 377 27 4 35 27 470

    Approved/ Deny Ratio c 112.3 63.6 85.3 57.2 80.6 103.3

    Other d 13,707 538 87 454 907 15,693 Total 56,408 2, 282 432 2,492 3,109
    64,723 FY1996 Approved 40,978 1, 648 313 1,909 1,913 46,761

    % Approved b 71.2% 72.2% 78.4% 80.1% 65.9% 71.4%

    Denied 342 32 0 25 20 419

    Approved/ Deny Ratio c 119.8 51.5 313.0 76.4 95.7 111.6

    Other d 16,217 602 86 450 968 18,323 Total 57,537 2, 282 399 2,384 2,901
    65,503 FY1997 Approved 47,015 1, 535 336 1,803 2,068 52,757

    % Approved b 72.3% 67.3% 76.9% 78.1% 64.1% 72.0%

    Denied 226 21 3 23 26 299

    Approved/ Deny Ratio c 208.0 73.1 112.0 78.4 79.5 176.4

    Other d 17,761 726 98 483 1,133 20,201 Total 65,002 2, 282 437 2,309 3,227
    73,257 FY1998 Approved 51,329 1, 696 265 1,694 1,977 56,961

    % Approved b 74.6% 70.3% 74.2% 80.0% 65.0% 74.2%

    Denied 382 15 2 14 13 426

    Appendix III: Data About Section 501( c)( 3- 6) Organizations

    Appendix III: Data About Section 501( c)( 3- 6) Organizations Page 45 GAO-
    02- 444 Political Organizations

    Type of Section 501( c) organization Disposition by fiscal year 501( c)( 3)
    501( c)( 4) 501( c)( 5) 501( c)( 6) All other 501( c) organizations a Total

    Approved/ Deny Ratio c 134.4 113.1 132.5 121.0 152.1 133.7

    Other d 17,085 700 90 409 1,052 19,336 Total 68,796 2, 411 357 2,117 3,042
    76,723 FY1999 Approved 52,773 1, 500 333 1,635 1,897 58,138

    % Approved b 81.1% 73.4% 81.2% 84.8% 69.7% 80.6%

    Denied 447 4 0 10 9 470

    Approved/ Deny Ratio c 118.1 375.0 333.0 163.5 210.8 123.7

    Other d 11,838 539 77 284 815 13,553 Total 65,058 2, 043 410 1,929 2,721
    72,161 FY2000 Approved 61,005 1, 681 468 1,718 2,362 67,234

    %Approved b 81.8% 72.7% 84.5% 84.5% 73.3% 81.3%

    Denied 456 9 0 8 9 482

    Approved/ Deny Ratio c 133.8 186.8 468.0 214.8 262.4 139.5

    Other d 13,073 622 86 307 850 14,938 Total 74,534 2, 312 554 2,033 3,221
    82,654 FY2001 Approved 59,909 1, 471 295 1,473 2,225 65,373

    % Approved b 80.6% 72.1% 81.7% 82.1% 73.5% 80.1%

    Denied 629 2 2 8 5 646

    Approved/ Deny Ratio c 95.2 735.5 147.5 184.1 445.0 101.2

    Other d 13,823 566 64 314 171 14,938 Total 74,361 2, 039 361 1,795 3,026
    81,582

    Note: Section 508 of the Internal Revenue Code requires most Section 501(
    c)( 3) organizations to apply for recognition of tax- exempt status. There
    is no comparable provision in the Internal Revenue Code that requires
    Section 501( c)( 4- 6) organizations to apply for this recognition. a
    Applications for Section 501( c)( 1- 27) except 3, 4, 5, and 6. Sections
    501( c)( 26) and (27) included for

    FY 1998 and FY 1999. b Percent of approvals assumes no carry- over of
    applications from previous year( s) and includes Other. c Approved/ Deny
    Ratio = For every 1 denial, there were X approvals. d Application withdrawn
    and failure to furnish required information, refusals to rule, information
    forwarded to other than national office, correction, disposal, and others.

    Appendix III: Data About Section 501( c)( 3- 6) Organizations Page 46 GAO-
    02- 444 Political Organizations

    Table 7: Types of Returns of Tax- Exempt Organizations Audited, Fiscal Years
    1995- 2001 FY1995 FY1996 FY1997 FY1998 FY1999 FY2000 FY2001

    Total number of returns for tax- exempt organizations filed in previous
    calendar year a 523,191 563,710 577,926 644,496 641,383 836,550 872,210
    Audit Rate (overall) b 2.0% 2.0% 1.9% 1.6% 1.3% 0.8% 0.6% Tax- exempt
    organizations and related taxable returns audited 10,497 11,020 10,700
    10,353 8,611 7,435 5,342

    Tax- exempt returns audited Forms 990 and 990- EZ c 3,852 4,067 4,168 4,145
    4,170 3,630 2,494 Forms 990PF, 5227, and 1041A 318 312 503 350 209 148 132
    Form 990- C d 51 114 78 88 34 18 9 Form 1120- POL e 62 56 30 107 75 52 7
    Forms 8038, 8038G, 8038GC, 8038T, and 8028 f na 68 100 126 92 186 295 Total
    4,283 4,617 4,879 4,816 4,580 4,034 2,937

    Related taxable returns audited Forms 940, 941, 942, and 943 g ` 3,670 4,157
    3,534 2,845 2,048 1409 1,170 Form 990- T h 2,139 1,747 1,702 1,717 1,198
    1217 825 Form 4720 i 143 98 51 50 87 121 41 Forms 1040 and 1120 adjusted j
    262 401 534 925 698 172 219 Total 6,214 6,403 5,821 5,537 4,031 2,919 2,255

    Notes: (1) Excludes Employee Plans. (2) Detail may not add due to rounding.
    (3) na= not available. a For 1995, returns filed include Forms 990, 990- EZ,
    990PF, 990- C, 5227, 1041- A, 1065. b In general, audits are associated with
    returns filed in the previous calendar year; however, this relationship is
    only approximate. c Tax- exempt organization returns (Forms 990 and the 990-
    EZ ?short? form), other than private foundations or farmers? cooperatives. d
    Form 990- C is filed by farmers? cooperatives. e Form 1120- POL is filed by
    certain political organizations. f Tax- exempt private activity bond issues
    (Form 8038), government- purpose tax- exempt bond issues (Form 8038G), small
    tax- exempt governmental bond issues (Form 8038GC), arbitrage rebates (Form
    8038T), and carryover election of unused private- activity bond volume cap
    (Form 8328), respectively. g Employer?s unemployment tax (Form 940);
    employer returns for income and social security tax withheld and advance
    earned income credit payments, for other than household or agricultural
    employees (Form 941); household employee tax (Form 942); and agricultural
    employees tax (Form 943), respectively. h Form 990- T is the tax- exempt
    organization business income tax return. i Form 4720 reports the excise tax
    on certain charities. j Tax on related individual (Form 1040 series) or
    corporation (Form 1120 series) income tax returns, adjusted as a result of
    audits of tax- exempt organization return. Source: IRS Annual Data Books,
    1995- 2002.

    Appendix III: Data About Section 501( c)( 3- 6) Organizations Page 47 GAO-
    02- 444 Political Organizations

    Table 8: Recommended and Average Additional Tax from Audits of Tax- Exempt
    Organizations, Fiscal Years 1995- 2001 FY1995 FY1996 FY1997 FY1998 FY1999
    FY2000 FY2001 Number of returns audited a Coordinated Examination

    Program (CEP) b 655 722 846 725 450 574 511 Non- CEP 9,842 10,298 9,854
    9,628 8,161 6,861 4,831

    Total 10,497 11,020 10,700 10,353 8,611 7,435 5,342 Recommended additional
    tax after audit (dollars) CEP 40,038,000 42,236,000 30,225,000 30,701,000
    73,923,000 26,210,000 28,354,000

    Non- CEP 86,521,000 88,242,000 59,252,000 51,543,000 23,702,000 312,321,000
    10,109,000

    Total 126,559,000 130,478,000 89,477,000 82,244,000 97,625,000 338,531,000
    38,463,000 Average recommended additional tax per return (dollars) CEP
    61,127 58,499 35,727 42,346 164,273 45,662 55,487

    Non- CEP 8,791 8,569 6,013 5,353 2,904 45,521 2,093

    Weighted Average 12,057 11,840 8, 362 7,944 11,337 45,532 7,200

    Notes: (1) Detail may not add to totals because of rounding. (2) Includes
    Audits of Related Taxable Returns and excludes Employee Plans. a In general,
    audits are associated with returns filed in the previous calendar year;
    however, this relationship is only approximate. b CEP (Coordinated
    Examination Program) covers ?a taxpayer, and its effectively controlled
    organizations, that warrants application of ?team examination? procedures.?
    Source: IRS Data Books 1995- 2002, and GAO analysis.

    Appendix III: Data About Section 501( c)( 3- 6) Organizations Page 48 GAO-
    02- 444 Political Organizations

    Table 9: Revocations of Section 501( c)( 3- 6) Tax- Exempt Status, Fiscal
    Years 1995- 2001

    Year Section 501( c)( 3) Section

    501( c)( 4) Section 501( c)( 5) Section

    501( c)( 6) Total

    1995 18 6 0 3 27

    1996 16 11 0 5 32

    1997 12 9 1 6 28

    1998 24 7 2 3 36

    1999 8 9 1 3 21

    2000 27 1 2 1 31

    2001 9 2 1 1 13 Total 114 45 7 22 188 Source: IRS?s Audit Information
    Management System (AIMS) database, fiscal years 1995- 2001.

    Appendix IV: IRS Section 527 Disclosure Web Site Accessibility Evaluation
    Page 49 GAO- 02- 444 Political Organizations

    Appendix IV: IRS Section 527 Disclosure Web Site Accessibility Evaluation

    Appendix IV: IRS Section 527 Disclosure Web Site Accessibility Evaluation
    Page 50 GAO- 02- 444 Political Organizations

    Appendix IV: IRS Section 527 Disclosure Web Site Accessibility Evaluation
    Page 51 GAO- 02- 444 Political Organizations

    Appendix IV: IRS Section 527 Disclosure Web Site Accessibility Evaluation
    Page 52 GAO- 02- 444 Political Organizations

    Appendix IV: IRS Section 527 Disclosure Web Site Accessibility Evaluation
    Page 53 GAO- 02- 444 Political Organizations

    Appendix IV: IRS Section 527 Disclosure Web Site Accessibility Evaluation
    Page 54 GAO- 02- 444 Political Organizations

    Appendix V: Groups Interviewed for this Report Page 55 GAO- 02- 444
    Political Organizations

    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.

    Americans for Tax Reform Campaign Finance Institute & Campaign Finance
    Institute?s Task Force on Disclosure Campaign for America/
    PoliticalMoneyLine. org Caplin & Drysdale, Chartered Center for Governmental
    Studies Center for Public Integrity

    Center for Responsive Politics Citizens Against Government Waste Common
    Cause Followthemoney. org / National Institute on Money and State Politics
    GuideStar National Taxpayers Union

    Project on Government Oversight Public Campaign Public Citizen The Reform
    Institute

    University of Miami Law School Urban Institute Appendix V: Groups
    Interviewed for this

    Report

    Appendix VI: Selected Provisions of P. L. 107- 155, the Bipartisan Campaign
    Reform Act of 2002

    Page 56 GAO- 02- 444 Political Organizations

    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 527related
    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. Appendix VI: Selected
    Provisions of P. L. 107-

    155, the Bipartisan Campaign Reform Act of 2002

    Public Disclosure of Data on the Internet

    Determining Responsibility for Disclosure and Oversight

    Appendix VI: Selected Provisions of P. L. 107- 155, the Bipartisan Campaign
    Reform Act of 2002

    Page 57 GAO- 02- 444 Political Organizations

    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.

    Appendix VII: Opportunities for Data Matching to Improve Oversight Page 58
    GAO- 02- 444 Political Organizations

    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. 1 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. 1 For the tax year 2001 Form 990, this
    would be line 81a divided by line 17. Appendix VII: Opportunities for Data

    Matching to Improve Oversight

    Appendix VII: Opportunities for Data Matching to Improve Oversight Page 59
    GAO- 02- 444 Political Organizations

    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.

    Appendix VIII: Comments from the Internal Revenue Service Page 60 GAO- 02-
    444 Political Organizations

    Appendix VIII: Comments from the Internal Revenue Service

    Appendix VIII: Comments from the Internal Revenue Service Page 61 GAO- 02-
    444 Political Organizations

    Appendix VIII: Comments from the Internal Revenue Service Page 62 GAO- 02-
    444 Political Organizations

    Appendix VIII: Comments from the Internal Revenue Service Page 63 GAO- 02-
    444 Political Organizations

    Appendix IX: GAO Contacts and Staff Acknowledgments Page 64 GAO- 02- 444
    Political Organizations

    Tom Short, (202) 512- 9074 Kerry Gail Dunn, (415) 904- 2234 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. Appendix IX: GAO Contacts and Staff Acknowledgments

    GAO Contacts Staff Acknowledgments (440066)

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