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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