Charitable organizations play a major role in the U.S. economy, providing critical services and resources to those in need.
Internal Revenue Service oversight helps ensure that charities abide by the purposes that justify their tax-exempt status and protects the sector from potential abuses and loss of confidence by donors.
However, budget cutbacks in recent years have called into question the adequacy of IRS oversight.
A review released this month by the Government Accountability Office found that the IRS needs to improve its oversight of charitable organizations.
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The GAO review was requested by Sen. Tom Coburn (R-Okla.) in response to an investigation last year by the Tampa Bay Times and the Center for Investigative Reporting on the worst tax-exempt organizations in the country.
The reporters found 50 charities who paid $1 billion to for-profit donation solicitors while giving little in actual aid to their causes. The groups often took names similar to those of well-known charities.
GAO said it had reviewed and analyzed IRS data and strategic planning and performance documents, and documented improvement efforts. It also interviewed IRS and Department of Justice officials, state charity regulators and subject matter specialists. And the agency compared IRS’ practices to federal guidance on performance management.
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The review found that although charitable organizations varied considerably in size and purpose, in 2011 the largest number of organizations was in the human services sector, providing employment and housing assistance among other services.
The highest concentration of assets was in the health and education sectors, which include hospitals and universities. Besides being concentrated in a few sectors, less than 3% of nonprofits held more than 80% of the assets.
In recent years, budget cuts at the IRS have reduced the number of full-time equivalent staff within the Exempt Organizations division, in turn leading to a steady decrease in the number of tax-exempt organizations examined, the review found.
According to GAO data, the examination rate for charities last year was 0.7%, down from 0.8% in 2011, and lower than the 1% exam rate for individuals and 1.4% for corporations.