TIGTA: IRS Should Strictly Monitor Section 527 Political Organization’s Financial Disclosures

The Treasury Inspector General for Tax Administration (“TIGTA”) has released a report on its review of the filing compliance of Section 527 political organizations.  The overall objective of this review was to determine whether the Internal Revenue Service (“IRS”) had taken the corrective actions needed to develop an effective program to identify and address noncompliant Section 527 organizations. This review was conducted as part of the TIGTA Fiscal Year 2009 Annual Audit Plan related to the major management challenge of Tax Compliance Initiatives.

Section 527 tax-exempt political organizations (“Political Organizations”) that desire to be tax exempt must report their contributions and expenditures to the IRS periodically. Although the Exempt Organizations (EO) function has taken action to identify noncompliant political organizations, we believe EO function management should focus on increased enforcement actions for noncompliant political organizations. With additional focus, the EO function will promote the full and accurate disclosure of political organizations’ financial information, which will help the public gain an accurate understanding of political organizations’ activities (e.g., tracking the flow of funds related to legislative issues and political campaigns).

In its report, the TIGTA stated that the IRS has taken significant actions to improve its ability to identify political organizations that do not timely notify the IRS of their existence or timely submit reports of their contributions and expenditures. However, the IRS has not fully addressed noncompliance among political organizations.

For example, one out of every four Political Organization Report of Contributions and Expenditures (Form 8872) that we reviewed had incomplete or missing contributor or recipient information. While some of these filings may later be deemed acceptable, we determined the IRS is not reviewing these filings to determine if they are complete or if penalties should be assessed.

Also, the IRS is not always issuing notices at the appropriate time that include all information needed by political organizations to become compliant. Lastly, the IRS is not following up on information it has requested from political organizations to verify compliance.

After the TIGTA’s prior review completed in Fiscal Year 2005, the EO function focused its efforts on completing actions that would better enable it to identify noncompliant political organizations. These included establishing new electronic tax accounts to track the activity of political organizations filing Political Organization Notice of Section 527 Status (Form 8871) and Forms 8872, issuing notices to inform political organizations of untimely and missing Forms 8871 and 8872, providing more detailed instructions to political organizations that improved the completeness of Form 8872 filings, and performing a compliance project focused on the filing compliance of Qualified State or Local Political Organizations.

Although the EO function has taken action to identify noncompliant political organizations, we believe EO function management should focus on addressing noncompliance through increased enforcement actions. The assessment of taxes and penalties for incomplete filings, when appropriate, could lead to increased accountability and disclosure by political organizations. Improvement in the notice process could also assist political organizations in complying with their responsibilities.

Recommendations

The TIGTA recommended that the Director, EO, Tax Exempt and Government Entities Division, 1) conduct periodic reviews to determine whether political organizations are submitting complete Forms 8872, 2) develop procedures for reviewing responses and following up on nonresponses to notices, including assessing additional tax or penalties as appropriate, 3) correct untimely and missing Form 8872 notices, and 4) revise forms and instructions for Forms 8871 and 8872 to improve compliance.

Response

The Commissioner, Tax Exempt and Government Entities Division, generally agreed with TIGTA’s recommendations and provided planned actions to address them.

Specifically, the EO Examination function is developing procedures for performing periodic reviews of a sample of Forms 8872 for compliance as well as procedures for reviewing reports of notices generated and notice responses. In addition, a request for changes to untimely and missing Form 8872 notices is being prepared for submission to the Modernization and Information Technology Services organization.

Also, revisions to Form 8871 instructions will be completed to clarify how to report any tax due to untimely filing. The EO Rulings and Agreements function will evaluate the resources required to implement the recommended changes to Form 8872 and the Master File, and initiate changes where it is reasonable to do so.

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