Posted by Jonathan Moll, CPA
Compliance by operating within an organization’s exempt purpose is paramount to managing, governing, and serving nonprofit organizations. And while a common goal of tax compliance is shared between the IRS and nonprofit organizations, the efforts to achieve those goals are not perceived as collaborative.
The good news is that the IRS recognizes the need for better collaboration between itself, the tax-exempt community, and other regulators and has incorporated this theme into recommendations aimed at shaping its strategic direction. The IRS Advisory Committee on Tax Exempt and Government Entities (ACT) issued its 2016 Report on Recommendations dated June 8, 2016. Included in the Report on Recommendations was a section titled “Stewards of the Public Trust: Long Range Planning for the Future of the IRS and the Exempt Community.” This section of the report focuses on big picture areas the IRS Exempt Organization (EO) function should consider in planning its future of overseeing exempt organizations.
Preparation of the report resulted from the ACT’s communication with those familiar with the issues and challenges affecting the industry. Per the report, a common theme, reflected in the ACT’s interviews this year, was the perception by sector stakeholders that the role and function of the IRS Exempt Organizations has been fundamentally impacted by certain critical factors: dwindling resources, declining budgets, loss of historic knowledge and personnel and antiquated technological platforms. Taken together, these critical factors contribute to a widely held perception that the IRS is not able to regulate the tax-exempt community consistently and effectively. There is also an increasing risk that as the number of tax-exempt organizations rises, the oversight by the IRS will not be sufficient. The common themes that emerged from talking to sector stakeholders were:
- A need for coordinated action among regulators
- Better communication between regulators and regulated entities
- Effective and efficient platforms for communication and dissemination of information
- The need to be user-focused throughout the regulatory and enforcement cycle.
The ACT used these themes as a guide for developing the structure and recommendations of their report. The following 6 recommendations were provided to tackle the challenges and the future environment of the IRS’s regulation of nonprofit organizations:
- Ensure that the IRS EO staff are equipped to carry out their responsibilities.
The report stated a 1.5% decrease in EO staff as a critical concern and recommends that all EO staff, not only senior staff, can benefit in outside professional development opportunities.
- Provide leadership and guidance on major issues impacting the exempt organizations sector.
When the regulators of the sector suffer from a lack of public trust, the sector itself inevitably suffers the same fate. As the exempt organization sector continues its trajectory toward greater complexity in the next decades, the IRS must be given, and must take, the opportunity to exercise effective regulatory and enforcement leadership. The failure to do so could hamper the sector’s ability to thrive.
- Give exempt organizations the tools they need to be tax compliant.
This is a sector dominated in sheer numbers by small- and medium-size nonprofits. These organizations have limited budgets and limited access to fee-for-service expertise. Obliged by their own standards and mission to operate transparently and efficiently, regardless of their size, type, or mission, they need to be able to access IRS guidance and educational resources.
- Assure cyber integrity through technology tools, data collection, and secured cyber storage.
A focus on new technology is driven by EO’s need to utilize its resources as efficiently as possible to reduce costs and increase standardization and speed.
- Release and share data in a digitized format where appropriate for public use.
Data in a digitized format is far more transparent than mere images of filings and far more useful to the nonprofit sector’s stakeholders, including the public, practitioners, regulators, policymakers, and academic researchers. Both the receipt and the public dissemination of the sector’s public data are necessary for transparency and a robust understanding of the import and scope of the nonprofit sector’s role in the U.S. economy.
- Foster two-way communication between the IRS EO division and the nonprofit sector.
Communication initiatives include finding ways to solicit input from a greater number of voices (including small nonprofits) and provide open channels for stakeholders to take issues to the IRS, revising the determination letter to educate exempt organizations on their obligations and responsibilities, using current technology to communicate with organizations, and increasing the availability of strong expert resources through phone customer service.
The full report can be found on the IRS website.