Nonprofits Make the List of Top Problems for the IRS—But Barely!

February 2010

Each year, the national taxpayer advocate submits an annual report to Congress listing the most serious problems encountered by taxpayers. This year's report, released December 31, 2009, and available on the IRS Web site, identifies, analyzes, and offers recommendations for resolving 21 problems, and only 1—listed as #20 out of the total of 21—is related to tax-exempt entities.

Issue Number 20—Research on Reaching Nonprofits

There is a clear recognition that the nonprofit sector is large and diverse, with citations of facts such as:

There is one exempt organization for every 169 Americans.
The sector employs about 9.4 million workers, representing over 7 percent of the total U.S. workforce.
There are 175 new tax-exempt organizations recognized by the IRS every day.
Higher education, hospitals, and primary care facilities, about 2 percent of the total number of public charities, hold more than half of the assets and represent well over half of all expenses.
Roughly half of all exempt organizations were staffed entirely by volunteers and another third had fewer than 10 employees.

But no matter the size of an organization, it must meet its tax-compliance and reporting obligations, whether or not it has staff or volunteers with the appropriate expertise. Even a volunteer who figures out the regular reporting obligations may be stumped by potential liability for excise taxes and accounting for unrelated business taxable income if the organization seeks to expand its funding sources. And the tenure of volunteers tends to be relatively short, so even if the knowledge is learned, the next volunteer needs to be educated.

The reality is that there are only nine employees in the Exempt Organizations Customer Education and Outreach (CE&O) division, and their daunting task is to meet the informational and educational needs of these nearly two million organizations. This staff represents less than 1.5 percent of the total number of IRS Exempt Organization employees.

So there are not very many people available to get the word out about such sweeping changes as the recent 990-N electronic postcard for small organizations and revisions in the Form 990. Although the IRS has done its best to leverage its limited resources (improved Web pages, regional workshops, collaborations with educational entities that train nonprofit professionals, etc.), it is a daunting task, and the national taxpayer advocate says that more resources are needed.

The discussion concludes with the recommendation for a research study to determine the best way to help educate nonprofits on their reporting responsibilities. Additionally, there is a focus on identifying collaborative partners to deliver the plan. Finally, and probably most important, it is hoped that such research can make a compelling argument for more funding for outreach, education, and perhaps even dedicated tax-exempt representatives in various geographic locations across the U.S.

So the national taxpayer advocate's position is for research that would inform the development of the best ways to inform the sector and document the need for more resources. It is now up to Congress and to the IRS to act on the recommendation. Again, note that this is the 20th on the list of 21 issues presented to Congress for action.

Other Issues Relevant to Nonprofits

Much of the report focuses on improving IRS assistance to all taxpayers on the telephone—in fact, the IRS's goal for 2010 is to answer 71 percent of the calls from taxpayers, down from 83 percent in FY 2007. This reduction means that the IRS doesn't plan to answer about 3 out of every 10 calls. Although the IRS responds that the problems are caused by lack of resources, this explanation does not appear to impress the national taxpayer advocate as a strategy for fixing the problem.

Other issues of interest to nonprofits include:

There is a concern with the poor advice and services being provided by some tax preparers. The current focus is on possible certification and licensing for those filing returns for individual taxpayers, but that could easily be expanded to those filing all kinds of returns, including Form 990.
There is a recommendation to remove the option to use an individual preparer's Social Security Number as an identifying number. This change would enable the IRS to get better data about the preparer population, identify trends and problem preparers, and target outreach and education more effectively.

Summary

The national taxpayer advocate's annual report to Congress sets the stage for discussion of IRS plans and strategies, but in a year dominated by health care reform and economic recovery strategies and 20 other issues on the list, making resources available for research on nonprofit sector needs seems unlikely. Although this recommendation could be viewed as a relatively low-cost issue where results could be delivered, more realistically, the sector should probably plan to continue its own outreach efforts to keep tax-exempt organizations informed on reporting responsibilities.

Linda M. Lampkin is research director of ERI Economic Research Institute (www.erieri.com), a company that provides Form 990 compensation data for use by nonprofits, and former director of the National Center for Charitable Statistics at the Urban Institute. She can be reached at linda.lampkin@erieri.com or (877) 799-3428.