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Budget-Crunched IRS Revamps Exempt Organizations Division

Unit that birthed targeting controversy speeds up applications processing.

“The IRS is guilty of targeting innocent Americans... So I targeted them.”

So proclaimed Rep. Paul Gosar, R-Ariz., in explaining his authorship of the amendment Congress just passed to cut $353 million in the Internal Revenue Service’s budget. President Obama signed the fiscal 2015 omnibus spending bill containing the decrease into law earlier this week.

The bad news for the tax agency arrives as its staff is gearing up for tax filing season, and it also hits the Exempt Organizations division—which birthed the dispute over political targeting of selected nonprofits —just as that unit under new leadership has significantly revamped its practices.

On Wednesday, IRS Commissioner John Koskinen sent staff an email calling the budget reductions “troubling,” noting that fiscal 2015 marks the fifth straight year of cuts to the agency.

“Since 2010, the budget reductions mean we have 13,000 fewer employees—a number that will grow by several thousand by the end of 2015,” he said, noting that mandatory operating expenses are rising along with increased workload under the 2010 Affordable Care Act. “The cumulative effect of these cuts will significantly undermine our ability to serve taxpayers, and they will touch all of our service, enforcement and support operations,” he wrote. Enforcement revenue collections, he added, will be reduced by at least $2 billion. 

Also on Wednesday, the Government Accountability Office released an analysis of the Exempt Organizations division’s problems in improving the efficiency and fairness of its handling of tax-exemption applications from organizations claiming to be charitable in mission.

The number of full-time employees in that division has fallen, GAO reported, from 889 to 842 (about 5 percent) and the number performing examinations fell from 529 to 493 (about 7 percent) between fiscal 2010 and 2013. This has led to a steady decrease in the number of charitable organizations examined, the auditors found. “In 2011, the examination rate was 0.81 percent; in 2013, it fell to 0.71 percent. This rate is lower than the exam rate for other types of taxpayers, such as individuals (1.0 percent) and corporations (1.4 percent).”

Auditors also found that the EO staff had trouble enforcing compliance, in part because fewer nonprofits seeking tax exemptions file electronically than is the case for individuals and businesses. And, said the report requested by Sen. Tom Coburn, R-Okla., “statutory requirements for safeguarding taxpayer data limit both IRS' ability to share data and state regulators' ability to use it” in enforcement of rules on nonprofit status, the report said.

GAO recommended that IRS develop compliance goals and additional performance measures to assess the impact of enforcement activities on compliance and clearly communicate with state charity regulators how they are allowed to use IRS information.

Koskinen in May testified to the House Oversight and Government Reform Committee that the IRS as of last January had completed action on all nine recommendations contained in the May 2013 audit from the Treasury Inspector General for Tax Administration that set off the political controversy that led to executive turnover, multiple congressional hearings and investigations. Recommended steps included a new process for documenting why applications are chosen for additional review, better training and new guidelines for judging political activity that might be grounds for denying tax-exempt status.

Another evaluation of the Exempt Organizations division came in June, when National Taxpayer Advocate Nina Olson—who herself has warned that cutting IRS’ budget will harm revenue collection—laid out her ombudsman shop’s goals for fiscal 2015.

She reviewed 16 of her team’s recommendations for avoiding the political controversy and mistreatment of some applicants. She criticized the Exempt Organizations division for switching its procedures after an investment in training under old procedures and disagreed with agency policy of creating a new streamlined E-Z application form, warning that it will fail to uncover unmeritorious applicants.

 “The National Taxpayer Advocate believes allowing mere attestation, without a description of the procedures the organization has adopted to avert future nonfiling, is inadvisable,” she wrote. “As with the requirement that organizations provide a narrative description of their activities in the initial application, the act of explaining in writing how the organization will avert future noncompliance would itself lead to future compliance.”

Most recently, an insider’s glimpse into the “profoundly changed” Exempt Organizations division came from a speech to tax professionals delivered in October by Matthew Weir, director of the Exempt Organization’s Rulings Agreements unit. The division’s employees in Washington and Cincinnati, he said, according to a transcript published by Exempt Organizations journal editor Paul Streckfus,“are incredibly hard-working individuals caught up in what you might say is a perfect storm of management problems and really working in a failed business model, which is taking in more cases than you close annually.” Many of the existing review processes were duplicative and excessive, he said.

Under EO Commissioner Sunita Lough (successor to the retired and controversial Lois Lerner), said Weir, the EO division’s leaders are “a fundamentally exam-oriented type of group really helping [the division] to get past some of the issues we had last year.” At the start of fiscal 2013, the division had a backlog of more than 65,000 applications, some idle for more than 270 days, he said. But this year, the Cincinnati staff closed 117,000 applications, a 121 percent increase from the prior year.

Weir defended the new streamlined application against criticism by some that it allows iffy nonprofits to squeak through to tax-exempt status, reporting that it saves bothering the taxpayer for “reams of information” and has reduced the average decision time to 11 days. “I met with some members of the EO practitioner community last week, and I kid you not, the complaint was that the determination letters were coming too quickly,” he said.  “And they had sort of accommodated their own practice to our systemic delays and had built that into their own practice.”

The situation now is a far cry from when Weir “got inside and saw the reasons that gave rise to that backlog of cases and the extent of boxes and boxes and boxes of paper applications and the tasks that lay ahead of those folks,” he said. “How they worked just tirelessly to get the job done is really impressive. So I want to celebrate those accomplishments. …It was achieved because the people in Cincinnati and Washington saw [their] commitment as a down payment to the public” and the community of tax professionals.

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