The Treasury Inspector General for Tax Administration has issued a report on its Political Activities Compliance Initiative that seeks to educate tax-exempt organizations regarding political campaign intervention, improve internal processes, and detect tax-exempt organizations that are potentially involved in repeated campaign intervention. Although progress has been made, the report concludes that timeliness goals can be improved.
Full Text:
Improvements Have Been Made to Educate Tax-Exempt Organizations
and Enforce the Prohibition Against Political Activities,
but Further Improvements Are Possible
1 = Tax Return/Return Information
Impact on the Taxpayer
The Political Activities Compliance Initiative (the Initiative) was implemented to educate tax-exempt organizations about the types of prohibited political activities and to notify organizations of the program implemented by the TE/GE Division to enforce this prohibition. The EO function increased its efforts to educate tax-exempt organizations about prohibited political activities and enhanced several internal processes. However, it could further improve its effectiveness by tracking the reasons why timeliness goals are not always met and by ensuring that all employees clearly understand what should be included in the Initiative. These actions should increase the likelihood that tax-exempt organizations will stop the prohibited activities before the relevant election and that tax-exempt organization activities will be evaluated consistently and fairly.
Synopsis
The TE/GE Division effectively focused on prohibited political campaign intervention by emphasizing efforts to educate tax-exempt organizations about prohibited political activities, improving internal processes, and setting up a program to detect tax-exempt organizations that are potentially involved in repeated campaign intervention. For example, the Division published a "Fact Sheet" in February 2006 with detailed examples of the types of activities the IRS investigated during the 2004 election cycle, along with related commentary to help tax-exempt organizations better understand what activities constitute political intervention. The EO function also improved the 2006 Initiative by more clearly defining timeliness guidelines and procedures for evaluating and assigning referrals for examination.
While the EO function created more detailed timeliness standards for evaluating referrals, the TE/GE Division did not always meet the timeliness standards. As a result, tax-exempt organizations might not be notified prior to the relevant election, thereby providing less assurance that prohibited political activities will cease prior to the relevant election. The EO function tracks the amount of time required to process a referral that warrants examination for potentially prohibited activity from the date it is received to the date first contact is made with the tax-exempt organization advising it that it might be involved in a prohibited political activity. However, the amount of time taken to perform each individual activity was not always tracked, which limits EO function management's ability to pinpoint the source of processing delays.
In addition, employees within the EO function did not always understand why certain referrals were not included in the Initiative. Employees responsible for initially identifying and researching referrals with alleged political intervention identified 12 referrals (in addition to the 100 referrals selected for the 2006 Initiative) that were not included in the Initiative, despite having issues similar to referrals that were included in the Initiative. However, upon reviewing the information, the Referral Committee responsible for fairly and impartially considering whether referrals have examination potential decided that the referrals did not meet the criteria for the Initiative. We believe that it is appropriate for an experienced, independent Referral Committee to reject referrals for the Initiative under certain circumstances, and we understand that criteria cannot be written to address every situation. However, we also believe that due to the sensitivity of the referrals involving potentially prohibited political activities, all employees must clearly understand what should be included in the Initiative.
Recommendations
We recommended that the Director, EO, ensure that all referrals of potentially prohibited political intervention are reviewed in a timely manner. To ensure the success of the Initiative, all significant activities should be tracked to ensure that adequate staffing is available to meet the EO function's established timeliness goals. In addition, we recommended that the Director, EO, seek to improve the consistent understanding of prohibited political intervention criteria within the EO function.
Response
The Commissioner, TE/GE Division, agreed with our findings with respect to these issues and has completed several corrective actions to address the recommendations in our report. These actions include 1) continuing to monitor established timeliness goals in the 2008 Initiative, 2) modifying the timeliness goals to accommodate a new electronic case processing system, 3) continuing the policy requiring the Referral Committee to review political activity referrals on an as-required basis, 4) starting the 2008 Initiative earlier than the 2006 Initiative to reduce backlog, 5) reminding all personnel of the importance of the expedited time periods, and 6) training 30 additional agents on the Initiative to increase the TE/GE Division's ability to handle caseload in a timely manner. In addition, Division management ensured that all employees involved in the 2008 Initiative received the same training on political campaign intervention by Internal Revenue Code Section 501(c)(3) organizations and instituted a process for the Referral Committee to provide feedback to the EO Classification function staff concerning why a referral was not selected for the Initiative.
The Commissioner, TE/GE Division, also provided perspective on how the Division processes referrals of potentially prohibited political activities by tax-exempt organizations. Management's complete response to the draft report is included as Appendix IV.
Office of Audit Comment
The Commissioner, TE/GE Division, provided alternate corrective actions for our recommendation to ensure that all referrals of potentially prohibited political intervention are reviewed in a timely manner. Actions such as training additional personnel to handle the caseload and starting the Initiative earlier in the year could help the IRS to better meet its timeliness goals. We agree with the alternate corrective actions and suggest that Division management continue to monitor timeliness goals and take additional actions if referrals are not processed in a timely manner.
Copies of this report are also being sent to the IRS managers affected by the report recommendations. Please contact me at (202) 622-6510 if you have questions or Nancy A. Nakamura, Assistant Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs), at (202) 622-8500.
As a result, these organizations are prohibited from endorsing candidates, making campaign donations, engaging in fundraising, distributing statements, or becoming involved in any other activities that may be beneficial or detrimental to any particular candidate. For example, allowing a candidate to use an organization's assets or facilities would violate the prohibition if other candidates are not given the same opportunity to use the organization's assets or facilities. Activities that encourage people to vote for or against a particular candidate on the basis of partisan criteria are also prohibited.
Referrals concerning potentially prohibited activities are received in the Exempt Organizations (EO) Classification function, where employees research the issue presented in each referral by gathering supporting evidence. This evidence is then provided to an independent, experienced group of EO function employees, known as the Referral Committee.2 The Committee considers the referral and supporting evidence and decides whether the referral warrants an examination. Referrals that the Committee determines warrant examination are forwarded to an EO Examination function group that notifies the tax-exempt organization that it will be investigated for potentially prohibited political activity.
The prohibition against political activities for charities and churches has existed since the 1954 revision of the Internal Revenue Code. However, in the 2004 election cycle, the Internal Revenue Service (IRS) recognized that referrals of potential political intervention by charities and churches were increasing. In response, the IRS initiated a Political Activities Compliance Initiative (the Initiative) in June 2004. The Initiative expanded on the IRS' prior educational efforts to remind tax-exempt organizations about the prohibition against political activities and the consequences of violating the prohibition. The IRS also enhanced its enforcement program to move quickly on specific, credible referrals of prohibited activities by expediting the processing of referrals to more quickly notify tax-exempt organizations when the IRS was reviewing potentially prohibited political activities. The enforcement program will also determine:
After the completion of our previous audit, the EO Examination function continued to work the examinations of potentially prohibited political activity as part of the 2004 Initiative. As shown in Figure 1, IRS results from the 2004 Initiative substantiated that tax-exempt organizations were engaging in prohibited political activity.
Figure 1: Results of 2004 Initiative
IRS Examination Action Taken by Number of Percentage
Results the IRS Cases of Cases
Prohibited Political Written Advisory
Activities Identified Sent to Tax-Exempt 71 65%
Organization
Tax-Exempt Status 5 5%
Revoked
No Prohibited Political Closing Letter Issued
Activities Identified to Tax-Exempt 29 26%
Organization
Pending Pending 5 5%
Total Examination Cases 110 100%
Source: IRS political activity campaign database as of January 25,
2008.4
Because a high number of the organizations examined in the 2004
Initiative were found to have engaged in prohibited political activity,
the TE/GE Division enhanced the process to expedite the processing of
potentially prohibited political activity referrals for the 2006
election cycle in an attempt to stop prohibited activities before the
relevant election. In addition, Division management anticipates a
vigorous 2008 election cycle and has pledged in media reports to follow
up on all referrals judged worthy of pursuit.
This review was performed at the National Headquarters of the TE/GE Division in Washington, D.C.; the EO Examination function in Dallas, Texas; and the EO Examination field office in Independence, Ohio, during the period July 2007 through January 2008. Similar to our previous audit, we did not assess the results of examinations or determine whether the activities by the tax-exempt organizations involved potentially prohibited political activity.
We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
Educational Activities Were Enhanced and Procedures Were Improved
The TE/GE Division has enhanced its efforts to educate tax-exempt organizations (specifically charities and churches) about prohibited political activities, including the enforcement consequences of engaging in these types of activities. The Division effectively accomplished this since our last report in February 2005 by completing the following activities:5
The EO function increased its efforts to educate tax-exempt organizations about prohibited political activities and improved some internal processes. However, additional improvements can be made to ensure that tax-exempt organizations receive timely notification that they might be involved in prohibited political activity. Also, the EO function needs to clarify why certain referrals are not included in the Initiative. These actions should increase the likelihood that tax-exempt organizations will stop the prohibited activities before the relevant election and that tax-exempt organization activities will be evaluated consistently and fairly.
Improving data collected on timeliness could help the EO function meet its timeliness goals
The EO function created more detailed timeliness standards for evaluating referrals (e.g., it set specific timeliness goals for EO Classification function employees to process referrals and for EO Examination function employees to establish contact with tax-exempt organizations). However, it did not always meet the timeliness standards. As a result, tax-exempt organizations might not be notified prior to the relevant election, thereby providing less assurance that prohibited political activities will cease prior to the relevant election.
Referrals were not always researched in a timely manner and evaluated for examination potential by employees in the EO Classification function. In addition, referrals were not directed in a timely manner to employees responsible for contacting the organization and conducting the examination in the EO Examination function groups. Overall, 63 of the 100 referrals selected for examination in the 2006 Initiative were not processed in a timely manner using the established expedited process. As noted in Figure 2, about 20 percent of the cases missed the IRS' expedited timeliness goals by more than 30 calendar days.
Figure 2: Referral Processing Time for
the 2006 Initiative
Referrals Timeliness Timeliness Timeliness
That Missed Goals Missed Goals Missed Goals Missed
the by Fewer by Between by More
Expedited Than 16 and Than
Referrals Timeliness 16 Calendar 30 Calendar 30 Calendar
Reviewed Goals Days Days Days
Referrals
Involving 43 30 7 8 15
Churches
Referrals
Involving 57 33 19 8 6
Charities
Total
Initiative 100 63 26 16 21
Referrals
Source: Analysis of the EO function's timeliness reports for the
2006 Initiative.7
The EO function tracks the amount of time required to process a
referral that warrants examination for potentially prohibited activity
from the date it is received in the EO Classification function to the
date first contact is made with the tax-exempt organization advising it
that it might be involved in a prohibited political activity. The
amount of time taken by the various segments of the EO function, such
as Classification, EO Counsel (for church referrals), and the
Examination groups, is also separately tracked.
However, the amount of time taken to perform each individual activity within the EO Classification function was not always tracked, which limits EO function management's ability to pinpoint the source of processing delays. In addition, the EO function has not set specific timeliness goals for each activity in the Classification function. Individually tracking the amount of time it takes to 1) research and build a case for the Referral Committee to review, 2) determine if an examination is warranted, and 3) assign a referral to an EO Examination function group would enable EO function management to better identify and remedy bottlenecks in the processing of referrals.
After the 2006 election cycle, the EO function analyzed the referrals to assess delays by reviewing referrals involving churches included in the 2006 Initiative and concluded that the referrals generally did not meet processing time standards due to backlogs in the EO Classification and Examination functions. The primary reasons for the delays included 1) having insufficient staff to work referrals in the Classification function due to scheduled vacation time and 2) the EO function not always applying the time standards for expediting Initiative referrals because some Examination groups had become saturated with cases identified from the referrals.
The Director, EO, advised us that the decision to not track individual activities was purposeful so that the EO Classification function would have greater flexibility for prioritizing the work. However, having additional data to determine where bottlenecks might be occurring would provide the EO function with information needed to adapt to increasing receipts by ensuring that appropriate staffing is available to meet established timeliness goals.
Improving communication among different employees involved in processing referrals would increase understanding of referral criteria
While the EO function enhanced its efforts to educate tax-exempt organizations about prohibited political activities by providing examples of prohibited activities and through other educational activities, employees within the EO function did not always understand why certain referrals were not included in the Initiative. Employees responsible for initially identifying and researching referrals of alleged political intervention identified 12 referrals (in addition to the 100 referrals selected for the 2006 Initiative) that were not included in the Initiative, despite having issues similar to referrals that were included in the Initiative. Upon reviewing the information, the Referral Committee decided the referrals did not meet the criteria for the Initiative. However, the Referral Committee determined that the referrals needed to be examined and used its discretion to forward the referrals for examination outside of the Initiative. Examinations conducted outside the Initiative are not subject to expedited time standards and are not given priority over non-Initiative cases. In addition, examiners may use their discretion to close non-Initiative cases without conducting the examination due to other priority work.
We reviewed copies of the 12 referral files and concluded that there were indications of prohibited political activity,8 but we did not make a determination as to whether the referrals should have been included in the Initiative. We believe that it is appropriate for an experienced, independent Referral Committee to reject referrals for inclusion in the Initiative under certain circumstances, and we understand that criteria cannot be written to address every situation. However, we also believe that sound management practices dictate that due to the sensitivity of the referrals involving potentially prohibited political activities, all employees must be aware of and clearly understand criteria for determining what referrals should be included in the Initiative.
One reason this might have occurred is that not all employees received the specialized training for the 2006 Initiative. In addition, EO function employees who provide cases to the Referral Committee might not receive adequate feedback in the case file when a case is rejected for the Initiative. Providing the same training to all employees involved in the Initiative and ensuring adequate feedback from the Committee as to why a referral is not selected would clarify what constitutes prohibited political activity and provide better assurance that all organizations potentially involved in prohibited political activities are being treated consistently and fairly.
Recommendations
The Director, EO, should:
Recommendation 1: Ensure that all referrals of potentially prohibited political activities are evaluated in a timely manner by:
Management's Response: TE/GE Division management agreed with the finding, and they have completed several corrective actions to address this recommendation. The Division analyzed the timeliness data in the 2006 Initiative to determine whether the timeliness goals should be modified but believed that any further sub-division of these goals, particularly in the Classification stage, would impede its flexibility in meeting these goals. Division management plans to maintain the same goals as those employed in the 2006 Initiative, with one modification as noted in the first bullet below. The Division will, however, continue to monitor its timeliness goals in the 2008 Initiative. Management has taken the following actions to improve the Division's ability to meet the timeliness goals:
Office of Audit Comment: The Commissioner, TE/GE Division, provided alternate corrective actions for our recommendation to ensure that all referrals of potentially prohibited political intervention are reviewed in a timely manner. Actions such as training additional personnel to handle the caseload and starting the Initiative earlier in the year could help the IRS to better meet its timeliness goals. We agree with the alternate corrective actions and suggest that Division management continue to monitor timeliness goals and take additional actions if referrals are not processed in a timely manner.
Management's Response: TE/GE Division management agreed with this recommendation and has implemented corrective actions. All employees involved in the 2008 Initiative, including the members of the Referral Committee, received the same training on political campaign intervention by Internal Revenue Code Section 501(c)(3) organizations. In addition, Division management instituted a process for the Referral Committee to provide feedback to the EO Classification function staff concerning why a referral was not selected for the Initiative.
2 The Referral Committee is comprised of three members who are experienced EO function technical employees (e.g., senior examiners, function specialists, group managers, or area managers). The Committee's responsibility is to fairly and impartially consider whether information items referred have examination potential.
3 Review of the Exempt Organizations Function Process for Reviewing Alleged Political Campaign Intervention by Tax Exempt Organizations (Reference Number 2005-10-035, dated February 2005).
4 We did not verify the information provided by the EO function. Percentages might not add up to 100 percent due to rounding.
5 Review of the Exempt Organizations Function Process for Reviewing Alleged Political Campaign Intervention by Tax Exempt Organizations (Reference Number 2005-10-035, dated February 2005).
1 * * *
7 We did not verify the accuracy of this information.
8 We determined that there were indications of potentially prohibited political activities by comparing the referrals to the 2006 Fact Sheet, applicable revenue rulings, EO function Initiative training documents, and EO function educational materials.
I. Reviewed actions taken by TE/GE Division management since our February 2005 report2 to educate Section 501(c)(3) organizations about their responsibilities related to political activities.
B. Obtained any press releases, letters, or other correspondence/documentation issued by the TE/GE Division to assess the adequacy of management's corrective actions to recommendations made in our prior report.
C. Interviewed EO function management to determine current plans for the 2008 election year and whether any changes in the process will be made based on the results of the Political Activities Compliance Initiative (the Initiative).
B. Obtained any procedures or documentation related to the revamping of the existing process for receiving and reviewing referrals of political campaign intervention to assess the adequacy of management's corrective actions to recommendations made in our prior report.
C. Evaluated processes for capturing Initiative results and assessed whether all referrals were included in the Initiative's results.
D. Reviewed cases identified as potentially not being captured in the Initiative and assessed whether they contained indications of prohibited political activity.
IV. Determined whether EO function actions to date have detected repeat potential political campaign intervention by Section 501(c)(3) organizations.
B. Obtained any procedures or documentation related to identifying and addressing repeat allegations of political campaign intervention by Section 501(c)(3) organizations.
C. Reviewed the results of any actions taken since the issuance of our prior report to determine whether any repeat allegations of political campaign intervention have been identified and addressed.
We obtained an extract of the EO function's referral database. Validations performed included ensuring that only appropriate data were included in each field and that the time period for the data met our requirements. We determined that the data were sufficiently reliable for our use.
Internal controls methodology
Internal controls relate to management's plans, methods, and procedures used to meet their mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations. They include the systems for measuring, reporting, and monitoring program performance. We determined that the following internal controls were relevant to our objective: the EO function's policies, procedures, and practices for planning, managing, and monitoring the Initiative. We evaluated these controls by interviewing management, reviewing applicable information, and analyzing referrals with potential political activity.
2 Review of the Exempt Organizations Function Process for Reviewing Alleged Political Campaign Intervention by Tax Exempt Organizations (Reference Number 2005-10-035, dated February 2005).
Your report notes that our educational efforts and improved internal processes have resulted in substantial improvements in the PACI program. You also suggest several additional improvements to better meet our timeliness goals and to provide training to EO employees involved in the PACI program. We agree with TIGTA's findings with respect to these issues and have already completed corrective actions to address the recommendations in your report. As noted in the attachment, we have taken a number of steps to achieve our timeliness goals in the 2008 PACI program and have provided training to all EO employees involved in it.
I wish to comment briefly on your discussion of the 12 referrals that the PACI Referral Committee did not select for the PACI program, but did forward for examination under the general program. The report accurately notes that "[e]xaminations conducted outside the initiative are not subject to expedited time standards and are not given priority over non-Initiative cases." With respect to the 12 referrals, the PACI Referral Committee, in the exercise of its responsibility, determined that they did not merit examination on the issue of political campaign intervention by a section 501(c)(3) organization. The committee found, however, that they did merit examination on some other issue. Because these cases were ultimately referred to Examination for issues other than political campaign intervention by a section 501(c)(3) organization, it is appropriate that they were not processed in accordance with the expedited time standards and priority of PACI.
The report also discusses the need for the Referral Committee to provide feedback to Classification staff as to why a referral was not selected for examination. Classification staff does not make recommendations on whether or not a referral warrants examination under the PACI procedures. Our procedures call for them to forward all allegations of political campaign intervention to the Referral Committee. It is then the responsibility of the Referral Committee to determine whether the allegation has sufficient merit for further action. The independence of the Referral Committee is the core of the PACI system's integrity. Nevertheless, in our continuing efforts to educate staff on these issues we have instituted a process for the Referral Committee to provide feedback to Classification staff concerning why a referral was not selected for examination.
Our response to your recommendations appears on the attachment.
Attachment
Recommendation 1
Ensure that all referrals of potentially prohibited political activities are evaluated in a timely manner by:
We agree with this finding but have implemented a corrective action different from the one recommended by TIGTA. We have analyzed the data concerning timeliness in the 2006 PACI cycle. We believe that any further sub-division of the timeliness goals, particularly in the Classification stage, would impede our flexibility in meeting these goals. We therefore do not plan to further sub-divide these goals. Nonetheless, we will continue to monitor our timeliness goals in the 2008 PACI cycle and have taken the following actions to improve our ability to meet the timeliness goals:
Completed
Responsible Official
Director, EO Examination
Recommendation 2
Seek to improve the consistent understanding of prohibited political intervention criteria within the EO function by ensuring that:
We agree with this recommendation and have implemented the following corrective actions. All employees involved in the 2008 PACI, including the members of the Referral Committee, have received the same training on political campaign intervention by section 501(c)(3) organizations. We have instituted a process for the Referral Committee to provide feedback to Classification staff concerning why a referral was not selected for the PACI program.
Implementation Data
Completed.
Responsible Official
Director, EO Examination