‘The Better Part of Valour Is Discretion’: Should the IRS Change or Surrender Its Oversight of Tax-Exempt Organizations?

Source: Lloyd Hitoshi Mayer, Notre Dame Legal Studies Paper No. 1523, September 9, 2015

From the abstract:
Recent events have highlighted the difficulties the Internal Revenue Service faces when attempting to ensure that purportedly tax-exempt organizations in fact qualify for that status. The problems in this area go much deeper than a group of IRS employees subjecting certain organizations to greater scrutiny based on their political leanings, however. For decades members of the public, the media, the academy, and Congress have criticized the limited ability of the IRS to ensure that organizations claiming exemption from federal income tax in fact deserve that categorization. Yet examples of IRS failings in this area continue to arise with depressing frequency. This is not surprising given that oversight of exempt organizations is but one of many areas that suffers from major difficulties faced by the IRS as a whole, including shrinking resources, growing responsibilities, and increasing responsibility for determinations that go beyond those necessary for revenue collection. As detailed in Part I of this Article, these difficulties have rendered the IRS unable to keep pace with the growth of the exempt organizations sector over the past 40 years.

One of the latest such initiatives suggests a new approach, however. In 2014 the IRS introduced the much shorter and simpler Form 1023-EZ application for nonprofit organizations that claim exempt charitable status and expect to have only modest financial resources, accompanied by faster procedures for handling all applications for recognition of exemption. These innovations represent the first significant permanent reduction in the level of oversight the IRS provides in this area since the introduction of a shorter version of the annual information return required for most exempt organizations. The questions they raise are whether such a reduction of oversight is in fact prudent, and whether other reductions might also be advisable. Part II of this Article draws on tax compliance literature to explore how the current level and methods of oversight for exempt organizations could be modified to improve compliance even given the existing resource constraints. It concludes that while marginal improvements in oversight are possible, there is no silver bullet to counter the IRS’s growing inability to oversee this area.
Part III of this Article therefore turns to more radical proposals that would move the locus of oversight for exempt and particularly charitable organizations out of the IRS. The proposal that shows the most promise, but also is the most risky, would shift much of this role to a private, self-regulatory body overseen by the IRS. The current crisis highlights the need to pursue this proposal now.