The IRS doesn't have the manpower to go after charities that flout the law, and it could do more to help state regulators target crooked operators, according to a federal watchdog report made public today.
The U.S. Government Accountability Office also flagged the revenue service for failing to track how well its charity regulators are doing their jobs.
"Clearly the IRS is failing to ensure charitable groups fully comply with the law, or even meet the minimum standards for receiving such preferential tax status," Sen. Tom Coburn, R-Okla., wrote last year in a letter requesting the review.
Coburn made the request in response to an investigation by the Tampa Bay Times and the Center for Investigative Reporting that showed lax regulation has allowed the same charities to spend virtually nothing on the needy for years.
The 66-page report focused on the tax-exempt organizations division of the IRS, where staffing has shrunk in the face of repeated budget cuts — and where regulators are bracing for still more cuts written into a federal budget bill that passed Congress last week.
"I think that the IRS in the tax-exempt area has some talented people, but they're clearly spread way too thin," said Jack Siegel, a Chicago attorney who runs a charity consulting firm. "You can't keep cutting an organizations's funding and expect it to do a job that you want it to do."
The GAO report found that the number of charities audited by the IRS is falling alongside staffing levels. The report notes that only 0.7 percent of the charities who file tax returns are reviewed, compared to 1 percent of individual taxpayers and 1.4 percent of corporations.
The report also says the IRS could be more clear with state regulators, who can be hampered by federal privacy laws, about what data they can glean from IRS files to help build cases against bad actors.
The report also recommended that Congress act to require more charities to file electronic tax returns — which would cut down on labor and make the IRS' job easier.
The Times and CIR spent a year investigating nonprofits across the country and identified the worst charities based on the money paid to for-profit fundraising companies over a decade.
Reporters also collected data from regulators in more than 40 states to piece together the first national list of regulatory actions against charities. Previously, regulators in one state had no systematic way to check if a charity had been in trouble somewhere else.
Reporters found that government regulation was so lax that charities and fundraisers banned in one state could simply move and re-open in another.