TlGTA Issues Report on Political Organizations' Filing Compliance

By Bruce R. HopkinsNovember 15, 2010 | Print
The Treasury Inspector General for Tax Administration OIGTA) issued a report, dated February 4 and made public in late August, on the filing compliance of political organizations (IRC § 527 entities) (201 0-1 0-01 8).

The essence of this report is that, while the IRS's Exempt Organizations (EO) function has taken action to identify noncompliant political organizations, EO function management "should focus on increased enforcement actions" for these entities. TlGTA is of the view that, with this additional focus, the EO function will "promote the full and accurate disclosure of political organizations' financial information, which will help the public gain an accurate understanding of political organizations' activities (e.g., tracking the flow of funds related to legislative issues and political campaigns)."

Law

To be tax-exempt, political organizations are required to notify the IRS of their existence by filing Form 8871 There are reporting and disclosure requirements, involving filing of Form 8872. A category of political organization is termed a qualified state or local political organization; these entities are required to notify the IRS of their existence but report their contribution and expenditure information to their respective states.

The IRS outlined six requirements for political organizations to meet in order to claim reasonable cause for failure to report all required information about their contributors (Rev. Proc. 2007-27 (see the May and June 2007 issues)). Failure to meet all six requirements may be considered willful neglect for the incomplete filings, leading to the assessment of penalties.

TIGTA Review

TlGTA provided four reasons why the IRS "has not fully addressed" political organizations' filing noncompliance. One, 25 percent of the Forms 8872 it reviewed had incomplete or missing contributor or recipient information. Two, the IRS is not reviewing these filings to determine if they are complete or if penalties should be imposed. Three, the IRS is not always issuing notlcc, at the appropriate time that include all the information needed by political organizations to become compliant. Four, the IRS is not following up on information it has requested from political organizations to verify compliance.

Following a TlGTA review in 2005, the IRS took steps to better enable it to identify noncompliant political organizations. It established electronic tax accounts to track the activity of organizations filing Forms 8871 and 8872, issuing notices informing political organizations of untimely and missing forms, providing more detailed instructions to political organizations that improved the completeness of Form 8872 filings, and initiating a compliance project focused on the filing compliance of qualified state or local political organizations.

TlGTA is of the view that there is $5.3 million in additional taxes and penalties to be collected from political organizations, either for receiving contributions before filing a Form 8871 or filing an incomplete or late Form 8872.

TlGTA Recommendations

TlGTA recommended that the EO Division (1) conduct periodic reviews to determine whether political organizations are submitting complete Forms 8872; (2) develop procedures for reviewing responses and following up on nonresponses to notices, including assessing additional taxes or penalties as appropriate; (3) correct untimely and missing Form 8872 notices; and (4) revise Forms 8871 and 8872 and their instructions to improve compliance.

TEIGE Division Response

The commissioner of the Tax Exempt and Government Entities (TEIGE) Division generally agreed with TIGTA's recommendations and has plans to address them. The EO function is developing procedures for performing periodic reviews of a sample of Forms 8872 for compliance as well as procedures for reviewing reports of notices generated and notice responses. A request for changes to untimely and missing Form 8872 notices is being prepared for submission to the Modernization and Information Technology Services organization. Revision of Form 8871 instructions will be completed to clarify how to report any tax due to untimely filing. The EO Rulings and Agreements function will evaluate the resources required to implement the recommended changes to Form 8872 and initiate changes where it is reasonable to do so.

TlGTA Response

TlGTA observed that its $5.3 million "outcomes measure" represents the total amount of additional tax and penalties that could be assessed for the untimely filing of Forms 8871 and 8872 ($1.9 million) and incomplete filing of Forms 8872 ($3.4 million). TlGTA wrote that it recognizes that some of this amount may not be assessed due to reasonable cause. Nonetheless, it could not "quantify the lesser amount" because the IRS "has not conducted enforcement actions on these filings to determine the reasons for the noncompliance."

Thus, "until appropriate enforcement action is taken on noncompliant political organizations, there is an increased risk that these organizations may continue to submit untimely and incomplete Forms 8871 and 8872 for which additional tax and penalties would be appropriate." Consequently, TlGTA remains adamant that the "$5.3 million outcome measure is still an accurate reflection of the amount of additional taxes and penalties that could potentially be assessed." [27.5]

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