IRS's National Taxpayer Advocate: Exempt Organizations Division May Have Violated the Law

    In a mid-year report to Congress, National Taxpayer Advocate Nina E. Olson weighed in on the controversy surrounding the IRS's review of exempt organization (EO) applications.  The Taxpayer Advocate Service (TAS) "is an independent organization within the IRS and helps taxpayers resolve problems with the IRS and recommend changes that will prevent the problems."  Although Olson noted that "the Advocate’s office does not have investigative authority and did not seek to duplicate other ongoing investigations," the IRS came under harsh criticism for its vague policies and lack of transparency, and even possible violation of the law.

The EO Function Did Not Post Its Procedures on the Internet, Potentially Violating the Law and Contributing to the Problem. The IRS is required to post on its website all “instructions to staff that affect a member of the public,” unless an exemption applies.  Even if an exemption applies, IRS functions should clear most guidance internally with affected program owners and “specialized reviewers” such as TAS.  EO did not clear with TAS or post on the Internet, even in redacted form, relevant training materials, form letters used to request additional information, the screening checksheet used by EO employees in the determinations process, and other key documents.  EO’s failure to clear its procedures with TAS and other stakeholders bypassed an important safeguard of taxpayer rights.

Had these documents been vetted by TAS, TAS would have had an opportunity to raise concerns before implementation. Had these documents been posted on the Internet, members of the public would have had access to them, providing greater transparency and enabling them to raise concerns about improper practices. Key EO documents still are not posted to the Internet, and TAS has not been able to locate them on the IRS intranet. The Tax Exempt and Government Entities Division (TE/GE), of which EO is a part, has agreed to share its guidance with TAS. The Advocate recommends that the IRS adopt more expansive disclosure policies both in TE/GE and throughout the IRS.

    Among the other problems cited by the report:

• The IRS’s Processing of Section 501(c)(4) Applications Violated Fundamental Taxpayer Rights. 
• Applicants for Exempt Status (and Other Taxpayers) Have No Easily Available Remedy for the Violation of Their Rights. 
• Congress No Longer Holds Joint Annual Oversight Hearings to Review IRS Challenges and Performance.
• EO Management Did Not Maintain an Adequate Inventory Management System.  
• EO Management Did Not Ensure that Requests for Guidance Received a Timely Response.
• EO Executives Resisted TAS’s Authority to Order Expedited Processing of Tax-Exemption Applications, and Thereby Isolated EO from TAS.
• EO Employees Did Not Refer Over-Aged Cases to TAS.
• EO Employees Did Not Report the Systemic Delays in EO Processing to TAS.  

Note: A version of this article first appeared at The Weekly Standard.