January 6, 2011; Source: Government Executive (National Journal) | According to the Internal Revenue Service’s Taxpayer Advocate’s FY2010 report to Congress, (PDF) the IRS is stretched pretty thin for its current work, not even taking into account new planned roles, such as in the monitoring of health care reform.  How will this affect nonprofits?

Among other things, the report suggests that the variety of programs that require IRS payouts, such as the Making Work Pay Tax Credit, the Homebuyer Tax Credit, and the Earned Income Tax Credit, force the IRS to divert resources away from the function of collecting taxes. 

The Advocate’s main role is to advocate for the taxpayer and much of this is focused on regular taxpayers, charging that various enforcement tactics are “tormenting” taxpayers and IRS compliance requirements are sometimes burdensome and counterproductive but this concern is also extended to nonprofits.

For nonprofits, the Tax Exempt and Governmental Entities (TEGE) unit ensures that nonprofits are staying true to the requirements of federal charitable tax status. The changes in the Form 990 have put the IRS in the position of monitoring and enforcing charitability and examining issues of nonprofit governance, but the TEGE unit has always been grossly underfunded to monitor charities and other tax exempts. 

The Advocate’s report specifically addresses nonprofits in one section, with a recommendation to limit the retroactive effect of IRS revocations of tax-exempt status. 

In other words, the change would limit the IRS’s ability to use information from closed tax years, say more than three years old, from being used to justify a current revocation of a tax exemption and, alternatively, limit the IRS’s ability to go back in time to revoke a tax exemption (which would potentially unsettle actions such as the organization’s already consummated tax exempt bonding or its receipt of tax deductible charitable contributions). 

While funding for the IRS is not subject to federal spending caps, it would appear that the new responsibilities increasingly being dumped on them, and particularly its upcoming role in health insurance reform, will make IRS oversight of the nonprofit sector more challenged than ever.—Rick Cohen