TIGTA Recommends Training and Procedural Changes for EO Determinations

From TIGTA‘s report, issued December 19, 2022:

Why TIGTA Did This Audit

This audit was initiated at the request of 13 U.S. Senators. The overall objective of this audit was to evaluate the Tax Exempt and Government Entities Division’s oversight controls and procedures when issuing proposed adverse Internal Revenue Code (I.R.C.) § 501(c)(3) tax-exempt status determination letters.

What TIGTA Found

Determination case files were sometimes incomplete, and employees did not always document actions taken when processing proposed and final adverse determinations. Our review of all 68 proposed adverse determination case files closed in Fiscal Year 2021 identified 40 (59 percent) case files that were missing required documents or information needed to support the actions taken by EOD specialists and Quality Assurance reviewers. For example, in 18 (26 percent) of 68 cases, EOD specialists did not document their manager’s concurrence with the proposed adverse determination, as required. Due to the missing documentation, TIGTA could not always confirm that EOD specialists and Quality Assurance reviewers completed all the necessary actions to process proposed adverse determinations. In addition, EOD management does not always effectively use Quality Measurement Process results to address identified quality issues. The Quality Measurement Process evaluates work quality in four categories of accuracy and timeliness measures. Although the overall quality score for the four categories evaluated averaged 82 percent in Fiscal Year 2021, individual attributes received far less favorable ratings. For example, Fiscal Year 2021 quarterly reports consistently indicated low scores for the “Timely Actions Taken” attribute. Finally, EOD management has not established quantifiable goals for quality review results. Goals help measure how organizations perform relative to its past performance and shows the progress in management’s efforts to improve the quality of programs. EOD specialists, Quality Assurance reviewers, and managers received religious, civil, and Constitutional rights training on how to determine if an organization is a church and were participants in discussions about the Bill of Rights and the Civil Rights Act of 1964, including the freedom of religion and nondiscrimination based on religion.

What TIGTA Recommended:

TIGTA recommended that the Director, Exempt Organizations: 1) ensure that EOD specialists complete, and managers review, all required actions when processing proposed denials of tax exemption; 2) require EOD specialists to fully document discussions with taxpayers and actions taken; 3) require Quality Assurance reviewers to document that applicants did not submit a protest; 4) provide refresher training to EOD specialists and Quality Assurance reviewers; 5) ensure that actions taken to address common quality deficiencies resolve the issues; and 6) develop baseline goals for quality review scores and adjust them periodically, as needed. IRS management agreed with all six recommendations and plans to take corrective actions.

This article summarizes the report, and quotes EOD’s response (the full response is included in the report):

In response to the report, Eric Slack director of employee plans at the IRS’s Tax-Exempt and Government Entities division, pointed out that in fiscal year 2021, the IRS closed approximately 90,000 applications for Section 501(c)3 status, approving approximately 78,000 of them and denying only about 60 applications, while around 12,000 were closed in other ways, such as withdrawal by the applicant before a determination was made.

“We make determinations of tax-exempt status based solely on the facts, attestations and representations in the administrative file of each individual case,” he wrote. “We are committed to respecting taxpayer rights in this process, including the right to be informed, to challenge the IRS’s decision and be heard, and to appeal the IRS’s position in an independent forum.

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