Background Charitable Contributions Section 501 of the Internal Revenue Code provides for tax-exempt status of certain corporations, trusts, and other organizations. This status allows qualifying organizations to claim exemption from federal income taxes. Subsection (c) of section 501 recognizes 28 categories of tax- exempt organizations, ranging from cemetery companies to multiemployer pension plan trusts. Section 501(c)(3), the section that recognizes charitable organizations, applied to approximately 1.3 million organizations in fiscal year 2017. These groups represent the largest number of 501(c) organizations. Federal tax law permits individual taxpayers and organizations to reduce their tax liability by deducting contributions to charitable organizations on their income tax returns. Individual taxpayers may deduct the amount of a contribution to charitable organizations from their gross income if they itemize their deductions. Charitable organizations provide many types of assistance, such as services for the aging or food and shelter for those in need. Taxpayers may support these activities by making contributions in the form of financial donations or in-kind gifts to qualified organizations. Federal law allows taxpayers to deduct charitable contributions from their adjusted gross income (AGI). This policy has been in place since 1917. An individual taxpayer may deduct up to 60 percent of his or her AGI for cash contributions, with 20 percent to 30 percent limits applying in some cases. A corporation may claim a limited deduction for charitable contributions made in cash or other property up to 10 percent of its taxable income for the year. Charitable Organizations An entity seeking tax-exempt status under 501(c)(3) from IRS must submit either a completed Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, along with organizing documents, or a completed Form 1023-EZ. Both Form 1023 and Form 1023-EZ require the entity seeking recognition of its tax- exempt status to provide information regarding its charitable purpose, as well as certain financial data. IRS employees then review the forms to determine the entity’s eligibility for tax-exemption status. Most tax-exempt charitable entities are required to file an annual information return from the Form 990 series. Certain small entities with gross receipts that are normally $50,000 or less may file Form 990-N Electronic Notice providing abbreviated information. Although the entity is filing its information return as a tax-exempt organization, the entity must pay employment taxes and taxes on unrelated business income, if applicable. IRS provides programs and products to help the entity understand specific issues related to its tax responsibilities. IRS’s Auditing History IRS personnel can audit an organization’s or individual’s submitted tax returns and financial information to verify that the reported tax is correct. IRS personnel audited 933,785 individual income tax returns in fiscal year 2017, according to IRS data. This was 0.6 percent of individual returns filed in calendar year 2016. From fiscal year 2006 to fiscal year 2017, the largest number of individual returns IRS audited was 1,564,690 in fiscal year 2010. There was a decrease in audits of individual tax returns after fiscal year 2011, which occurred about the same time that IRS’s budget declined by about $2.1 billion (15.7 percent) from fiscal years 2011 through 2018, after adjusting for inflation. Concurrent with IRS’s declining resources were increasing responsibilities, such as implementing aspects of the Foreign Account Tax Compliance Act and the Patient Protection and Affordable Care Act. We reported in 2014 that budget cuts had resulted in a significant staffing decline and uneven performance at IRS. In March 2019, we reported that IRS was in the early stages of defining and addressing its workforce needs, but IRS officials stated that there was room for improvement in implementing its workforce plans, and that it was working on a corrective action plan that would address deficiencies noted in our report. IRS’s Primary Operating Divisions The operating divisions that, along with conducting audits, carry out service and enforcement, and that deal most often with abusive tax schemes or tax-exempt entities are TE/GE, SB/SE, and LB&I. These divisions interact with taxpayers and entities that file tax returns. In particular, each of the three divisions may audit taxpayers or entities to determine whether information filed was reported accurately. IRS has set one of its cross-divisional objectives as identifying “new types of tax transactions or promotions that are either abusive or potentially abusive requiring different levels of coordination and varying strategies.” Another of TE/GE’s audit objectives is to “promote the highest degree of voluntary compliance with the statutes governing qualification of plans and exemption of certain types of organizations from tax and to determine the extent of compliance and the causes of noncompliance with the tax laws by plans and organizations.” TE/GE accomplishes this objective by auditing charitable organizations’ compliance with the tax code through its Exempt Organizations unit. In addition to this function, Exempt Organizations also reviews organizations’ tax-exempt status applications and makes tax-exempt status determinations. It also coordinates with other state and federal agencies. Additionally, it audits entities to identify and address noncompliance, where it may propose tax assessments or changes to the tax-exempt status of the audited entity. TE/GE uses various enforcement processes, such as referrals from the public and other parts of IRS and data-driven approaches, to select tax- exempt organization for possible audits. IRS projects that Exempt Organizations will receive approximately 1.6 million filings from tax- exempt and government entities in fiscal year 2019, primarily Form 990 series information returns. SB/SE mainly oversees small businesses and self-employed taxpayers and all other businesses with assets of less than $10 million. Examples of the types of businesses that SB/SE covers include small-business start-ups, small businesses with or without employees, taxpayers with rental properties, taxpayers with farming businesses, and individuals investing in businesses such as partnerships. Overall, IRS projects that SB/SE will receive approximately 59.4 million tax returns in fiscal year 2019. The Lead Development Center, an office within SB/SE, receives referrals from and facilitates communication between SB/SE and TE/GE on the subject of abusive tax schemes. LB&I oversees tax compliance of large partnerships, S Corporations, and C corporations with assets of $10 million or more, as well as individuals with high wealth (those with tens of millions of dollars in assets or earnings) or international tax issues. IRS projects that LB&I will receive approximately 400,000 corporate tax-return filings in fiscal year 2019. LB&I has developed a compliance strategy to identify potential issues that arise during audits of tax returns. LB&I also oversees the processing of reportable transaction disclosure filings by those involved in reportable transactions. A transaction includes all the factual elements relevant to the expected tax treatment of any investment, entity, plan, or arrangement. It also includes any series of steps carried out as part of a plan. Transactions become “reportable” (meaning a taxpayer must report it to IRS) when they fall under one or more of the following categories: listed transactions, confidential transactions, contractual protection transactions, loss transactions, and transactions of interest. A listed transaction is any transaction that IRS has identified as an abusive tax avoidance transaction and has identified in published guidance as a listed transaction. Taxpayers that have engaged in transactions that have tax consequences or tax strategies described in published IRS guidance are required by law to disclose the transaction to IRS. The fact that a transaction must be reported does not mean IRS will disallow the tax benefit, but IRS uses the reports to assess compliance. Appendix IV discusses reportable transaction types in greater detail. Taxpayers are required to disclose all types of reportable transactions on Form 8886, Reportable Transaction Disclosure Statement. Similarly, advisers helping taxpayers conduct reportable transactions are required to file Form 8918, Material Advisor Disclosure Statement. Tax-exempt entities are required to file Form 8886-T, Disclosure by Tax- Exempt Entity Regarding Prohibited Tax Shelter Transaction, when the entity is a party to a listed, confidential, or contractual protection transaction, and the entity knows the identify of any other party in the transaction. Tax-exempt entities that are party to a listed or confidential transaction may be subject to an excise tax of 100 percent of the income from the transaction. Transactions that require the filing of form 8886-T constitute a different, smaller range of activity than transactions requiring the filing of Form 8886. The Office of Tax Shelter Analysis, a unit within LB&I, supports LB&I’s work by coordinating its tax shelter planning and operations. This office also analyzes information collected from disclosure forms. According to IRS policy, if the Office of Tax Shelter Analysis determines a formal investigation is warranted, it presents the information to the LB&I Technical Tax Shelter Promoter Committee, an office within LB&I that has sole authority to approve any proposed investigations. Examples of Abusive Tax Schemes Illustrate Various Ways That Tax- Exempt Status Can Be Exploited by Individuals or Organizations Taxpayers seeking to reduce their tax liability through charitable donations may participate in legal tax planning strategies that allow them to maximize their deductions while giving to charitable organizations. In contrast to these legal tax planning strategies involving charitable donations, abusive tax schemes occur when taxpayers conduct transactions that are not supported by established law to improperly claim tax benefits, or that have no economic significance or business purpose other than the avoidance of tax, among other factors. IRS has long recognized that some charitable donors and tax-exempt organizations have engaged in abusive tax schemes. One such scheme can consist of a donor grossly overvaluing a charitable contribution to obtain a larger deduction on his or her filed tax returns. Another abusive tax scheme can entail a tax-exempt organization providing benefits to a private shareholder or individual. As we previously have reported, the abusive transactions that comprise abusive tax schemes have been a long-standing, ever-changing, and often hidden problem for IRS. The following three examples illustrate various ways that an entity’s tax- exempt status can be used in transactions that are not supported by law or are inconsistent with the law’s intent, and how otherwise legitimate tax- exempt activity can be exploited improperly. Syndicated Conservation Easements A conservation easement is a legal agreement that grants an organization the right to restrict the development and use of property for conservation purposes with the intent of preserving the land or buildings. If statutory requirements are met, taxpayers may donate an easement to a qualified organization and receive a charitable income tax deduction for the appraised value of the easement. A conservation easement becomes “syndicated” if a person or company promoting the easement (a promoter) offers multiple investors in a partnership or pass-through entity the opportunity to claim charitable deductions based on the value of the easement in return for cash. The Brookings Institution estimated that investments in syndicated conservation easements totaled $623 million in 2016, an increase of 29 percent from $484 million in 2015. It further estimated that because tax deductions from syndicated conservation easement contributions generate a benefit greater than the value of the investments themselves, the tax deductions resulted in federal tax revenue loss between $1 billion and $1.9 billion in 2015 and between $1.3 billion and $2.4 billion in 2016. According to IRS, in a syndicated conservation easement, promoters purchase land and convey ownership to a pass-through entity, such as a partnership. The promoters offer interests in the pass-through entity to prospective investors who are then able to deduct their share of the value of the easement as a charitable contribution. In its guidance, IRS said the conservation easement becomes noncompliant if, for example, the promoters obtain an appraisal that purports to be a qualified appraisal, but that greatly inflates the value of the conservation easement based on unreasonable assumptions about the development potential of the real property. Because the promoters inflate the value of the property, the investors may benefit by claiming a charitable deduction on their tax returns that exceeds their initial investment. Figure 1 shows the steps in the formation of a syndicated conservation easement and the point at which the easement becomes noncompliant when promoters obtain an inflated value for the easement. IRS has indicated its concern about the potential for abuse of conservation easements, whether syndicated or otherwise, when used in ways not supported by the law. In December 2016, the Department of the Treasury (Treasury) and IRS issued Notice 2017-10 designating syndicated conservation easements as listed transactions. This notice provides that certain syndicated conservation easements promoted with a return on investment of at least 250 percent will be identified as listed transactions. It also provided details on how Treasury and IRS view these transactions as forms of abuse. Although promoters who abuse syndicated conservation easements exploit tax-exempt entities, the law does not treat the tax-exempt entity as a participant, meaning that even when a promoter is found to use a syndicated easement in a noncompliant manner, the tax-exempt entity associated with the scheme may still be considered compliant. In addition to the potential for overvaluation of easements, Treasury and IRS considered that syndicated conservation easements may become problematic because of the potential they have to involve transactions that violate the economic substance doctrine. Because of its concerns, IRS has identified taxpayer abuse of conservation easements as a risk area for noncompliance. Syndicated easements also illustrate how noncompliance can cross the areas of responsibility of IRS’s audit divisions. In this case, the beneficiary of the scheme may be a small-business taxpayer (SB/SE’s responsibility) or a corporation (LB&I’s responsibility), even though the scheme hinges on an inflated appraisal and being able to donate to the tax-exempt recipient (TE/GE’s responsibility). Donor-Advised Funds A donor-advised fund is a fund or account held by a charity that receives contributions from donors who may advise, but not control, how the organization uses the money. The Pension Protection Act of 2006 defined donor-advised funds in the Internal Revenue Code and subjected the funds to new requirements. Because donor-advised fund accounts are operated by charities, contributions to these funds are deductible at a higher percentage of adjusted gross income (generally 50 percent or 60 percent for cash contributions) than donations to private foundations (generally 30 percent). Some donors may use the donor-advised funds in ways that IRS considers improper. For example, prior to tax-law changes in 2006, IRS said that abusive donor-advised funds are those that appear to be established to generate questionable charitable deductions, and provide impermissible economic benefits to donors and their families (including tax-sheltered investment income for the donors). Figure 2 illustrates how donor-advised fund accounts operate and highlights where in the process the parties involved could abuse the funds or raise policy concerns about how donor advised funds have been used. Donor-advised funds have grown in various measures in recent years, according to data compiled by the National Philanthropic Trust. For example, it reports that from 2013 to 2017, the total grants made by donor-advised funds grew from $9.83 billion to $19.08 billion, and contributions grew from $17.24 billion to $29.23 billion. Total assets held in donor-advised funds increased from $57.1 billion to $110.01 billion as well, according to the organization’s study. In 2017, about 463,000 donor- advised funds existed in the United States, with an estimated $110 billion in assets, according to the National Philanthropic Trust. Some of the largest of these funds in terms of assets are sponsored by financial institutions, religious groups, and community foundations, while others are independent, according to our review of selected donor-advised funds’ sponsoring organizations’ websites and data from the National Philanthropic Trust. Patient Assistance Programs Patient assistance programs help patients afflicted with certain medical ailments obtain financial assistance for medical care or free drug products and these programs may qualify for tax-exempt status. Pharmaceutical companies may establish their own patient assistance programs or make monetary donations to independent charities’ patient assistance programs. In addition to financial support, pharmaceutical companies may donate medication (through in-kind product donations) to patient assistance programs. Donations such as these allow pharmaceutical companies to claim a limited tax deduction for charitable contributions. If they claim deductions, the deductions may be up to 10 percent of the corporations’ taxable income when donating to charities. The possibility of donors receiving private benefits in excess of the charitable deduction creates potential risks to participating pharmaceutical companies and compliance challenges for IRS, according federal regulators. For example, because independent charity patient assistance programs may be 501(c)(3) tax-exempt organizations, pharmaceutical manufacturers’ profits generated from sales of their products to individuals receiving help from patient assistance programs that they donate to may raise issues of inurement. Figure 3 summarizes how a hypothetical patient assistance program works and highlights points in the process where potential abuse of the program may occur. The federal government has investigated cases of potential private benefit by pharmaceutical companies and patient assistance programs. For example, IRS filed a court summons in May 2017 in an ongoing investigation of a patient assistance program over concerns that it spent the majority of its donations on copayment support that went to patients who were prescribed medication from companies that had donated money to the patient assistance program. The Number of Audits Involving Tax-Exempt Entities Generally Declined and Few Tax-Exempt Entities Filed Prohibited Transaction Reports The Number of Audits Involving Tax-Exempt Entities Generally Declined Across TE/GE, SB/SE and LB&I over a 10-year Period As shown in the tax scheme examples previously discussed, abusive schemes with tax-exempt entities can involve the tax-exempt entity directly or leverage an entity’s tax-exempt status indirectly to reduce taxes. Consequently, the characteristics of audits involving abusive tax schemes, such as which IRS operating division is responsible for the audit, will differ according to the type of scheme. In addition, IRS generally presents information about abusive tax schemes under a category it calls abusive tax avoidance transactions. The abusive tax schemes we have been discussing in this report are a subset of abusive tax avoidance transactions in which the transaction or arrangement involves multiple types of entities. IRS data do not allow us to identify separately the transactions involving multiple entities. The discussion that follows describes trends under the assumption that over time abusive transactions involving multiple entities would closely track total abusive transactions. TE/GE audited 2,294 tax-exempt entities with what IRS identified as abusive tax avoidance transactions in the 10-year period from fiscal year 2008 through 2017. As shown in figure 4, the number of abusive- transaction audits fell from a high of 886 in fiscal year 2009 to 10 or less in fiscal year 2017. This decline represented at least a 98.9 percent decrease in audits performed by TE/GE (see appendix V, table 6). The decline in abusive-transaction audits generally corresponds with the overall decrease in audit activity by IRS over recent years (see appendix V, tables 2, 3, and 4). During the same 10-year period, TE/GE assessed a total tax increase of $107 million based on its audits of tax-exempt entities and the average tax increase per audit was $46,804. The amount assessed for the tax increase declined from 45.3 million in 2008 to 1.2 million in the merged years of 2016 and 2017. The effectiveness and efficiency of the audit process may be reflected in the no-change rate and staff days associated with the audits. The no- change rate—the percentage of audits that results in no tax change—was 13.9-percent (see appendix V, table 11). IRS uses this ratio as an indicator of how effectively IRS identifies noncompliant taxpayers (a lower no-change rate on its audits is consistent with more effective audit selection methods). The lower rate may also reflect higher economic efficiency because less IRS and taxpayer time and other resources are used for auditing compliant returns. On average, TE/GE spent 70 hours per audit of tax-exempt entities from fiscal year 2008 through 2017 (see appendix V, table 9). Audits involving abusive schemes where taxpayers leverage an entity’s tax exempt status—but the tax-exempt entities are not the subject of the audit—are the responsibility of SB/SE and LB&I. To determine the minimum number of audits these divisions conducted on abusive schemes involving tax-exempt entities, we used IRS project codes that IRS agreed were relevant. For these project codes, SB/SE and LB&I conducted 4,207 audits over the 10-year period. The numbers of audits generally decreased over the period except for increases in 2012, 2015, and 2017 for LB&I audits and increases in fiscal year 2015 and 2017 for SB/SE audits. Combined SB/SE and LB&I audits fell from 1,176 in fiscal year 2008 to 99 in fiscal year 2017, a 91.6 percent decrease (see appendix V, table 13). SB/SE and LB&I recommended about $8.3 billion in tax changes over the 10-year period. As shown in figure 5, the average recommended amount was larger for LB&I, but tended to fluctuate more than the SB/SE amounts. The average tax change amount per audit over the 10-year period recommended by SB/SE was $89,399. The average amount recommended by LB&I was $8.6 million. Figure 5 also shows how both divisions had a surge in recommended tax amount changes for 2017 compared to prior years. SB/SE’s recommended changes increased from $270,131 in fiscal year 2016 to $127 million in fiscal year 2017. LB&I recommended changes increased from $299 million in 2016 to $555 million in 2017. IRS officials could not provide an explanation for the surge in 2017 (see appendix V, table 14). Again, the divisions’ resource use may be reflected in staff days and the no-change rate. SB/SE and LB&I combined spent 218 hours, on average, per audit for the audits involving tax-exempt entities identified by project codes (see appendix V, table 15). The no-change rate for SB/SE audits we examined involving tax-exempt entities identified by project code was 10.9 percent. LB&I audits involving tax-exempt entities had a no-change rate of 15.5 percent (see appendix V, table 16). Audits Involving Tax- Exempt Entities Had Larger Recommended Tax Changes and Used More Staff Hours on Average than the Total of All Abusive Transaction Audits Numbers of audits of all types of abusive transactions showed a pattern of decline similar to audits involving tax exempt entities. SB/SE and LB&I conducted a total of 155,467 audits involving all types of abusive transactions from fiscal year 2008 to fiscal year 2017. As shown in figure 6, the total number of these audits conducted by each of the operating divisions fell in most years. Abusive transaction audits conducted by SB/SE and LB&I fell from 26,519 in fiscal year 2008 to a low of 4,248 in fiscal year 2017, an 84 percent decrease in audits closed during this period (see appendix V, table 5). Audits involving tax-exempt entities resulted in higher average tax changes than audits for the total of all abusive transactions. Combined, SB/SE and LB&I recommended a total of $39 billion in tax changes for the total of all for abusive-transaction audits. As shown in figure 7, SB/SE recommended tax amount changes that averaged $40,834 per audit and LB&I recommended tax amount changes that averaged $3 million per audit. The recommended tax change per abusive-transaction audit was larger for audits involving tax-exempt entities than for the total of all abusive-transaction audits in both operating divisions which were (as described above) $89,399 for SB/SE and $8.6 million for LB&I. The total recommended tax amount change for SB/SE decreased from $1.4 billion to $339 million, a 75 percent decrease over the period. For LB&I, the recommended tax amount change decreased from $7.5 billion to $866 million, an 89 percent decrease (see appendix V, table 7). We estimated audits involving tax-exempt entities identified on the basis of project codes led to SB/SE and LB&I recommending about $8.3 billion in tax changes over the 10-year period. The no-change rate for all SB/SE abusive transaction audits over the period was 8.8 percent. The no-change rate for all LB&I abusive- transaction audits was 14 percent (see appendix V, table 10). Combined, SB/SE and LB&I spent a total of 6.6 million staff hours for the total of all abusive transaction audits from fiscal year 2008 to 2017, spending, on average, 42 hours per audit for all abusive-transaction audits (see appendix V, table 8). As described above, SB/SE and LB&I spent more in resources, 218 hours, on average, per audit of tax-exempt schemes, than the average for the total of all abusive-transaction audits. Taxpayers with Audits Involving Tax-Exempt Entities Differed by Income The majority (88 percent) of taxpayer audits involving tax-exempt entities identified on the basis of project codes for both SB/SE and LB&I had an Adjusted Gross Income (AGI) of more than $50,000, with about 40 percent of the audits involving the taxpayers with AGI falling between $100,000 and $500,000. The SB/SE audits had an average AGI of $1.2 million and median AGI value between $200,000 and $500,000. LB&I audits had an average AGI of $6.2 million and a median AGI value between $1.0 million and $1.5 million. The majority of business taxpayers with abusive-transaction audits involving tax-exempts (about 70 percent) reported zero gross receipts (see appendix V, tables 17 and 18). Taxpayers Reported Tax- Exempt Entities on Thousands of Reportable Transaction Disclosures, While Few Tax-Exempt Entities Filed Prohibited Transaction Reports While the audit data examined above show the noncompliance IRS has found regarding abusive schemes with tax-exempt entities, information about the taxpayers involved in the transactions can also be derived from the IRS disclosure forms. Most of the taxpayers identified partnerships as the entities involved in the listed transactions that they reported. Of the taxpayer disclosures identifying a tax-exempt entity on Form 8886, 97.8 percent identified the type of reportable transaction as a listed transaction and 95.5 percent listed a partnership for type of entity involved in the transaction. Further, 98.1 percent of taxpayers claimed a deduction from their AGI as the benefit generated by the transaction and 5 percent claimed an ordinary loss as the tax benefit. The different disclosure reports that IRS receives from tax-exempt entities, taxpayers, and tax advisors contain data that identify the potential involvement of tax-exempt entities with reportable transactions. However, there are differences in the legal filing requirements, the types of information supplied, and the number of disclosure forms filed. Few tax-exempt entities directly disclose their involvement in prohibited transactions to IRS. Regulations require that certain tax-exempt entities disclose information on a prohibited tax shelter transaction to which the entity is a party. For calendar years 2004 through 2016, IRS received 71 Form 8886-T disclosures from tax-exempt entities that were a party to a prohibited transaction. Moreover, the actual number of filers making disclosures was smaller, only 33, because some submitted multiple forms during the period. Many more tax-exempt entities were identified by taxpayers filing the Form 8886, which requires a different, broader range of transactions to be reported than the Form 8886-T. For calendar years 2000 through 2017, IRS received more than 979,900 Form 8886 disclosure reports from taxpayers. Of that number the taxpayer identified a tax-exempt entity as part of the reportable transaction on 32,847 disclosures or 3.4 percent of all Form 8886 reports. A smaller number was identified by tax advisors on Form 8918. For calendar years 2007 through 2018, out of the 16,477 Form 8918 disclosure statements received from tax advisors, 155 submissions identified a tax-exempt entity as part of a reportable transaction. While detail about the transactions themselves—when they appear in the form narratives—is not readily available from the Form 8886 disclosure databases. IRS’s Research, Applied Analytics and Statistics Division has created an analytic tool for analyzing narrative information that it has tested on the Form 8886. When we performed a test analysis using this tool on the narrative fields on the Form 8886, we identified keywords that may help isolate tax-exempt organization involvement in potentially abusive schemes and ultimately help select returns for more detailed review. This more detailed review is required because transactions reported on the Form 8886 are not necessarily noncompliant. For our test analysis, we selected certain terms related to known abusive tax schemes involving tax-exempt entities such as “conservation easement” or related to the tax-exempt sector such as “charitable organization” and counted the number of times the terms appeared in the narrative field of 26,632 Form 8886 disclosures made in fiscal year 2017. For example, the term “conservation easement” occurred in the narrative field of 6,767 disclosure forms and the term charitable organization occurred on 17 disclosure forms. Through further searching on terms that might relate to charitable organizations, such as “charity,” “sports,” “children,” “animals,” “foundation,” and “scientific,” we identified 211 occurrences. IRS is not undertaking this type of analysis of taxpayer disclosures, which would expand its ability to identify tax-exempt entities and evaluate their potential involvement with reportable transactions, as discussed later in this report. IRS Has a Variety of Programs Working Collectively to Identify Abusive Schemes Involving Tax-Exempt Entities, but Some Internal Control Weaknesses Exist in Its Approach Various IRS Programs and Offices Identify and Coordinate on Abusive Tax Schemes IRS operates various programs to identify abusive tax schemes involving tax-exempt entities. Not all of these programs exclusively address abusive tax schemes with tax-exempt entities but nevertheless can provide relevant information on that issue. For example, the Office of Tax Shelter Analysis processes disclosures of reportable transactions, including those related to tax-exempt entities, and the Lead Development Center may collect information about abusive schemes related to tax- exempt entities as part of its role in dealing with abusive tax transactions in general. As figure 8 illustrates, several of these programs in practice are linked by the Service-wide Compliance Strategy Executive Steering Committee. This committee is responsible for collecting input from the operating divisions (TE/GE, SB/SE, and LB&I), as well as other parts of IRS, about abusive tax schemes that cross divisional responsibilities, including schemes involving tax-exempt entities. The Executive Steering Committee also may make decisions about how to address abusive tax schemes that cross the operating divisions’ responsibility. IRS officials said that the operating divisions are individually responsible for monitoring the committee’s performance. Therefore, the committee’s decisions depend on what information the operating divisions provide. As figure 8 also shows, the operating divisions pass information about abusive schemes among themselves through referrals, making clear communication among the operating divisions critical for IRS in identifying abusive tax schemes. An IRS office that more directly addresses potential abusive schemes with tax-exempt organizations is TE/GE’s Compliance Planning and Classification office (CP&C). This office has several responsibilities relating to identifying abusive tax schemes and communicating with other parts of IRS, as well as coordinating with other operating divisions on potential noncompliance. For example, CP&C is responsible for reviewing emerging abusive tax schemes, conducting research, and reviewing suggestions from a computer portal through which staff can raise potential issues about compliance. The portal also serves as the foundation to TE/GE’s compliance issue identification process. IRS Met Some, but Not All, of the Internal Controls Criteria Relating to How the Agency Identifies Abusive Tax Schemes with Tax-Exempt Entities We found that IRS maintains a variety of programs to identify tax schemes involving tax exempt entities agency-wide, and these programs together fully met seven of our 10 criteria. Appendix I contains more information about the criteria we used in our analysis and a table that summarizes the results of our analysis. One criterion that IRS fully met was identifying areas of authority. All of the programs we reviewed had documentation showing the responsibilities the program was to fulfill and the roles it was to perform. IRS’s programs also fully met the criterion for ensuring competency by having documented procedures for training to enhance staff’s responsibilities across the programs we reviewed and met the communication criterion by, for example, having coordination meetings among officials representing the different operating divisions. In addition, IRS met the criterion for conducting monitoring activities by, for example, having inventory reports on TE/GE’s issue submission portal and maintaining a monitoring group over TE/GE’s audit plans. Finally, IRS met all three of our fraud-related criteria with programs or procedures that specifically identify fraud, such as TE/GE’s Fraud Investigation Unit, or that assist auditors in identifying fraud on returns, such as IRS’s Fraud Handbook. Reviewing whether auditors assessed fraud risk is also part of TE/GE’s quality review system. In the following sections, we discuss how IRS did not meet the other three internal control criteria. IRS Has Not Assessed Risks That Tax-Exempt Entities Do Not Properly File Form 8886-T A relatively low number of tax exempt entities filing Forms 8886-T combined with our analysis of audit data raises questions about whether tax-exempt entities are filing these forms as often as they should. As we discussed above, tax-exempt entities filed only 71 Forms 8886-T over a 12-year period from fiscal year 2004 through 2016, where they listed prohibited transactions. At about the same time, taxpayers in general filed thousands of Forms 8886 annually where they identified tax-exempt entities as part of their reportable transactions. In addition, when we compared Form 8886 filings that identified tax- exempt entities as part of the reportable transaction with SB/SE and LB&I audit data, again for the same time period, we found 432 closed cases with tax changes. Although we did not determine whether the subject of these audits was the abusive scheme involving a tax-exempt entity, the result of 432 closed audit cases suggests that tax-exempt entities may be part of more prohibited transactions than those reported on the 71 Form 8886-T filed during the period. The audit cases identified in SB/SE and LB&I data resulted in about $1.9 billion in tax changes. The average per audit tax change recommended by SB/SE was $65,143 and by LB&I was $19 million. A similar analysis could be conducted comparing audit results with data from Form 8918, which is filed by tax advisors. IRS officials said the disparity between the number of Form 8886 filings and the small number of 8886-T filings has not raised concerns because the legal requirements for tax-exempt entities filing Form 8886-T are narrower than the requirements taxpayers must follow to file Form 8886, as we discussed earlier. However, IRS has not undertaken a risk assessment to test whether this explanation—that the lower number of filings should be expected because the filing requirement is narrower—is valid, which is inconsistent with the internal control standards for risk assessment. The Office of Tax Shelter Analysis sends Form 8886-T filings it receives to TE/GE, and the Compliance Planning and Classification office reviews these filings, but no documented process exists to determine whether all tax-exempt entities that should file Form 8886-T were filing the form as required. In addition, IRS provided us with no studies investigating the causes and consequences of such a small number of filings. While IRS has adopted processes to help ensure proper filing for other disclosures, such as Form 8886, it has not extended these to Form 8886- T. In 2011, we recommended that IRS establish a process to periodically check whether Form 8886 filers met their reporting obligations. In response to that recommendation, IRS implemented a new indicator and matching process to review whether filers met their obligations. IRS officials told us that similar controls do not exist for 8886-T filings. TE/GE officials said one way that they ensure forms are filed is through penalties, yet they said they have never assessed the penalty for nonfiling of Form 8886-T. TE/GE officials also said that another way they ensure proper filing is through education and cited such documentation as IRS Publication 557, Tax-Exempt Status for Your Organization. IRS said it provides other information through its website informing charities of their responsibilities. Despite this education effort, it may still be the case that a lack of knowledge about filing requirements reduces the number of tax-exempt entities that file. An IRS official suggested that charities may not have the financial sophistication to realize that they are involved in a prohibited tax shelter transaction and therefore are required to file a Form 8886-T. Without a better understanding of the reasons behind the low filing, IRS cannot be reasonably certain that tax-exempt entities are following the law on filing Form 8886-T and ensuring tax-exempt entities’ compliance. IRS Data Do Not Facilitate Some Analysis of Abusive Tax Schemes Involving Tax- Exempt Entities We were able to use the IRS audit and disclosure data to perform certain analyses on abusive tax schemes with tax-exempt entities for this report, but data deficiencies prevented us from undertaking more complete analysis and hinder management’s use of the data. These deficiencies— which are inconsistent with internal control standards for quality information—weaken divisions’ ability to identify abusive tax schemes involving tax-exempt entities as well as the Executive Steering Committee’s ability to make decisions about how to address abusive tax schemes across divisions and develop compliance strategies. First, the descriptions of project codes in audit data do not always clearly identify abusive tax schemes across operating divisions. For example, one code LB&I uses to identify abusive transactions in audit data is “domestic tax shelters.” TE/GE uses two codes both titled, “Abusive Tax Avoidance Transactions,” and SB/SE uses a code titled, “Tax Shelter List Projects.” IRS officials provided no additional documentation on what these codes mean. The lack of specificity hinders analyses of abusive tax schemes involving tax-exempt entities. IRS officials said that they do not keep an overall list of project codes that cover abusive schemes involving tax-exempt entities. This limits their ability to readily assess and manage audits of abusive tax schemes involving tax-exempt entities. However, they did say such a list, which would be effective in certain circumstances or operating divisions, might be possible to produce. Cross-operating division analysis could enhance the Executive Steering Committee’s objective to assess emerging issues and develop policy responses. Second, we found that there were no project codes consistently identifying abusive schemes involving tax-exempt entities that crossed operating divisions. Instead, IRS officials said each operating division assigned its own project codes that identify abusive tax schemes. Having no uniform way to identify abusive schemes across the operating divisions makes analysis of schemes that overlap with different operating divisions’ responsibilities problematic and inhibits IRS from accomplishing its objectives. The lack of cross-divisional project codes echoes findings from our 2011 report on abusive tax avoidance transaction data, where we found that some abusive tax avoidance transaction data were reported inconsistently across IRS divisions. We said in that report that without comprehensive or consistent information, IRS does not have the best information to decide how to evaluate the results of its audits. Our recommendation to separately track the tax amounts recommended, assessed, and collected between abusive tax avoidance transaction issues and nonabusive transaction issues remains open because IRS said resource and capability constraints preclude it from capturing information in this way. Similarly, IRS officials told us it would be costly and logistically prohibitive to create new project codes identifying abusive schemes involving tax- exempt entities that crossed divisions. However, as we said in our previous report, tracking audit results for abusive and nonabusive transactions would provide IRS management with the data needed to make more informed decisions about program effectiveness and resource allocation. If, as IRS indicated above, it would be possible to make an overall list of codes, such a list could be used to achieve the same results as adjusting the database system. IRS Does Not Use Available Tools to Identify Abusive Schemes with Tax-Exempt Entities That Cut Across Operating Divisions Although IRS does not identify some data that would facilitate analysis of abusive tax schemes involving tax-exempt entities spanning the operating divisions, we found evidence that TE/GE’s Returns Inventory and Classification System (RICS) could at least partially support analysis and monitoring of audit data across the operating divisions. For example, the RICS user manual states that RICS can access a variety of forms outside of TE/GE’s purview, such as Form 1065 and the Form 1120 series tax returns, which typically are handled by SB/SE or LB&I respectively. While TE/GE uses RICS, officials we spoke with at LB&I, for example, were not familiar with RICS’ capabilities. TE/GE officials said IRS would have to study whether using RICS in other divisions would generate productive audits. As we discussed earlier in this report, IRS’s Research, Analysis and Statistics office also has developed the capability to analyze narrative information, which it has tested on the Form 8886. However, this analytical tool is not being used operationally to review the Form 8886 or any other disclosure report. Our analysis shows that the tool has the potential to help IRS better search disclosure reports for additional information about transactions that could help IRS identify potentially abusive schemes involving tax-exempt entities. For example, it can be used to identify keywords in disclosure reports that could help determine whether a tax-exempt entity was a party to a reportable transaction that warrants further investigation for compliance. However, IRS officials told us they have no plans to use this tool but agreed that it may be beneficial. IRS officials also told us that TE/GE does not routinely review Form 8886 filings that show tax-exempt entities as being part of the reported transaction because the data are not clear indicators of noncompliance. However, by not using these data for possible leads, IRS may be missing opportunities to identify known abusive schemes, which is inconsistent with internal controls on using quality information. Again, our analysis of the 8886 filings combined with audit results suggests that there is potential for IRS to use the Form 8886 to identify potential noncompliance. Without conducting such an analysis, IRS may be missing opportunities to identify leads on tax-exempt entities in abusive tax schemes. Quality Control over Cross- Operating Division Referrals Is Limited We previously showed that abusive tax schemes involving tax-exempt entities can involve multiple types of entities that cross IRS’s operating divisions’ areas of responsibility. We also showed that IRS relies on auditors to refer potentially noncompliant entities involved in an abusive scheme to the responsible operating division. Consequently, IRS needs assurance that auditors’ make referrals when appropriate. However, IRS lacks a control to ensure that auditors make referrals correctly. An IRS audit official said that managers are tasked with reviewing auditors’ work and identifying referrals that should have been made during case closings. However, there is no documented guidance specifically directing managers to assess whether auditors correctly identified referrals involving abusive tax schemes, reducing assurance that such auditors will make such identifications correctly and route them appropriately. IRS’s audit quality review systems, which generally measure how well auditors follow procedures from a random sample of audits, also do not assess whether referrals of abusive schemes involving tax-exempt entities are properly identified and routed. The lack of guidance to ensure auditors make referrals across the operating divisions increases risk that the responsible division will not be alerted to potential noncompliance to make further assessments for enforcement action. Absent specific guidance, there also is increased risk that even when one entity in an abusive tax scheme is audited, other entities in the scheme may go unexamined. This is inconsistent with internal controls standards for control activities. Conclusions Abusive tax schemes involving tax-exempt entities pose enforcement challenges for IRS, as schemes can cross IRS’s operating divisions’ areas of responsibility and evolve over time. While IRS has established programs to help identify new abusive schemes, opportunities exit to better ensure that IRS accomplishes its objectives of identifying existing and emerging schemes. In particular, opportunities exist for IRS to improve the quality of its data and how it is using the data it has in managing its programs. Because IRS uses codes to identify abusive schemes that are not consistent across the operating divisions, its efforts to formulate policy across operating divisions may be made more difficult. Also, IRS may not be making the best use of its data by not using existing tools that may be helpful in analyzing data to identify abusive schemes involving tax-exempt entities. Next, IRS has an opportunity to reduce the risk that tax-exempt entities are noncompliant by assessing the number of Form 8886-T filings. Finally, referrals across divisions play an important role in IRS’s ability to identify schemes with tax-exempt entities, but IRS’s internal control activities over referrals are limited. By taking actions to further strengthen its internal controls, IRS could enhance its efforts to identify and combat abusive tax schemes that involve tax-exempt entities. Recommendations for Executive Action We are making the following five recommendations to IRS: The Commissioner of Internal Revenue should undertake a risk assessment of tax-exempt entity Form 8886-T filings. Based on the findings of the risk assessment, IRS should then determine whether steps are needed to increase compliance, such as, for example, through increased outreach to tax-exempt entities or assessment of nonfiling penalties. (Recommendation 1) The Commissioner of Internal Revenue should link audit data on abusive tax schemes involving tax-exempt entities across operating divisions and use the linked data to assess emerging issues and develop policy responses. (Recommendation 2) The Commissioner of Internal Revenue should test the ability of the Return Inventory Classification System to facilitate analysis and monitoring of audit data across the operating divisions and to support the IRS’s enforcement objectives. (Recommendation 3) The Commissioner of Internal Revenue should use existing data analytic tools to further mine Form 8886 and Form 8918 data, which could be used to find audit leads on tax-exempt entity involvement in potentially abusive tax schemes. (Recommendation 4) The Commissioner of Internal Revenue should develop guidance to help managers ensure referrals about abusive schemes involving tax-exempt entities are made across operating divisions. This could be accomplished by, for example, adopting specific guidance for audit managers to look for referral accuracy in their reviews of case closings. (Recommendation 5) Agency Comments We provided a draft of this report to the Commissioner of Internal Revenue for review and comment. On August 16, 2019, the IRS Deputy Commissioner for Services and Enforcement provided written comments stating that IRS agreed with GAO’s recommendations. In the letter, which is reproduced in appendix VII, the Deputy Commissioner said that GAO’s recommendations would provide IRS with additional opportunities for improving the identification of tax schemes involving exempt entities. IRS also sent us technical comments, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretary of the Treasury, the Commissioner of Internal Revenue, and other interested parties. In addition, this report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-9110 or mctiguej@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VIII. Appendix I: Scope and Methodology To describe ways in which taxpayers have abused a tax-exempt entity through abusive tax schemes, we conducted interviews with knowledgeable professionals and researchers. We chose the interview sources by reviewing relevant articles from academic databases and reaching out to professional organizations. We narrowed our list of examples of abusive tax schemes by focusing on those professionals and researchers who: had recent professional experience as an attorney, accountant, or other industry professional with a firm specializing in tax-exempt entities or tax shelters; had recent professional experience in nonprofit management or affiliation with professional associations specializing in nonprofit organization or oversight; had published books, articles, or other research on tax-exempt entities or tax shelters within the last 10 years; were recommended to us by a relevant professional organization, such as the American Bar Association or the American Institute of Certified Public Accountants; work for or previously worked in charity tax enforcement at the state previously worked for the Internal Revenue Service (IRS), specifically in the Tax Exempt and Government Entities Division (TE/GE); or would (in our professional judgment) be able to speak on the topics of abusive tax avoidance schemes or IRS investigations of tax-exempt entities. We conducted literature and court case reviews using academic and legal databases and covered years 2008 through 2018 using search terms such as “tax avoidance,” “tax-exempt,” and “shelter.” We combined the information found in interviews with reviews of relevant literature and court cases. We categorized the observations from our research by the following criteria. Involved multiple entities, at least one of which was tax exempt, and Involved a transaction or scheme already known to IRS, such as a listed transaction or transaction of interest or Involved a transaction mentioned in expert interviews. We then applied the following factors to make the final three choices for the examples: how representative the example was of abusive tax- schemes involving tax-exempt entities; how well-documented we found the example to be in literature reviews; how recent the example had been used by abusers; and how much impact the example had in terms of prevalence and tax revenues. To examine trends in IRS’s compliance and the characteristics of taxpayers audited for using abusive tax schemes involving tax-exempt entities, we collected data from the following IRS business operating divisions that conduct audits on abusive transactions: (1) TE/GE, (2) Small Business/Self-Employed (SB/SE), and (3) Large Business and International (LB&I). We received data extracts from the following computer data systems (1) the Returns Inventory and Classification System data extracts from TE/GE; (2) the Automated Information Management System Centralized Information System (A-CIS), utilized by SB/SE and LB&I; and (3) the Compliance Data Warehouse (CDW) utilized by SB/SE and LB&I. IRS performs a number of quality control steps to verify the internal consistency of the Return Inventory Classification System, A-CIS, and CDW data. Additionally, we reviewed documentation from the operating divisions on the data, discussed the data with IRS officials, and conducted electronic reliability testing. For example, we verified the completeness of analysis variables and the date ranges for our analysis. We excluded 178 records from our analysis of SB/SE data because they were not within our date range. Based on our review, we believe the data are sufficiently complete and accurate for our purposes. We identified audits with potential tax exempt entities by selecting audits based on IRS project codes that IRS agreed were relevant to determine the minimum number of audits conducted on abusive schemes involving tax-exempt entities. We also matched the SB/SE and LB&I data with IRS’s Form 8886, Reportable Transaction Disclosure Statement, data file of the tax-exempt records. We used these data to produce descriptive statistics on audit and taxpayer characteristics and IRS compliance efforts for 2008 through 2017. Tax return information came from Form 1040, U.S. Individual Income Tax Return; Form 1120, U.S. Corporation Income Tax Return; and Form 990, Return of Organization Exempt from Income Tax. Dollars amounts reported for the 10-year period have been adjusted for inflation in 2018 dollars based on a Fiscal Year, Gross Domestic Product Price index. Separately, we compiled descriptive statistics on disclosures of reportable transactions that also involved tax-exempt entities from Form 8886 and Form 8918, Material Advisor Disclosure Statement. IRS’s Office of Tax Shelter Analysis provided the data for Forms 8886 and 8918. We also performed an analysis of the narrative portions of Form 8886 from tax year 2017 to identify more information about the descriptions of the reported transactions. We identified that IRS could conduct Python optical character recognition (OCR) analysis of the text fields on IRS Form 8886. We worked with officials at IRS’s Research, Analysis and Statistics office on using Python computer programming language to conduct the analysis. IRS ran the OCR using keywords associated with 29 different tax-exempt organizations we identified. The keywords we used were based on characteristics of tax-exempt entities, such as “charity” and “foundation”— terms found in 26 U.S.C. Section 501. We received summary tables and copies of PDFs of all Form 8886-T, Disclosure by Tax-Exempt Entity Regarding Prohibited Tax Shelter Transaction, for tax years 2004 through 2016. We checked the reliability of IRS’s summary tables and manually reviewed the PDF submissions to generate descriptions of the Form 8886-T data. We conducted reliability testing for all of the data we used for this objective. For the audit and tax return data, we interviewed relevant IRS officials and compared our statistical runs with publicly available statistics. For the Form 8886 and Form 8918 disclosure data, we interviewed relevant IRS officials. For the 8886-T data, we compared the summary tables IRS provided with the PDFs of the original Form 8886-T submissions. To assess how IRS identifies emerging abusive tax schemes and to identify potential improvements, we reviewed documentation on programs that help IRS identify possible abusive tax schemes involving tax-exempt entities. We identified the programs by reviewing IRS documentation, including the Internal Revenue Manual, in combination with IRS’s determination of relevant programs (see appendix VI for more details about these programs). We then identified criteria appropriate for assessing the programs’ alignment selected principles from Standards for Internal Control in the Federal Government (Green Book) and leading practices from our Fraud Risk Management Framework. To select these criteria, we reviewed the Green Book and Fraud Risk Management Framework to identify principles relevant to specific aspects of IRS’s programs for identifying and initiating enforcement actions against abusive tax schemes involving tax exempt entities. IRS agreed that these criteria were appropriate. The following list shows the criteria we selected through this process. Green Book Principle 3: Establish structure, responsibility, and Green Book Principle 4: Demonstrate a commitment to recruit, develop, and retain competent individuals Green Book Principle 7: Identify, analyze, and respond to risks Green Book Principle 8: Assess fraud risk GAO Fraud Risk Management Framework Overarching Concept 1.2 (structure) GAO Fraud Risk Management Framework Overarching Concept 2.1 (plans exist to assess fraud) Green Book Principle 10: Design control activities Green Book Principle 13: Use quality information Green Book Principle 14: Communicate Internally Green Book Principle 16: Perform Monitoring Activities After establishing appropriate criteria, two analysts independently reviewed appropriate evidence and determined whether the evidence aligned with the criteria for the programs was based on the attributes for the Green Book criteria and Fraud Risk Management Framework guidance. We also considered how the programs met TE/GE’s objective to “promote the highest degree of voluntary compliance with the statutes governing qualification of plans and exemption of certain types of organizations from tax and to determine the extent of compliance and the causes of noncompliance with the tax laws by plans and organizations,” and IRS’s objective to “identify new types of tax transactions or promotions that are either abusive or potentially abusive requiring different levels of coordination and varying strategies.” We determined the criterion was met only if all of the programs under review offered sufficient support. Table 1 shows how we assessed the programs we reviewed on the criteria. Appendix II: Types of Tax-Exempt Organizations Listed in Internal Revenue Code Section 501 The federal tax code provides a variety of tax benefits to organizations often referred to as “tax exempt.” This appendix focuses on organizations or entities qualifying for a tax-exempt status under 26 U.S.C. § 501. We discussed the tax benefits and requirements for different types of tax- exempt organizations in our 2014 report on oversight of charitable organizations. In addition to section 501, there are various other scattered provisions which give a full or partial tax exemption to certain specific types of entities and income. Section 501 distinguishes between charitable organizations, also known as 501(c)(3) organizations (after the subsection in which they are defined) from all other organizations qualifying for an exemption under section 501. Organizations that qualify for an exemption under section 501, but are not charitable organizations have been referred to as mutual benefit organizations or non-charitable nonprofits. Section 509 further divides charitable organizations between those that are private foundations and all other charitable organizations, and private foundations are divided between operating and nonoperating foundations in section 4942. Appendix III: Tax-Exempt and Government Entities Budget over Time Figure 9 shows the declines in the Internal Revenue Service’s Tax- Exempt and Government Entities Division’s budget since an increase from fiscal years 2009 through 2011. Appendix IV: Financial Transactions the Internal Revenue Service Requires Taxpayers to Report The Internal Revenue Service (IRS) defines a transaction as one that includes all the factual elements relevant to the expected tax treatment of any investment, entity, plan, or arrangement, and it includes any series of steps carried out as part of a plan. Department of the Treasury (Treasury) regulations require that certain transactions be registered and that lists of investors be maintained by parties who organize or sell interests in the transaction. A transaction becomes “reportable” (i.e., a taxpayer must disclose it to IRS on Form 8886) when it falls under one or more of the following categories: listed, confidential, contractual protection, loss transactions, and transactions of interest. Listed transactions: A listed transaction is reportable when it is the same or substantially similar to one of the types of transactions that IRS has determined to be an avoidance transaction. IRS provides a detailed list of the 36 recognized listed transactions on its website. Confidential transactions: A confidential transaction is offered to a taxpayer or a related party under conditions of confidentiality and is a type of transaction for which a taxpayer has paid a minimum advisor fee. A transaction is considered offered under conditions of confidentiality for two reasons: the advisor places a limitation on the taxpayer’s disclosure of the tax treatment or tax structure of the transaction, and the limitation on disclosure protects the confidentiality of the advisor’s tax strategies. The transaction is treated as confidential even if the conditions of confidentiality are not legally binding on the taxpayer. Contractual protection transactions: A contractual protection transaction is a transaction for which a taxpayer or a related party has the right to full or partial refund of fees if all or part of the tax consequences from the transaction are not sustained. It also includes a transaction for which fees are contingent on a taxpayer’s realization of tax benefits from the transaction. Loss transactions: A loss transaction is a transaction that results in a taxpayer claiming a loss. The type of taxpaying individual or entity determines the applicable amount of the loss. The types of loss transactions IRS has described are as follows for: Individuals: at least $2 million in any single tax year or $4 million in any combination of tax years. Corporations (excluding S corporations): at least $10 million in any single tax year or $20 million in any combination of tax years. Partnerships with only corporations (excluding S corporations) as partners: at least $10 million in any single tax year or $20 million in any combination of tax years, whether or not any losses flow through to one or more partners. All other partnerships and S corporations: At least $2 million in any single tax year or $4 million in any combination of tax years, whether or not any losses flow through to one or more partners or stakeholders. Trusts: At least $2 million in any single tax year or $4 million in any combination of tax years, whether or not any losses flow through to one or more beneficiaries. Transactions of interest: A transaction of interest is one that IRS and Treasury believe to have the potential for tax avoidance or evasion, but which lacks enough information for IRS and Treasury to determine whether the transaction should be identified as a tax avoidance transaction. Appendix V: Internal Revenue Service Tax Return and Audit Data Tables 2 and 3 below show Internal Revenue Service (IRS) data for forms filed and audited, and the audit coverage rate, for individual income tax and corporate tax returns during fiscal years 2006 to 2017. Table 4 shows the number of returns processed and audited, and the audit coverage rate, for tax-exempt organizations during fiscal years 2006 to 2015. All three tables show declines in audit coverage rates: the decline occurred for individual income tax returns after fiscal year 2011 and for corporate income tax returns after fiscal year 2012. The audit coverage rate for tax-exempt organizations’ returns declined from fiscal years 2013 to 2015, the last fiscal year for which we have complete data on tax- exempt organization returns. Appendix VI: Descriptions of Internal Revenue Service Programs Addressing Abusive Schemes with Tax-Exempt Entities Table 21 lists 10 programs that the Internal Revenue Service (IRS) operates that may identify or conduct enforcement action on abusive tax schemes that involve a tax-exempt entity. Appendix VII: Comments from the Internal Revenue Service Appendix VIII: GAO Contact and Staff Acknowledgments GAO Contact James R. McTigue, Jr. (202) 512-9110 or mctiguej@gao.gov. Staff Acknowledgments In addition to the contact named above, Kevin Daly (Assistant Director); Susan Baker; Jehan Chase; Sara Daleski; Steven Flint; Eric Gorman; Gina Hoover; Andrew Howard; Edward Nannenhorn; Kevin Newak; Carolyn Ours; Robert Robinson; Dylan Stagner; and Elwood White made significant contributions to this review. Also contributing to this report were Toni Gillich; Sarah Gilliland; John Hussey; Jessica Lucas-Judy; Cynthia Saunders; Stewart Small; Rebecca Shea; and Janet Temko-Blinder.


Introduction The House of Representatives has standing rules that govern how bills and resolutions are to be taken up and considered on the floor. However, to expedite legislation receiving floor action, the House may temporarily set aside these rules for measures that are not otherwise privileged for consideration. This can be done by agreeing to a special order of business resolution (special rule) or by adopting a motion to suspend the rules and pass the underlying measure. In general, special rules enable the consideration of complex or contentious legislation, such as major appropriations or reauthorizations, while the suspension of the rules procedure is usually applied to broadly supported legislation that can be approved without floor amendments or extensive debate in the chamber. Most bills and resolutions that receive floor action in the House are called up and considered under suspension of the rules. The suspension procedure allows non-privileged measures to be raised without a special rule, waives points of order, limits debate, and prohibits floor amendments. Motions to suspend the rules and pass the measure require a two-thirds vote, so the procedure is typically reserved for bills and resolutions that can meet a supermajority threshold. Decisions to schedule bills for consideration under suspension are generally based on how widely supported the measures are, how long Members wish to debate them, and whether they want to propose floor amendments. These decisions are not necessarily related to the subject matter of the measure. Accordingly, measures brought up under suspension cover a wide range of policy areas but most often address government operations, such as the designation of federal facilities. This report describes the suspension procedure, which is defined in clause 1 of House Rule XV, and provides an analysis of measures considered under suspension during the 115 th Congress (2017-2018). Figures 1-8 display statistical data, including the prevalence and form of suspension measures, sponsors of measures, committee consideration, length of floor debate, voting, and resolution of differences between the chambers. Table 1 summarizes the final legislative status of measures initially considered in the House under the suspension of the rules. Finally, the Appendix depicts the use of the suspension procedure from the 110 th through the 115 th Congresses (2009-2018). House Rule XV (Clause 1) The suspension of the rules procedure is established by clause 1 of House Rule XV. Bills, resolutions, House amendments to Senate bills, amendments to the Constitution, conference reports, and other types of business may be considered under suspension, even those "that would otherwise be subject to a point of order â¦ [or have] not been reported or referred to any calendar or previously introduced." Suspension motions are in order on designated days. Rule XV states that "the Speaker may not entertain a motion that the House suspend the rules except on Mondays, Tuesdays, and Wednesdays and during the last six days of a session of Congress." Suspension measures, however, may be considered on other days by unanimous consent or under the terms of a special order of business (special rule) reported by the Committee on Rules and agreed to by the House. A motion to suspend the rules is a compound motion to suspend the House rules and pass a bill or agree to a resolution. When considering such a motion, the House is voting on the two questions simultaneously. Once recognized, the Member making the motion will say, "Mr. [or Madam] Speaker, I move to suspend the rules and pass___." The House rules that are suspended under this procedure include those that "would impede an immediate vote on passage of a measure â¦ such as ordering the previous question, third reading, recommittal, or division of the question." A measure considered under the suspension procedure is not subject to floor amendment. The motion to suspend and pass the measure, though, may provide for passage of the measure in an amended form. That is, the text to be approved may be presented in a form altered by committee amendments or by informal negotiations. Suspension measures that are passed with changes incorporated into the text are passed "as amended." There are no separate votes on the floor approving such amendments. Suspension motions are "debatable for 40 minutes, one-half in favor of the motion and one-half in opposition thereto." However, in most instances, a true opponent never claims half the time, and most speakers come to the floor to express support for the measure. Debate time is controlled by two floor managers, one from each party, who sit on a committee of jurisdiction. Each manager makes an opening statement and may yield increments of the 20 minutes they control to other Members to debate the measure. Once debate has concluded, a single vote is held on the motion to suspend the rules and pass the measure. The motion requires approval by "two-thirds of the Members voting, a quorum being present." Should the vote fall short of the two-thirds required for passage (290, if all Members vote), the measure is not permanently rejected. Before the end of the Congress, the House may consider the measure again under suspension, or the Committee on Rules may report a special rule that provides for floor consideration of the measure. Prevalence and Form of Suspension Measures, 115th Congress As illustrated in Figure 1 , the majority of measures considered on the House floor during the 115 th Congress were initially called up under the suspension of the rules procedure. Sixty-four percent of all measures that received floor action were initially considered under suspension (952 out of the 1,498), compared to those under the terms of a special rule (12%), unanimous consent (10%), or privileged business (15%). Figure 2 displays the form of suspension measures. Most of the measures considered under suspension during the 115 th Congress (94%) were bills. House bills made up 83% of the suspension total, Senate bills 10%. The remaining measures were House resolutions, House concurrent resolutions, and House joint resolutions. There were no Senate concurrent or joint resolutions considered under suspension of the rules in the 115 th Congress. Sponsors of Suspension Measures As represented in Figure 3 , most suspension measures were sponsored by members of the majority party during the 115 th Congress. House or Senate majority-party members sponsored 73% of all bills and resolutions initially considered in the House under suspension, while House majority-party members sponsored 627 (73%) of the 855 House-originated measures (designated with an H.R., H.Res., H.Con.Res. or H.J.Res. prefix). Suspension is, however, the most common procedure used to consider minority-sponsored legislation in the House by a wide margin. In the 115 th Congress, 77% of the minority-sponsored measures that were considered on the House floor were raised under the suspension procedure. Members of the House or Senate minority parties sponsored 27% of all suspension measures originating in either chamber, compared to 14% of legislation subject to different procedures, including privileged business (27 measures) and unanimous consent (48 measures). Minority-party House Members sponsored 228 (27%) of the 855 House measures considered under suspension. There were no minority-sponsored measures considered under the terms of a special rule. Committee Consideration Committee Referral Most suspension measures are referred to at least one House committee before their consideration on the chamber floor. In the 115 th Congress, 896 out of the 952 suspension measures considered (94%) were previously referred to a House committee. Of the 55 measures that were considered without a referral, 51 were Senate bills that were "held at the desk," and four were House resolutions that provided concurrence to Senate amendments with an amendment. Measures may be referred to multiple House committees before receiving floor action. When a bill or resolution is referred to more than one House committee, the Speaker will designate one committee as primary, meaning it is the committee exercising jurisdiction over the largest part of the measure. Generally, the chair of the committee of primary jurisdiction works with majority party leadership to determine if and when a measure should be considered under suspension. Figure 4 shows the number and percentage of measures brought up under suspension from each House committee of primary jurisdiction. The House Committee on Natural Resources was the committee of primary jurisdiction for the plurality of measures considered under suspension in the 115 th Congress: 146, or 15%, of the total number of suspension measures considered. Many of these bills concerned the designation or use of federally owned land. For most House committees, the majority of their referred measures that reached the floor were raised under the suspension procedure. In the 115 th Congress, the three exceptions were the Committee on House Administrationâwhich had several measures considered by unanimous consentâand the Committees on Budget and Appropriations, which had all or most of their measures considered pursuant to special rules, respectively. For the other committees, suspension measures ranged from 56% to 100% of the total number of the committee's measures receiving floor action ( Figure 5 ). Since suspension motions require a two-thirds majority for passage, House committees that handle less contentious subjects tend to have more of their measures considered under the suspension procedure in comparison to other committees. In the 115 th Congress, high-suspension committees included Small Business and Homeland Security (100% of measures receiving floor action); Veterans' Affairs (92%); and Science, Space, and Technology (90%). The Small Business Committee's measures sought to authorize new business development programs. Veterans' Affairs measures included authorizations, reauthorizations, and bills designating federal facilities. Committee Markup and Reporting While suspension measures are not subject to floor amendments, committees may recommend amendments to legislative texts during markup meetings or through informal negotiations. The motion to suspend the rules can include these proposed changes when a Member moves to suspend the rules and pass the measure "as amended." In the 115 th Congress, 521 suspension measures (55% of the total) were considered "as amended," meaning that the text to be approved differed from the measure's introduced text. Clause 2 of House Rule XIII requires that measures reported by House committees must be accompanied by a written report. Otherwise, they are not placed on a calendar of measures eligible for floor consideration. However, the written report requirement is among those rules suspended under the suspension procedure. Thus, measures may be called up on the floor under suspension of the rules even if a committee never ordered them to be reported or wrote an accompanying committee report. Instead, the motion to suspend the rules discharges the committee and moves the legislation directly to the House floor. In the 115 th Congress, 659 (69%) suspension measures were ordered to be reported by a House committee. Of this number, 505 were reported with an accompanying House committee report. Fifty-seven measures that did not have a House report did have a Senate report (of these, 24 were Senate bills that did not receive a House committee referral), while 390 measures had no written report from either chamber (41% of the total number of suspension measures). Floor Consideration Raising Measures (Day of Week) Pursuant to Rule XV, motions to suspend the rules are regularly in order on Mondays, Tuesdays, and Wednesdays or on the last six days of a session of Congress. However, suspension motions may be considered on other days by unanimous consent or under the terms of a special rule reported by the Committee on Rules and agreed to by the House. As displayed in Figure 6 , in the 115 th Congress, the plurality of suspension measures were considered on Tuesdays (446, 47% of the total number considered), followed by Mondays (279, 29%) and Wednesdays (168, 18%). In addition, 31 suspension measures were considered on Thursdays and 28 on Fridays. Of these, seven were considered by unanimous consent, while 52 were called up under suspension pursuant to permission included in a special rule reported by the Rules Committee and agreed to by the full House. Such special rules included a provision stating, "It shall be in order at any time on the legislative day of ___ for the Speaker to entertain motions that the House suspend the rules as though under clause 1 of rule XV." Majority and Minority Floor Managers Pursuant to Rule XV, suspension measures are "debatable for 40 minutes, one-half in favor of the motion and one-half in opposition thereto." In practice, there is rarely a true opponent to a motion to suspend the rules, and the time is divided between two floor managers, usually one from each party, who both favor the motion. The floor managers each control 20 minutes of debate. The managers may be their parties' sole representatives for or against the motion, or they may yield increments of the 20-minute allotment to other Members. Typically, the relevant committee chairs and ranking members select the majority and minority floor managers for particular bills and resolutions. These managers may be the measure's sponsor, the chair or ranking member of the measure's committee of primary jurisdiction, or another committee member. In the 115 th Congress, the measure's sponsor served as the majority manager on 23% of the suspension measures receiving floor action. The committee chair managed 28% of the measures. The minority manager was the measure's sponsor for 9% of the measures and the committee's ranking member for 25% of the measures considered. Occasionally, floor managers controlling time on a motion to suspend the rules ceded their control to other Members during debate. By unanimous request, the other Member then controlled the remaining amount of time allotted. In one identified case, another Member claimed the time in true opposition during the initial floor consideration on the basis of both the majority and minority floor managers favoring the measure. Pursuant to the rule, the Member in true opposition then controlled 20 minutes of debate. In at least two instances, the minority manager opposed the measure. Debate Managers and Additional Speakers A majority floor manager makes the motion to suspend the rules by stating, "Mr. [or Madam] Speaker, I move to suspend the rules and pass the bill [or resolution] ____." The Speaker (or Speaker pro tempore) responds, "Pursuant to the rule, the gentleman[woman] from [state] and the gentleman[woman] from [state] each will control twenty minutes." The majority and minority managers then, in turn, make opening statements regarding the measure using the 20 minutes each controls. If the majority and minority managers have secured additional speakers, the speakers generally alternate between the parties within the 40-minute limit. During the 115 th Congress, on a motion to suspend the rules, the average number of speakers in addition to the floor managers was fewer than two. On 56% of the measures (531) considered, there were one or two additional speakers. On 28% of the measures (268) considered, there were no additional speakers, and in 14% of the measures (136) considered, there were three to 13 additional speakers. Seventeen measures had 14 or more additional speakers. The measure with the most additional speakers (34), H.J.Res. 2 , proposing an amendment to the Constitution, was allowed four hours of debate under the terms of a special rule ( H.Res. 811 ). At the start of the debate period, the majority manager may request "unanimous consent that all Members may have five legislative days in which to revise and extend their remarks and add extraneous materials on this bill [resolution]." This request enables general leave statements to be inserted into the Congressional Record . In 20% of the suspension measures considered in the 115 th Congress, a written general leave statement appeared in the Record following in-person remarks, indicating that the remarks were submitted on the day the legislation was considered. General leave statements submitted on a day other than the day of consideration appear in the Extension of Remarks section of the Congressional Record . Length of Consideration Suspension measures are limited to a maximum of 40 minutes of debate under Rule XV. However, if there are time gaps between speakers or procedural interruptions, such as a vote on a motion to adjourn, the time period between the start of the first speaker's remarks and the conclusion of debate may exceed 40 minutes. The statistics displayed in Figure 7 show the length of consideration of suspension measures as documented in Congress.gov, not the accumulated length of statements, as kept by official timekeepers in the chamber. In the 115 th Congress, the average length of consideration on a motion to suspend the rules was 12 minutes and 21 seconds, and more than half of the measures considered had a debate period of 10 minutes or less. Thus, while overall debate is limited to 40 minutes under the rule, on most suspension measures, a fraction of that time was actually expended during consideration. Twenty-eight measures, however, had consideration periods that exceeded 40 minutes due to procedural delays or, in the case of H.J.Res. 2 , proposing an amendment to the Constitution, due to the terms of a special rule ( H.Res. 811 ), which enabled four hours of debate. Voting and Passage in the House House leaders generally choose measures for suspension that are likely to achieve the two-thirds majority threshold for passage. Thus, almost all suspension measures were passed by the House in the 115 th Congress. The House passed, via motions to suspend the rules, 790 of the 794 House bills that were initially considered under suspension. Four House bills did not receive the requisite supermajority. Three of these bills were later considered and approved under the terms of a special rule. The other bill did not return to the floor and therefore did not pass the House. The House agreed to all House resolutions (47) and concurrent resolutions (10) that were considered under suspension. The House approved three out of the four House joint resolutions. The House joint resolution that did not receive the requisite supermajority was H.J.Res. 2 , proposing a balanced budget amendment to the Constitution. The House approved 93 out of the 97 Senate bills under the suspension procedure. One of the Senate bills, which initially failed in the House, was later passed under the terms of a special rule. The other three Senate bills did not receive further consideration in the House. Voice Votes Most suspension motions are agreed to in the House by voice vote, which is the chamber's default method of voting on most questions. In 2017 and 2018, this method of voting led to the final approval of 72% (687) of the motions to suspend the rules and pass the measures (see Figure 8 ). Record Votes After the initial voice vote, Members triggered an eventual record vote (often called a roll call vote) on 266 (28%) of the suspension measures considered in the 115 th Congress. This was done by demanding the "yeas and nays," objecting to the vote "on the grounds that a quorum is not present," or, in two cases, demanding a recorded vote. In most instances, the chair elected to postpone the vote to a later period within two additional legislative days, pursuant to clause 8 of House Rule XX. Of the 266 record votes, two immediately followed debate on the measure. The remaining 264 votes were postponed to another time on the legislative schedule, usually later the same day. In the 115 th Congress, 257 suspension motions were adopted by record vote, and nine motions to suspend the rules were defeated by record votes. The defeat of a motion to suspend the rules, however, does not necessarily kill the legislation. The Speaker may choose to recognize a Member at a later time to make another motion to suspend the rules and pass the bill, or the House may consider the measure pursuant to a special rule reported by the Committee on Rules. Accordingly, four of the initially unsuccessful measures were later called up and passed under the terms of a special rule. The House Rules Committee reported a special rule for another measure, but the special rule was not considered on the floor, so the measure did not receive further action. Four additional measures were not considered again, via any procedure, before the end of the 115 th Congress. Thus, of the measures initially considered on the House floor under suspension of the rules, five did not receive House approval. Final Disposition of Measures Considered Under Suspension of the Rules Passed by the Senate Although suspension measures generally receive broad support, measures that receive the requisite two-thirds majority in the House are not guaranteed passage in the Senate. As noted in Table 1 , in the 115 th Congress, the Senate agreed to one of the four House joint resolutions and six of the 10 House concurrent resolutions considered under suspension of the rules. The Senate passed 229 of the 794 House bills initially considered under suspension (29%). Of the number of suspension measures that passed the House and Senate, 77 entered a "resolution of differences" stage between the chambers. Fifty-eight House measures and 19 Senate bills were subject to an amendment exchange process. (No measure initially considered under suspension of the rules had bicameral differences resolved in a conference committee.) Two of these measures, H.R. 88 and H.R. 695 , did not have their differences resolved because the House and Senate did not agree on the final text as amended by both chambers. The House passed, with amendments, two Senate bills ( S. 488 and S. 2497 ) that did not enter the "resolving differences" stage because the Senate did not take up the House amendments. Likewise, the Senate passed, with amendments, four House bills ( H.R. 4969 , H.R. 4203 , H.R. 1967 , and H.R. 1020 ) that did not receive final passage because the House did not take up the Senate amendments. Thus, these bills, as well as H.R. 88 and H.R. 695 , were not enacted into law. Presidential Action Of the measures initially considered under suspension during the 115 th Congress, President Trump was presented with 223 House bills, 92 Senate bills, and one House joint resolution for signature or veto. The President signed all of these measures (vetoing none), so a total of 315 bills, and one joint resolution, were enacted into law (see Table 1 ). Appendix. Use of Suspension Motions, 110th-115th Congresses