EFTA01104426.pdf

United States Government Accountability Office GAO Report to the Chairman, Committee on Ways and Means, House of Representatives July 2006 TAX-EXEMPT ORGANIZATIONS Collecting More Data on Donor-Advised Funds and Supporting Organizations Could Help Address Compliance Challenges JAL G A 0 A....Wry • Integrity • Rell.' Illy GAO-06-799 EFTA01104426  July 2006 TAX-EXEMPT ORGANIZATIONS proG A 0 Highlights Collecting More Data on Donor-Advised Highlights of GAO.CG7vu, a report to the Funds and Supporting Organizations Chairman, Committee on Ways and Means, House of Representatives Could Help Address Compliance Challenges Why GAO Did This Study What GAO Found Donor-advised funds and Donor-advised funds, supporting organizations, and private foundations supporting organizations are two are all tax-exempt charitable-giving vehicles. Donor-advised funds are charitable-giving options that have separate accounts held by a public charity to receive contributions from received attention from Congress and the Internal Revenue Service donors who may recommend, but not control, charitable distributions (IRS) for their potential to facilitate from the account. Supporting organizations are public charities that are noncompliance with tax law. to carry out their tax-exempt purpose by supporting one or more tax- As requested, GAO is providing exempt organizations, usually other public charities. Compared with information on donor-advised private foundations, donor-advised funds and supporting organizations funds and supporting organizations give donors less control over how their donation will be used but provide related to (1) federal laws and donors more favorable tax deductions, lower administration costs, less regulations, compared to private IRS oversight, and fewer reporting requirements. foundations; (2) financial and organizational characteristics; and (3) types of noncompliance and Donor-advised funds hold billions of dollars in assets, and supporting promotion methods and challenges organizations and private foundations hold hundreds of billions of dollars in identifying them. assets. Public charities and private foundations must annually file an IRS Form 990 or Form 990-PF, respectively, to report their activities. However, What GAO Recommends donor-advised fund data are limited because organizations that maintain the funds are not required to separately report fUnd data from other financial GAO suggests that Congress data on Form 990. Although some supporting organization characteristics consider (1) directing IRS to collect Form 990 data for, and provide can be determined from Form 990 data, other characteristics, such as the guidance on calculating payout rate at which payments are made to charities and details about the recipients rates for donor-advised funds and of loans from the organization, cannot be reliably determined. Concerns supporting organizations, and (2) have arisen about the "payout" rate to charities, and Congress is considering providing IRS authority to protect a minimum payout requirement, similar to the one for private foundations. from public disclosure the taxpayer Further, supporting organizations are not required to report their supported identification numbers (TIN) of organizations' identification numbers, making it more difficult to track the loan recipients, so that IRS can relationship between organizations. To collect additional data, IRS revised collect the TINs on the Form 990. Form 990 for 2003 and 2005 and Is considering further revisions, but no firm GAO recommends that IRS require plans have been determined. (1) more comprehensive reporting of donor-advised fund data, (2) reporting of supported According to IRS managers, examinations reveal that some donor-advised organizations' identification hinds and supporting organizations are used in abusive schemes to numbers, and (3) reporting of TINs unallowably benefit donors or related parties or give donors excess control for recipients of large loans, if of charitable assets and operations. In some cases, IRS is able to clearly granted authority to protect the determine noncompliance and assign appropriate corrective actions. TINs from public disclosure. However, in other cases, IRS faces challenges gathering evidence or addressing activities that do not seem to benefit charities, but do not violate IRS agrees with the first two any law or regulation, such as when a supporting organization loans money, recommendations but believes it at market rate, to a donor, director, or officer of the organization. needs legislative authority to Promoters, who are individuals or entities who facilitate abusive schemes, protect loan recipient Ms. further complicate IRS's examination efforts. www.gao.govfogebingetrpt?GAG.06-799. To view the hi product, including the scope and methodology, click on the link above. For more information, contact Michael Brostek at (202) 512-9110 or brostekmOgeo.gov. United States Government Accountability Office EFTA01104427 ig GA O w Accountability • lany • RAMSlay United States Government Accountability Office Washington, DC 20548 July 27, 2006 The Honorable William M. Thomas Chairman Committee on Ways and Means House of Representatives Dear Mr. Chairman: Each year, millions of donors give hundreds of billions of dollars to charities.' The Internal Revenue Service (IRS) estimated that for tax year 2002, charitable contributions totaled over $229 billion, the largest portion coming from individuals and foundations.' In addition to traditional public charities and private foundations, donors may make charitable contributions through the use of donor-advised funds and supporting organizations. Donor-advised funds are generally separate funds or accounts established and maintained by a public charity to receive contributions from a single donor or a group of donors.' While the donor may recommend charitable distributions from the account, the charity must be free to accept or reject the donor's recommendations. Supporting organizations are public charities that are to carry out their tax-exempt purpose by supporting one or more tax-exempt organizations, usually other public charities. IRS has recognized that while the majority of tax- exempt organizations are trying to comply with tax law, a significant compliance challenge involves the use of donor-advised funds and supporting organizations in abusive arrangements benefiting individuals or organizations other than charities. Concerns about these abuses have led 'Charities, recognized by Internal Revenue Code (IRC) section 50I(c)(3), are exempt front paying income taxes on the funds collected for charitable purposes. Charitable purposes include serving the poor and distressed; advancing religious, educational, and scientific endeavors; protecting various human and civil rights; and addressing various societal problems. Contributions to charities are tax deductible under IRC section 170. See glossary for terms used throughout this report. 'The most recent IRS estimate available at the time of our review was for tax year 2002. We have convened IRS's reported dollar amounts to 2005 constant dollars. 'The term donor-advised funds has been used to refer to both the individual accounts donors establish, as well as the charities that maintain these accounts. For this report, we will be using the terms donor-advised funds or donor-advised fund accounts to refer to the accounts that donors establish, unless otherwise noted. Page I GA0.06.799 Tax Compliance EFTA01104428 to proposed legislation imposing requirements on the operation of donor- advised funds and supporting organizations. As requested, we are providing information on (1) federal laws and regulations regarding donor-advised funds and supporting organizations, as compared to private foundations; (2) financial and organizational characteristics, such as loan recipients, of donor-advised funds, supporting organizations, and private foundations, to the extent data are available; and (3) types of potential or actual noncompliance and promotion methods involving donor-advised funds and supporting organizations and the challenges identifying them. In addition, we agreed to provide information about noncash contribution valuation methods and marketing methods involving donor-advised funds and supporting organizations, which are discussed in appendixes III and IV. To compare current federal laws and regulations for donor-advised funds and supporting organizations to those for private foundations, we reviewed the Internal Revenue Code (IRC), Department of the Treasury regulations, and IRS publications as they related to the purpose and operation of these entities. To determine financial and organizational characteristics of donor-advised funds, supporting organizations, and private foundations, we analyzed IRS Forms 990 and 990-PP data, as well as reviewed survey data that external organizations collected on donor- advised funds. Unless otherwise noted, tax year 2003 was the most recent year of data available at the time of our analysis. We converted 2003 dollar amounts to 2005 constant dollars. To identify types of noncompliance and promotion methods involving donor-advised funds and supporting organizations, we reviewed documents from IRS as well as from our literature search. For each objective, we spoke to various IRS managers and individuals knowledgeable about the tax-exempt community. We conducted our review from July 2005 through May 2006 in accordance with generally accepted government auditing standards. 'Private foundations are defined by IRC as section 501(cX3) domestic or foreign tax- exempt organizations except those specifically excluded from the definition by section 509(a), including wiiversities, churches, and hospitals, and similar organizations that meet a public support test or that support one of these organizations. 'IRS Forms 990 and 990-PF are federal information returns filed annually by tax-exempt public charities, such as supporting organizations, and private foundations, respectively. Information reported on these returns includes assets held, contributions received, and grants paid. Page 2 0AO46-799 Tax Compliance EFTA01104429  Although donor-advised funds, supporting organizations, and private Results in Brief foundations are all tax-exempt, charitable-giving vehicles, federal tax laws and regulations treat them differently. In general, donors who establish donor-advised funds and supporting organizations have less control over the use of the charitable assets than those who establish private foundations, but they generally incur less administrative burden, receive less IRS oversight, have fewer limits in claiming charitable tax deductions, and have fewer reporting requirements. Donor-advised funds, unlike supporting organizations and private foundations, are charitable-giving vehicles rather than entities and are not defined under federal law. Supporting organizations fall in between a donor-advised fund and a private foundation in terms of restrictions and sanctions versus control over the use of the charitable assets. The level of control that the supported charity has over the supporting organization varies, depending on the type of relationship between the two entities. Unlike donor-advised funds and supporting organizations, private foundations are not public charities. They also face more types of taxes and requirements, such as in annual reporting, making investments, and paying out funds. Donor-advised funds hold billions of dollars in assets, and supporting organizations and private foundations hold hundreds of billions of dollars in assets. However, IRS data on donor-advised funds are limited because although organizations that maintain donor-advised funds are to file a Form 990 that includes financial data for all organizational activities, including for donor-advised funds, data on these funds are not readily identified from the form because these data are not separately reported. Limited data on donor-advised funds are available from annual surveys by The Chronicle of Philanthropy, even though these data are incomplete and only represent those who voluntarily responded.' For 2003, the 90 survey respondents reported that their donor-advised fund accounts held over $11.9 billion in assets and distributed over $2.2 billion to charities. Data from Forms 990 and 990-PF for 2003 showed differences between supporting organizations and private foundations. For example, in 2003, supporting organizations held over $239.4 billion in assets and paid over °The Chronicle ofPhilanthropy is a newspaper that publishes articles about the tax- exempt sector and Is a source cited by IRS and others on the tax-exempt sector. Its most recent survey of donor-advised funds collected 2005 data, but in order to compare the data to that for supporting organizations, we used 2003 survey data that we adjusted to 2005 constant dollars. Results from this survey cannot be interpreted as being representative of all donor-advised funds. Page 3 GAG•06.799 Tax Compliance EFTA01104430 810.7 billion in grants.' Private foundations held over 8449.5 billion in assets in 2003 and paid over $31.0 billion in grants. Certain other characteristics cannot be reliably determined from Form 990. For example, supporting organizations are not required to compute and report a "payout" rate equivalent to that for private foundations. Questions have arisen about how much and how often supporting organizations pay out to charities because, like private foundations, some supporting organizations can be used to accumulate contributions before distributing the money to charity. Further, other organizational characteristics, such as detailed information on ►oan recipients and supported organizations' identification numbers, are not readily identified from the Form 990. IRS revised the Form 990 for 2003 to include whether the Form 990 filer maintains donor- advised funds, and for 2005, the type of supporting organization in terms of its relationship to its supported organization. IRS is considering other Form 990 revisions for donor-advised funds and supporting organizations, but plans for making revisions are preliminary. Through examinations, IRS is finding evidence that some donors or related parties are exerting excess control over or receiving undue benefits from a donor-advised fund or supporting organization. For example, some donors to donor-advised funds and supporting organizations participate in schemes which allow them to regain their contribution, thus giving them a tax deduction on assets that did not actually go to charity. These examinations were not intended to be a statistically representative sample and even when finished will not allow IRS to estimate the magnitude of noncompliance involving donor-advised funds and supporting organizations. Although the examinations have produced strong evidence of abusive schemes involving excess control and undue benefits, IRS faces challenges when identifying and examining noncompliance, namely the difficulty of gathering evidence on the facts and circumstances of some cases. IRS is also challenged by cases in which a donor-advised fund or supporting organization is compliant because no law or regulation is violated, but engage in activities that do not seem to benefit charity. For example, under certain circumstances, a market rate loan made to a :B eyond grants, supporting organizations can also provide support through other means, such as providing direct services. At the time of our analysis, the most recent data available were from 2003. For data that IRS did not transcribe, such as amount of grants paid for supporting organizations, we obtained the data from GuldeStar. GuideStar is a nonprofit organization that transcribes data front Form 990 into searchable databases. IRS has not assessed in detail the quality of GuldeStar's data, but did include quality control provisions in its contract with GuideStar. Page 4 GA0.06499 Tax Compliance EFTA01104431 donor, officer, or director from a supporting organization may not violate legal requirements applicable to public charities even though it may appear to be a conflict of interest and have no benefit to charity. Some abusive schemes are instigated or facilitated by entities or individuals, such as attorneys, accountants, and financial planners, who promote the schemes. Because of the potentially criminal and obscure nature of their activities, these entities and individuals are often difficult to identify and investigate, which adds to the challenges in IRS's examinations. Given the concerns about how much and how often donor-advised funds and supporting organizations are paying out their assets to charities, this report suggests that Congress should consider directing IRS to revise the Form 990 to collect sufficient information so that a consistent payout rate can be calculated for both types of charitable-giving vehicles. This information could help inform decisions about whether to adopt a minimum payout requirement and if so, whether the required rate should be adjusted over time. To help IRS make these revisions, Congress should direct IRS about the types of support that should be included in the payout rate, as it has for private foundations. In addition, given the lack of data from the Form 990 to be used to determine certain characteristics of donor-advised funds and supporting organizations and the concerns about noncompliance involving these charitable-giving vehicles, we are making recommendations to IRS on collecting better data on the Form 990. IRS agreed with our two recommendations to require more comprehensive reporting of donor-advised fund data and to require supporting organizations to report their supported organizations' employer identification numbers (EIN). However, IRS did not believe that it could implement our third recommendation to require reporting of loan recipients' taxpayer identification numbers (TIN) without legislative authority to protect the TINs from public disclosure.' In response, we have revised our recommendation and, so that IRS can modify the Form 990 to require reporting of Tills of loan recipients from supporting organizations, we are also suggesting that Congress consider providing IRS authority to protect that information from public disclosure. EFTA01104432  In recent years, donor-advised funds have become popular charitable- Federal Laws and giving vehicles, and the number of supporting organizations has also Regulations Impose continued to increase. At the same time, federal tax law generally imposes Fewer Requirements fewer restrictions and requirements on donor-advised funds and supporting organizations, but provides them and their donors less control on Donor-Advised over the use and investment of the charitable assets compared to private Funds and Supporting foundations; in fact, section 501(c)(3) and federal regulations do not specifically mention donor-advised hinds. Organizations and Their Donors, but As a general principle, the more control that a donor has over the use of the charitable contributions and assets, the more regulations and Allow Donors Less restrictions apply. Table 1discusses how federal tax law views donor- Control Compared to advised funds and supporting organizations compared to private foundations across a number of variables. Private Foundations Page 11 GA0-06-799 Tax Compliance EFTA01104433 Table 1: Simplified Comparison of Differences and Similarities in Federal Tax Laws for Donor-Advised Funds. Supporting Organizations, and Private Foundations Donor-advised funds Supporting organizations Private foundations Tax code treatment Although not statutorily defined, Public charities that carry out their Charities that do not qualify as part of a public charity that charitable purpose by supporting public charities. operates funds as separately other public charities. identified accounts. Filing requirement Fund administrators must apply for Must apply for exempt status as a Must apply for exempt status as a tax-exempt status and annually file supporting organization. Must private foundation. Must annually Form 990 If annual gross receipts annually file Form 990 if annual file Form 990-PF as well as are over $25,000, indicating if they gross receipts are over 525,000. schedules on the use. distribution, have separate accounts (on which and investment of funds. separate Forms 990 are not required). Donor control Donors cannot have control but Donors can be involved with boards Donors and foundation's board may advise on use of funds. but should not directly or indirectly have absolute control, such as control the boards. hiring staff and choosing charities to support. Donor tax Follows rules for public charities. Donors may deduct up to 50 Donors may deduct up to 30 deductions See 'Supporting organizations? percent of adjusted gross income percent of adjusted gross income for cash donations and up to 30 for donations of cash and up to 20 percent of adjusted gross income percent of adjusted gross income for donations of capital gain on capital gain property at cost property at fair market value. basis. Excise taxation Follows rules for public charities. Subject to two excise taxes. Subject to six excise taxes. See 'Suppoding organizations? Payout rules None. None Must meet annual minimum payout requirement. Association with Follows rules for public charities. May make grants to foreign Must follow more detailed rules foreign entitles See 'Supporting organizations? organizations, but must ensure that than for public charities, including funds are used for charitable expenditure responsibility process. purposes. Source GAO anakis or Primal Revenue Code. Takers FreGAbons. and IRS Forms and Peaklike's. Among the three types of charitable-giving vehicles, donor-advised funds allow donors to create a long-term vehicle for supporting charities with relatively less administrative burden because the fund is managed by a third party. Furthermore, donor-advised funds are not required to file separate tax returns, file for tax-exempt status, or adhere to private foundation rules. The donor can make a gift and take an income tax deduction for that tax year, and at that time or later, advise which charities should receive the distribution. However, in doing so, the donor gives up control over the distribution of the gift to charities. Page 12 GAO-06.799 Tax Compliance EFTA01104434  IRS program managers report that some donor-advised funds and Private Benefit, supporting organizations cases highlight concerns about private benefit, Inurement, and Donor inurement, and donor control. Some of these cases demonstrate clear Control Have Been noncompliance, allowing IRS to propose appropriate corrective actions. However, IRS is confronted with many cases that require detailed Found in Some Cases assessments of evidence, which makes addressing noncompliance Involving Donor- challenging. Additionally, IRS contends with activities involving donor- advised funds and supporting organizations that do not violate laws or Advised Funds and regulations, yet do not seem to benefit charities. Entities or individuals, Supporting such as financial advisers or attorneys, sometimes facilitate abusive schemes, introducing additional complexities to IRS's examination Organizations, with process. Promoters Sometimes Facilitating Schemes Page 25 GAO-06-799 Tax Compliance EFTA01104435 Private Benefit, Inurement, Private benefit, inurement, and donor control are common concerns for and Donor Control Are IRS in examinations of potential noncompliance involving donor-advised Prevailing Concerns in funds and supporting organizations. IRS is unable to provide estimates about the prevalence of this noncompliance, and noncompliance in Donor-Advised Fund and general. Thus, the examples presented are intended to illustrate known Supporting Organization cases of private benefit and donor control, and do not represent the entire Noncompliance Cases range of noncompliance." Private Benefit and Inurement Private benefit occurs when a 501(c)(3) organization is not operated or Lead to Personal Gains organized exclusively for exempt purposes because it serves a private rather than public interest. Because they are subject to section 501(c)(3), both donor-advised funds and supporting organizations must avoid private benefit that is more than incidental to the charitable purpose being served; if private benefit is substantial enough, it may jeopardize an organization's tax-exempt status. If the organization's assets or income are transferred to an individual who is a charity insider, the benefit is called Inurement. " Private benefit and inurement schemes involving donor-advised funds and supporting organizations may benefit various individuals and may vary in complexity. IRS has encountered multiple cases of private benefit where donors to donor-advised funds are able to regain some or all of their contribution. For example, IRS has concerns about one fund offering a loan program," where donors were able to repossess their donation, with no obligation for repayment. IRS also sees inurement cases, in which individuals other than the donor receive private benefit. For example, IRS is examining one exempt organization and donor-advised fund operated by a for-profit company. The company offered the fund as a charitable giving vehicle for its employees. The exempt organization lacked an independent board, with the president-who also served as president of the for-profit company-receiving potentially high commissions and fees from contracts with the donor-advised fund. mall examples in this section are from ongoing or past IRS investigat ions, and were described by IRS officials. "A charity insider Ls an individual such as an officer, board member, or other persons able to exercise substantial influence over a tax-exempt organization. Donors to donor-advised fluids are rarely considered to be insiders, while donors to supporting organizations can be insiders, for example, if they also serve on the supported organization's board. Page 26 GAO.99.799 Tax Compliance EFTA01104436  While donor-advised fund schemes often involve private benefit, schemes involving supporting organizations more often result in inurement and are typically more complex, according to IRS management. Schemes can involve direct payment of benefits to donors or, more indirectly, payments routed through offshore entities. One direct payment scheme, designed to benefit a donor's children, funneled school tuition payments through a supporting organization intended to support their child's school. More complex schemes enable the donor to regain his or her donation after it is routed offshore. One typical scheme begins with a donation to a supporting organization, which is then transferred to an account in an offshore investment firm controlled by a financial planner, accountant, or other knowledgeable insider working with the donor. The money is then transferred to a domestic mortgage lender, also controlled by the insider, giving the donor access to the money for use toward an interest-only mortgage. As a result, the donor benefits from a tax deduction on his or her contribution, while still retaining access to the donation. To justify the scheme, the supporting organization claims that earnings from their investment in the offshore firm will benefit charity. Donor Control May Involve Donor control arises when a donor holds authority that exceeds what is Assets or Charity Operations permissible for donor-advised funds or supporting organizations. Illegal control can occur when a donor or disqualified person has control over the charity's assets, operations, or governance, or the organizations receiving supports' It is possible for donor control to occur without private benefit. A donor may control a function or operation of a supporting organization or donor-advised fund without receiving benefits, according to IRS management. Donor control involving donor-advised funds and supporting organizations manifests in different ways. Donor control of a donor-advised fund occurs when the donor oversteps his or her advisory role and retains ultimate authority over the distribution of fund assets. One IRS manager told us that, although more common in supporting organization cases, a donor-advised fund donor may also achieve control by controlling the exempt organization receiving the benefits of their donation. For example, IRS is pursuing a case where a donor-advised fund appears to be maldng distributions to a public charity, which is controlled by the donor-advised fund's donor. If the donor- 0'ln order for a charitable contribution to be considered a donation eligible for a tax deduction, the donor must relinquish control of the asset. IRC sect ion 170 defines charitable contributions and provides the ntles and limits for tax deductions for individuals and corporations. Page 27 GAO-0G.799 Tax Compliance EFTA01104437  advised fund did not exist, the public charity recipient would likely be classified as a private foundation. IRS is investigating whether the charity has other support sources. For supporting organizations, control of the organization's board or the donor's ability to designate charitable recipients can constitute donor control.' Board control can occur directly by controlling more than 50 percent of board voting power or veto power granted to disqualified persons. Alternatively, board control can occur indirectly through a disqualified person influencing board members who are not disqualified persons, according to IRS managers. Retaining access to assets can also signify direct or indirect control of a supporting organization. In one case, IRS has questioned whether or not a donor controlled the operations and investments of the supporting organization that the donor founded, although the donor did not receive private benefit. Donor control can also occur indirectly through control of an asset donated to the supporting organization. For example, in one case, IRS is concerned that a donor is continuing to collect and retain rent from building tenants after the building was donated to a supporting organization. Other Types of Noncompliance Although private benefit, inurement, and donor control are reoccurring Exist themes in IRS's caseload, other types of noncompliance involving donor- advised funds and supporting organizations can occur. Specifically, a supporting organization could fail to maintain a relationship with its supported organization(s)." A representative from the tax-exempt community told us of situations where charities listed as supported organizations were unaware of a purported relationship with a supporting organization. The Panel on the Nonprofit Sector also recognized this problem in its June 2005 report. Similarly, IRS managers told us that a major issue in supporting organization examinations is whether or not the organization maintains a sufficient relationship with its supported organization. Form 990 only requires that supporting organizations report the name of their supported organizations; it does not require them to report the EIN of the supported organization. IRS managers told us that ''Definitions of 'control' and the limits of power for disqualified persons are found in Treas. Reg. Ii1.509(a)-4(J)(1). Also see Rev. Rid. 80-207 for analysis of Indirect influence on a board. "Because of required structures and board oversight for Type I and II supporting organizations, this problem is more likely for Type III supporting organizations. Page 28 GAO-06-790 Tax Compliance EFTA01104438  not knowing the EIN makes it harder for IRS staff to track the relationship between the two organizations. IRS Has Various Efforts to IRS uses resources from a variety of units to identify and examine Identify and Correct noncompliance involving donor-advised funds and supporting Noncompliance, but Does Not organizations. Toward these ends, IRS created two teams, one on donor- Know the Rate of advised funds and one on supporting organizations." As of June 2006, the Noncompliance donor-advised fund team had opened but had not yet closed 27 examinations, according to an IRS manager? As of June 2006, the supporting organization team had opened 102 examinations and closed 20 of them; 18 of which were found to be noncompliant, according to IRS. IRS managers also told us that other programs-including the Tax Examination Program and the Excessive Compensation Program—have also examined and closed supporting organization cases, and are currently examining 655 supporting organizations? Regardless of the type of noncompliance found, IRS can propose corrective actions when the evidence shows that a law or regulation has been unmistakably violated. IRS is developing criteria for proposing corrective actions for donor-advised funds as the related team finishes its examinations; many of the examinations are in the early stages. For supporting organization cases, IRS officials said, in general, they will propose a change to private foundation status for issues of donor control. Intermediate sanctions or revocation of the tax-exempt status are typically proposed for inurement cases, according to IRS? Criminal charges may be brought upon individuals found to be exhibiting criminal behavior while "Each team will report on noncompliance trends and possible regulatory or legislative actions. The donor-advised fund team, which formed in 2002, plans to issue a report by the end of 2006, according to an IRS manager. The supporting organization team, which formed in 2003, told us it plans to issue reports-the first of which would be released in August 2006 and the last of which would be released at the end of fiscal year 2007-on each of the three waves of cases they are investigating. 3!The 27 examination cases involved 27 tax returns for 22 different organizations. 39Between October I, 2001, and September 30, 2005, these other IRS units have closed 715 cases involving supporting organizations, 400 of which were found to be noncompliant. For fiscal year 2006, 94 cases have been closed so far 64 of which were found to be noncompliant. i°"Intermediate sanction? in this context generally refers to excise taxes paid by a disqualified person receiving private benefit or a charily manager with knowledge of a scheme, as defined in IRC section 4958. IRS officials said that, in the most egregious cases, IRS may recommend intermediate sanctions in conjunction with revocation of the supporting organization's tax-exempt status. Page 29 GAOAG•799 Tax Compliance EFTA01104439  participating in abusive schemes, and may occur in conjunction with corrective actions resulting from examinations. In cases where the donor. advised fund or supporting organization is believed to be beneficial overall but needs correction in order to be fully compliant, IRS managers told us they may also initiate a closing agreement, which provides a set of requirements intended to correct flaws in the donor-advised fund or supporting organization structure or operations. For various reasons, IRS does not know the overall rate of noncompliance or the prevalence of different forms of noncompliance involving donor- advised funds and supporting organizations. Fust, IRS did not use a random sample to identify cases for examination. Instead, it used methods that led to examining the most egregious noncompliance schemes. For example, the manager for the donor-advised fund team told us it selected cases for examination based on large asset size or other unusual characteristics, such as high compensation or high fees." Supporting organizations cases were selected based on referrals from other IRS units, according to the team's manager. Second, IRS has no established population of donor-advised funds for which to estimate a noncompliance rate. An IRS manager said IRS is unable to identify the population because exempt organizations have not been required to report their use of donor- advised funds, which prevents IRS from employing statistical sampling methodology to estimate donor-advised fund noncompliance. Third, examinations by IRS's teams are relatively new; examinations began in 2005 for donor-advised funds and began in 2004 for supporting organizations, according to IRS managers." IRS Faces Challenges in Not all cases involving donor-advised funds and supporting organizations Addressing are clear; IRS faces challenges in identifying and examining potential Noncompliance Involving noncompliance. In part, these challenges are due to uncertainty about whet