At the request of Senators Max Baucus and Charles Grassley, the Chair and Ranking Minority Member of the Senate Finance Committee, the United States General Accounting Office conducted a study to determine whether nonprofit organizations spend too much money on fundraising and not enough money fulfilling their charitable mission. That study, titled Tax-Exempt Organizations: Improvements Possible in Public, IRS, and State Oversight of Charities and dated April 30, 2002, was released to the public May 28.

The study focuses on the following three areas: 1) the adequacy of the publicly reported Form 990 data on charity spending in facilitating public oversight of charities, 2) IRS's oversight of charities, and 3) IRS' data sharing with state agencies that oversee charities.

1. Assessing the adequacy of the publicly reported Form 990 data on charity spending in facilitating public oversight of charities

• This study warns that Form 990 disclosures may not give an accurate or complete picture regarding charity spending data and the public is cautioned that it cannot depend upon this instrument exclusively in order to determine a charity's spending efficiency. 
• The GAO cites two problems with Form 990 expense data:

1. There is no evidence available to substantiate the accuracy of the reported expense data. Because grantmakers use the Form 990 in order to make their funding decisions, the study suggests that grantseekers have an “incentive” to report the best possible use of their funding. Between 1994 and 1998, charities across the board reported in aggregate that 87 percent of its funds were allocated to “charitable program services” and the rest of its funds to “fundraising and general management.” 
2. Charities exercise too much discretion in how they categorize expenses. This study cites IRS discoveries that charities misreport the actual cost of fundraising, or “net” the cost of the service provided by a professional fundraiser by subtracting that service fee from the actual amount raised and only reporting that amount as the direct public contribution. Also, the study claims that professional fundraising fees have been misreported as “other” expenses. The study acknowledges that the IRS does not know the extent of this misreporting.

• The study also highlights concerns from within nonprofit community about the accuracy of the information reported by organizations and cites an Urban Institute study that “found that 59 percent of 58,127 charities that received public donations either reported zero fundraising expenses or left this line item blank on the Form 990.” The study compares this finding against its own analysis that found 64 percent of all organizations reported similarly.

2. IRS's oversight of charities

• This study finds that the IRS cannot properly oversee the nonprofit sector because the growth of the sector has out paced the IRS' resources.
• The IRS has not developed a comprehensive strategy for oversight of the nonprofit sector.
• From 1996 through 2001:

1. Staffing for the tax-exempt division of the IRS has fallen by 15 percent;
2. The number of applicants for nonprofit status has increased 9 percent; and
3. The number of Forms 990 filed by charities has increased by 25 percent.

• The IRS plans to improve its oversight of the nonprofit community by developing long-term, results-oriented goals, and a strategy for achieving them throughout the sector.

3. IRS' data sharing with state agencies that oversee charities

• State officials consider the data that are received by state officials from the IRS to assist them in overseeing charities to be inadequate.
• The IRS does not proactively share some information that states are allowed to receive, such as denials and revocations of charities' tax-exempt status. 
• It is illegal to share some information that state charity officials would find valuable, such as the status and results of examinations of charities' returns.
• The IRS will explore the possibility of changing federal law to allow for a more open exchange of information with the states, while protecting the confidentiality of the data.

A complete copy of the full report (PDF) can be found at http://www.gao.gov/new.items/d02526.pdf.