As the IRS faces large staffing and budget cuts, a former Exempt Organizations Division director proposes systemic changes — including bifurcating traditional tax and tax-exempt organization enforcement and rehoming IRS tech.
The IRS’ tax-exempt organizations functions are “out of step” with the rest of the agency, explained Marc Owens, an attorney at Loeb & Loeb and a previous IRS Exempt Organizations Division director. He described the current structure of the division within the IRS as a “dislocation,” adding that “they have different roles, different guiding principles.”
The IRS’ focus for tax-exempt organizations is on “what you do that justifies that you are outside the federal tax system that applies to everybody else,” said Owens at a February 21, 2025, TEGE Exempt Organizations Council conference. “The balance of the IRS doesn’t care how you raise your money. They just care if you pay taxes on it.”
In a forthcoming commentary paper*, Owens recommends several IRS systemic changes. A key recommendation is to “bifurcate IRS enforcement functions into a tax enforcement sub-agency under the IRS that will focus on the traditional core mission of the IRS” and “a separate sub-agency that will include those enforcement functions that are regulatory in nature and which do not necessarily involve significant tax collection” — such as the IRS’ tax-exempt organizations function.
A resource issue.
Meghan Biss, also of Loeb & Loeb, noted that “resources have always been an issue at the IRS.” The IRS has “a lot of responsibilities” but has had “fewer and fewer resources for a very long time, up until the Inflation Reduction Act — and that funding is now at risk.”
Between ongoing resource issues and news last week that thousands of IRS staff members would be dismissed, Biss said the IRS has to “figure out how do you allocate the people that you have.”
One such choice, said Biss, was Form 1023-EZ — a streamlined version of the application for Code Sec. 501(c)(3) status. Certain organizations, other than private foundations, that normally have gross receipts of $50,000 or less may use the Form 1023-EZ to claim tax-exempt status via a fast-track procedure.
“The thinking is that organizations that have less than $50,000 of income are going to be less of a risk as far as tax compliance status goes,” explained Biss. But “that doesn’t mean there’s no risk.”
According to Owens, “if there’s only $50,000 to play with, and all of it was taken — diverted into someone’s pocket — that’s not enough of a diversion to really make a difference in overall tax collection.” But for exempt organizations, “fraud occurs in small amounts.”
Different missions, standards.
Another issue comes down to the goals of the IRS generally as compared to those of the agency’s Exempt Organizations Division. “The mission of the IRS is to collect money from taxpayers to fund the government,” Owens explained. However, the tax-exempt organizations function is not tax-collecting, rather it is “regulatory in nature,” he said.
Biss noted that beginning in the early 2010s, “there were a lot of applications coming in for tax-exempt status,” including those raising questions of whether applicants’ activities were “political campaign intervention” or “charitable or social welfare activities.”
“There were all kinds of very difficult issues coming in with a very large backlog of applications to work through,” said Biss. Key questions IRS agents faced: “How do we determine whether something really is political campaign intervention? How much political campaign intervention is too much?”
Biss said regulations and other guidance on those questions is still lacking. That’s because “the IRS has been prohibited via appropriation since at least 2015 from being able to issue their guidance,” she explained.
In the tax-exempt space, “you’re not talking about revenue and collecting tax; you’re talking about someone’s fundamental beliefs,” said Owens. But the current IRS system relies on revenue agents who are trained as accountants to review tax-exempt applications. While the system was set up for applications from “children’s athletic groups” and “soup kitchens,” now it’s an area “where people express their religion” and “their desires for a better world.”
For Owens, that leads to the question: “Why is enforcement of the nonprofit area packed in with tax collecting?”
Tech modernization.
Beyond tax-exempt enforcement funding, Owens argues in his commentary that one of the most critical IRS funding issues is the cost of “modern computer systems.” Multiple IRS commissioners have had to choose between allocating funds for “hugely costly computer infrastructure or the hiring and training of revenue agents and other enforcement personnel who actually enforce federal tax law,” Owens explains.
One solution, Owens posits, is to move “IRS Service Centers and associated computer systems infrastructure” to a new Treasury sub-agency. Computer systems for other Treasury financial operations, such as Corporate Transparency Act databases, could also be housed in that new sub-agency.
“The effect of the shift will be to move the huge computer expense out of the IRS budget and into a structure that will be more immune from the impact of the ancient hostility to the tax collector,” Owens explains.
* Marc Owens’ commentary paper was submitted originally to the Urban Institute/Indiana University symposium on “The Future of Nonprofit Regulation in the US in 2024.” It is currently under review for publication in Spring 2025 with the Nonprofit Policy Forum journal.
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