A June 23 Business article about increased Internal Revenue Service audits of nonprofit groups implied that Commissioner Mark W. Everson was referring to all nonprofits when he told a Senate committee that the IRS has or soon will have "fully one-half of the total revenues of the known filing universe" under audit. He was referring to audits of credit-counseling groups. (Published 6/24/04)

The Internal Revenue Service is making charities and other nonprofit organizations one of its top enforcement priorities, and has launched "an unprecedented audit effort" against these groups, the tax agency's chief told a Senate committee yesterday.

"Fully one-half of the total revenues of the known filing universe are either already under active audit or will be later this summer," Internal Revenue Commissioner Mark W. Everson told the Senate Finance Committee, which is considering a crackdown on charities after scandals in recent years.

The IRS is "also initiating a broader review of foundations to include examinations of 400 entities," he said.

Charities and other nonprofits had such a good track record that the IRS for many years paid little attention to them. The audit rate for the nation's 3 million nonprofits was less than one-half of 1 percent, Everson said. Those groups were "viewed as a compliant area [that] doesn't generate [tax] revenue, so it's sort of been left off on the side," he said. "This problem has crept up over time and our response has lagged."

Everson said it is essential that Congress approve the Bush administration's $10.7 billion budget request for the agency in fiscal 2005. He said broader enforcement is hindered by laws that allow the IRS to share information with state tax authorities but not with state regulators.

State officials, watchdog groups and representatives of many nonprofit organizations agreed that laws should be tightened and that the IRS should get more resources to enforce them.

Charities must apply to the IRS for an initial tax exemption and then file a Form 990 annually afterward, but the tax agency does little follow-up, many said. New York state Assistant Attorney General William Josephson said 25 percent of the 990s reviewed by his staff are incomplete or "inconsistent on their face."

"My theory is that no human being actually reviews them," said JJ MacNab, a Bethesda-based life insurance analyst and author of a book about charitable giving.

One proposal the committee is considering would require charities to refile with the IRS every five years to show that they are carrying out the mission that qualifies them for a tax exemption.

Representatives of charities urged the panel to be cautious about enacting wide-ranging reforms, especially those that might unfairly burden small groups.

Charities are a large sector of the economy, employing about 11.7 million people and spending $875 billion a year, said Diane Aviv, president of Independent Sector, an umbrella organization of nonprofits. But 70 percent of charities have annual budgets under $500,000 and many of them would be hard-pressed to comply with some of the requirements the committee is discussing, she said.

"Actions to improve the work of the voluntary sector should not be so draconian that people of goodwill are discouraged" from working for charitable organizations, she said.

Internal Revenue Commissioner Mark W. Everson urged Congress to approve his agency's proposed $10.7 billion budget for fiscal 2005.