The AICPA is the national, professional organization of certified public accountants comprised of 331,000 members. Our members advise clients on Federal, state, and international tax matters and prepare income and other tax returns for millions of Americans. They provide services to individuals, not-for-profit organizations, small and medium-size businesses, as well as Americaís largest businesses. It is from this base of experience that we offer our comments. We appreciate the opportunity to submit written comments on restructuring the administration of employee plans and exempt organizations.
Under the Employee Retirement Income Security Act of l974 (ERISA), Congress designed a separate tax administrative structure within the Internal Revenue Service to oversee the regulation of pension plans and tax-exempt organizations. The Office of Assistant Commissioner (Employee Plans and Exempt Organizations) ("EP/EO") was created to emphasize the basic objectives involved in maintaining the integrity of plans that are or claim to be qualified under section 401 of the Internal Revenue Code (Code) and organizations that are or claim to be exempt from income taxes under section 501 of the Code. A separate budget and increased staffing was authorized for this unit.
Within twenty years after EP/EO was created, the sector increased significantly in size and importance. James McGovern, former Assistant Commissioner (EP/EO), stated in his January 8, l997 testimony before this Commission that the number of tax-exempt organizations almost doubled from 690,000 to 1.1 million. Assets now exceed $1.2 trillion. Total annual revenue is $743 billion, representing 11 percent of Gross Domestic Product. Between l975 and l990, assets of tax-exempt organizations increased in real terms by over 150 percent, while revenues increased by over 227 percent. This compares to a growth in real Gross Domestic Product of 52 percent in the same period.
In the pension area, 77 million workers, more than double that of l974, participate in 900,000 retirement plans with assets of $1.7 trillion. When plans maintained by Federal, state and local governments are considered, retirement plans control nearly $3 trillion of assets, approximately 25 percent of the combined value of securities listed on the New York, American, and NASDAQ stock exchanges.
Currently, EP/EO regulates sectors of the economy that represent $126.5 billion in annual Federal tax expenditures, an amount equal to approximately 25 percent of Federal tax expenditures. The Joint Committee on Taxationís recently published forecast of Federal tax expenditures projects the revenue impact of EP/EOís special tax provisions to be more than $693 billion between fiscal l997 and 2001.
While EP/EOís regulatory responsibilities, as a result of significant tax law changes, have more than doubled since l974, and while it has assumed compliance responsibility for the $1 trillion tax-exempt bond sector, its staffing has remained static. During the past 21 years, EP/EOs staffing has increased by 7 percent, from 2,075 employees in l975 to 2,229 employees in l996 (an increase of 154 employees). Although Congress has attempted to increase staffing and funding levels to regulate public charities, budgetary constraints prevented additional funding and caused fewer resources to be dedicated to the exempt organizations compliance program.
During the past 25 years copious changes to the tax laws have crippled the tax administrative system. In the late l980s, Treasury was unable to provide guidance with respect to major tax law changes applicable to the nationís tax-qualified pension plans. To address this guidance issue, the Treasury Department created the Office of Benefits Tax Counsel and hired a staff of pension law experts to revive the public guidance process for qualified pension plans.
Tax exempt organizations provisions have not been part of the legislative focus of the past 22 years, thus, guidance in this area has been minimal. During the past two and a half decades, 431 exempt organizations revenue rulings were published, and 406 of those rulings (94 percent) were published between l974 and l983. The remaining 25 rulings (6 percent) were published in the next 10 years. No revenue rulings have been published in the past 5 years.
Revenue rulings from the l960s and 70s are the basis for resolution of todayís tax disputes involving the nationsí largest exempt universities and health systems. James McGovern points out that, "while the Service and Treasury have undertaken efforts to revive the exempt organizations guidance process, those efforts will not succeed without the creation of an Exempt Organizations Tax Counsel and a dedicated staff of experts at Treasury as well as adequate staffing of the Exempt Organizations technical function at IRS, where employees have received RIF notification."
In addition, information returns, Form 5500 for pension plans and Form 990 for tax-exempt organizations, are processed through a "pipeline system" in IRS service centers. The processing system is expensive using the IRSí existing key punch technology.
While a data base of information from Form 5500 returns is available because the Department of Labor (DOL) and IRS share the cost of processing employee plan returns, EP/EO is working to reduce the cost by looking outside the IRS returns processing system. A complete data base of information from Form 990 returns is not available and paper copies must be relied upon. During l995 a complete electronic file from all private foundation returns (Form 990-PF) was created, with the hope that data from all exempt organizations returns would be available in this medium by the summer of l998. However, this initiative was discontinued because of the sharp cuts in IRSí appropriation in fiscal year l996.
If the IRS is to implement its mandate of maintaining the integrity of the EP/EO system, its budget must be increased, staffing must improve and technology must be upgraded. Before drastically overhauling the office of Assistant Commissioner (EP/EO) the IRS should use its raw data, computer facilities and data collection procedures to make information available.
Recent proposals have suggested creating a separate Treasury function for EP/EO, reenacting a separate funding mechanism for EP/EO within the IRS, creating a governmental or quasi-governmental organization for EP/EO and creating a governmental or quasi-governmental organization for EP and a Treasury function for EO. We would like to suggest the formation of a special task force to discuss and evaluate these and other ways to improve the administration of EP/EO. This task force should be comprised of former and current EP/EO officials and outside organizations. Though the idea of creating a distinct unit to handle separate functions is worth considering, the cost of adding a layer or creating an entirely new bureaucracy should be approached with extreme caution.
Thank you again for the opportunity to express our views. We would be pleased to assist you in your efforts.