SAN FRANCISCO - The Internal Revenue Service may survey a larger group of nonprofit organizations or conduct "compliance checks" to better determine the extent to which they are complying with the tax laws and rules pertaining to their outstanding tax-exempt bonds, the director of the agency's tax-exempt bond office said Friday.

"At this point we're evaluating what kind of follow-up there ought to be," Clifford Gannett said, after the IRS released a report Thursday showing that less than half of 192 nonprofit organizations could show they were complying with bond requirements.

The survey found that there are "significant pockets of industry inattention to post-issuance compliance, particularly with respect to maintenance of records throughout the life of the bonds" among tax-exempt 501(c)(3) charitable organizations.

The IRS said in the report that it is preparing between 200 and 500 similar surveys to be sent to governmental bond issuers by the end of this year.

In its findings on the nonprofit organizations, the IRS said that, although 95% of the 192 organizations that responded to the survey stated they had established procedures to ensure proper post-issuance tax compliance, only 16% "demonstrated conclusively" with written documents that they had compliance processes in place.

"The responses to the questionnaire indicated that there is a high recognition of the importance of post-issuance compliance and recordkeeping, however, the overall effectiveness of the implementation of such programs is questionable," the IRS stated in the report. "Further testing through examinations or other field tests may be warranted to further assess compliance in these areas."

But Gannett said Friday that a more likely follow-up would be to conduct a larger survey or do field compliance checks, which he stressed would not be audits and would not involve enforcement action. In these checks, a field agent would request tax information from an organization to determine its level of compliance.

Overall, just 49% of the groups that responded to the survey indicated they had specific procedures in place for post-issuance compliance and record retention and only 33% of those organizations stated they had "ad hoc" procedures to ensure compliance in the area.

Of the remaining respondents who said they had procedures in place, 28% said they relied on bond documents, 4% simply restated the question in their response, 6% did not provide enough details to determine what procedures, if any, they were using, and 9% did not answer the question.

Overall, the IRS sent out 207 surveys and received 192 responses. Of the 15 organizations that did not respond, only four failed to respond at all and the other 11 provided specific reasons for their inability to complete the survey, such as that they did not have any outstanding bond obligations for the year surveyed. The IRS said it is considering whether it is appropriate to follow up on the four non-respondents by auditing them.

The survey, which the agency calls a "soft-contact" initiative, is the first of its kind in the municipal market and illustrates a kinder, gentler IRS. The agency said it was pleased with the high level of interest and positive response that it has received from the tax-exempt bond industry. As a result, it said the tax-exempt bond office may consider making these non-examination compliances surveys a key part of its compliance efforts.

"While an active examination program is fundamental to ensuring compliance, TEB has recognized the industry's very positive response to alternative soft-contact compliance approaches," the report stated. "Specifically, comments have suggested that information-gathering projects, such as this compliance questionnaire, should be an integral component to the IRS's tax-exempt bond compliance program."

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