IRS Exempt Organizations Branch – A Perfect Storm
By Amy Driscoll, CPA
GetInvolved Nonprofit Guide Article published in the July 2013 News Journal
After years and years of anonymity, the IRS Exempt Organizations Determinations Office is in the eye of a raging political storm. In reading the headlines, you may be thankful that you are not trying to gain exemption for a group with “Tea Party” or “Patriot” in its name, but the surge from this storm may spread farther than you think.
In 2008, the Pension Protection Act of 2006 started requiring many more organizations claiming exempt status to file reports with the IRS. All nonprofits are now required to file a form annually, even those with fewer than $25,000 in gross receipts. Small organizations are required to file a 990-N “e-Postcard,” whereas previously there was no reporting requirement at all for entities of that size.
The consequence of not filing for three consecutive years is a revocation of tax-exempt status. Starting in 2011, organizations that were unaware of these changes or did not comply for various reasons had their status revoked. Reasons for non-compliance ranged from frequent change in board members who were unaware of the requirements to previous notices to an address change whereby no IRS notices were received. The reason didn’t matter – revocation became widespread. According to the IRS website, over 1,600 entities in Delaware alone automatically lost their exempt status.
In order to be reinstated as a tax-exempt entity, organizations are basically required to start over. A 40-page Form 1023 (or 1024 depending on the type of organization) needs to be submitted, with accompanying fees ranging from $300 to $850. In what you might presume was a predictable event, a wave of re-applications has hit the IRS since the revocations began and the already-reeling Exempt Organizations Determinations Office has been trying to cope with the increased volume.
To complete the disaster, the recent scandal hit. As a quick recap, some IRS agents within the Exempt Organizations Determinations Office were found to have inappropriately targeted groups with politically sounding terms in their names, such as “Tea Party” or “Patriot.” There are continuing revelations resulting in senior officials being fired, resigning or “taking the Fifth” in congressional hearings. An ironic side note is that, as 501(c)(4) organizations, these groups had not been required to file for formal approval of their exempt status.
As someone who calls the IRS often on behalf of my clients, I can tell you that there are many helpful, professional and courteous IRS employees. There are also a few who are challenged in those areas. While some may see a high-level conspiracy here, from our experience, whether you are able to get anything accomplished often depends simply on who picks up the phone (or file) at the IRS.
The Exempt Organizations Determinations Office of the IRS is at a near standstill with reviewing applications. At the AICPA’s Not-For-Profit Industry Conference on June 20, Ms. Lois Lerner was scheduled, but not available to present (she had been in charge of the Exempt Organizations Division of the IRS before infamously taking the Fifth at a congressional hearing). Her replacement at the conference, Mr. Marcus Owens, reported that the IRS Exempt Organizations Determinations Branch is in a virtual lockdown. He also noted that the Branch is now assigning for review applications received in April of 2012. That’s not a typo – they are now reviewing applications that were received 15 months ago! Mr. Owens may have been channeling Ms. Lerner when he suggested that the audience of CPAs write to their representatives in Congress, implying the delay was primarily their fault.
If you have filed a Form 1023, 1024 or 8734 (used to convert private foundations into public charities) or are planning to file one in the near future, be ready to hunker down and ride out the storm – I wish we had better news. When your application is eventually reviewed and hopefully approved, the exempt status will be retroactive to the date the form was filed. It is possible to request an earlier retroactive date, but that may result in further delays in processing.
If you have questions about changes to your organization’s exempt status, please contact Pete Kennedy, Amy Driscoll or any other member of our Nonprofit Practice team, at Cover & Rossiter at (302) 656-6632.
Cover & Rossiter, P.A. is one of the most respected and experienced CPA firms serving the accounting, tax and audit needs of the nonprofit community in Delaware.