ACT Report on IRS and Small Exempt Organizations

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The Advisory Committee on Tax Exempt and Government Entities (ACT) has released its annual report and recommendations to the IRS on selected issues concerning exempt organizations, employee benefit plans, tax-exempt financing, and state and local governmental entities. See our post about last year’s report here. The annual ACT report is always an important indicator and focus group of IRS trends. This year’s Exempt Organizations (EO) report, “Leveraging Limited IRS Resources in the Tax Administration of Small Tax-Exempt Organizations,” is particularly interesting. The development of the Report and recommendations preceded the so-called “IRS TEGE scandal” involving alleged targeting of certain (c)(3) and (c)(4) applications for review, the exodus of Lois Lerner, and the consequent infusion of long-needed resources for eliminating or reducing EO application and review bureaucratic delays, due to pure and simple overload, and limited resources, exacerbated by the Sequester.

The Report also reflects a serious effort by all the players to figure out how to leverage limited administrative, educational and enforcement resources in the interest of providing more public information, transparency and accountability for the “small” and “very small” EOs (in part because the Attorney-General offices (AGOs) often see these EOs being an easy target for fraudsters at the local level, an arena AGOs are charged with policing and which they have far more incentives to monitor than the IRS), expanding the availability of education and technical assistance for these EOs through leveraging a range of private/public vehicles, plus the IRS website itself, and enhanced information sharing for all these purposes with state charity regulators.

The Report is also very useful as an overview and analysis of these issues, and quite readable/accessible. Further, there is substantial consensus on almost all of the recommendations, and a clear and very positive evidence of meaningful dialogue between the IRS and the ACT members, a dialogue that, post-scandal, has become a quite meaningful vehicle for implementing IRS reforms that dramatically further collaboration and cooperation, and as a response and remedy for the IRS to its congressional critics.

Herewith three highlights and commentary on the three major Report recommendations:

  1. More information from 990 EZ filers, via additional schedules, in order to require relevant information from these organizations, to avoid them falling through the cracks in terms of disclosure, transparency and compliance. The ACT trade-off was to decline the threshold for eligibility to use the 990EZ, as opposed to requiring the 990 filing (a position certainly favored by charity regulators), and to defer requiring the 990 governance information, pending the outcome of an IRS study evaluating which governance measures are useful indicators to evaluate EO compliance.
  2. For all intents and purposes, the enhanced education recommendations were totally agreed upon and make a huge amount of sense, and apparently are in the process of being implemented, now that the IRS has been given added resources to effect change and reform. And they are, in fact, “no-brainers” in terms of benefit to these EOs in particular –i.e. the addition immediately to the IRS home page of a link to EOs, which heretofore did not exist and created huge obstacles to accessing otherwise very user-friendly educational and awareness materials; the continued expansion of collaboratives with various educational entities to provide education and expanded technical assistance to EOs, including easy to access checklists –publicly and readily available. This educational expansion is critical to any effective and fair enforcement or compliance effort and, hence, is also a huge benefit to any regulator.
  3. The third section on IRS –state charity regulator information-sharing is surely of greatest interest to the regulator and legal community, and may seem totally arcane, if not draconian, to the EOs themselves. How to achieve enhanced information sharing with state regulators, surely an obvious, common sense method of leveraging limited resources, has bedeviled AGs in particular for years –and created obstacles to effective enforcement that only the shady EOs and a community fearing or suspicious (rightly or wrongly) of prosecutorial political or other abuse could love.

The report appends the NAAG letter which highlights the major issue i.e. reforms designed to allow the IRS to share information about its actions or proposed actions, which the public charity is aware of, with state regulators in the PPA Act of 2006, essentially became a gift that did not keep giving! Proposed rules implementing the IRS’s sharing authority were issued in 2011 but have not been finalized. The information could be shared but the state had to climb mountains in order to use it, and risked criminal penalties if it were disclosed in anything other than a formal administrative or adjudicatory hearing process! Therefore, in spite of herculean efforts by the IRS to try to work out information sharing methods, most states simply could not use the information to initiate an inquiry or take the risk that it might have to be disclosed, given their various disclosure and discovery rules and practices. This lack of sharing directly affected the states, who are the “eyes and ears” and are particularly concerned about these smaller entities as targets for fraud.

A practical outcome of this Report, and perhaps the scandal, is that now states can get the information, though they must lock it up, but they now may call the charity and ask questions based on the information they get, information the charity already has. This new freedom to share, combined with generally excellent relationships state regulators have with their IRS liaisons and their ongoing regular meetings with key IRS TEGE staff, is deemed a major breakthrough and resource for the states. The community affected may not agree, of course, but at least this way even opponents of enhanced government oversight surely may have trouble arguing that it is in the public and charitable interest to prevent these federal and state agencies from being more efficient, effective and coordinated.

Given the consistent public posture of the Independent Sector that the non-profit community supports enhanced enforcement and compliance as a useful complement to self-regulation, these efforts to enhance disclosure, ensure better education and coordinated enforcement for the vast majority of small and very small EOS must surely be applauded and encouraged. Given that the protections of confidentiality of tax returns for taxable entities are preserved fully, and we are dealing here with EOs that receive a highly favorable tax treatment and public subsidy through the deduction, frankly, the only real question is why it has taken so long to provide these tools as key components of public trust oversight, and leads one to wonder who the opposition is and what those motives are!

Topics:  Exempt Organizations, IRS

Published In: Nonprofits Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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