IRS Probes Organizations That Self-Declare Tax-Exempt Status

by Polsinelli
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A Polsinelli Shughart Update

On March 21, Lois Lerner, the Director of the Exempt Organizations Division of the Internal Revenue Service, announced an IRS investigation of organizations that self-declare rather than apply to the IRS for recognition of tax-exempt status. Ms. Lerner made the announcement at the annual Washington Non-Profit Legal & Tax Conference in Arlington, Virginia.

What You Need To Know

Background

  • Under the federal tax law, Section 501(c)(4) social welfare organizations; Section 501(c)(5) labor, agricultural, and horticultural groups; and Section 501(c)(6) business leagues, among others, are able to declare themselves tax-exempt without an official determination from the IRS.
  • To ensure that self-declared tax-exempt organizations are in compliance with IRS rules, the IRS's Exempt Organizations division has sent letters to more than 1,300 self-declaring social welfare organizations, labor unions, and trade associations, and has issued them Form 14449, Self-Declarers Questionnaire (the "Questionnaire"), to be completed and returned to the IRS.
  • Though not a formal audit, the Questionnaire inquires extensively about various aspects of the self-declaring organizations' operations.

Key Concepts Included in the Questionnaire

  • Part I of the Questionnaire requests general information about the self-declaring organization. The most important question in Part I is Question 6. It asks the organization to describe the reason(s) for not applying for recognition of exemption.
  • Part II of the Questionnaire requests information about certain activities of the self-declaring organization and its related organizations. The organization must list each of its activities and indicate the percentage of revenue, expenses, and time devoted to each. The organization must also report the portion of the income from each activity that is unrelated business income.
  • Part III of the Questionnaire requests information about the organization's revenues and expenses.
  • Part IV of the Questionnaire requests information regarding the compensation of the organization's officers, directors, trustees, and key employees.

What You Need To Do Now

Organizations that receive the Questionnaire should carefully complete the document, understanding that the questions are directed at the organization's tax-exempt status. The Questionnaire can also be useful for organizations that are not required to complete it. As with other IRS Questionnaires, it serves as an excellent resource for compliance planning.

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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