1. Summary. The Internal Revenue Service ("IRS") has issued regulations requiring tax-exempt organizations to provide copies of their applications for recognition of exemption and most components of their tax returns to the public. The new rules apply to organizations described by Sections 501(c) or (d) and exempt from taxation under Section 501(a) of the Internal Revenue Code ("IRC"). The new regulations took effect on June 9, 1999.
2. Prior Law. Prior law required each tax-exempt organization (including private foundations) to permit public inspection of the organization's application for recognition of tax exemption. Similarly, Federal statute required tax-exempt organizations (other than private foundations) to permit public inspection of the organization's three most recent annual information returns. Prior law did not require tax-exempt organizations to provide copies of the foregoing documents to the public.
3. Statutory Changes. The Taxpayer Bill of Rights, enacted on July 30, 1996, (the "1996 Act") added public disclosure requirements. The 1996 Act required all tax-exempt organizations (including private foundations) to provide copies of the organization's application for recognition of tax exemption if requested by the public. The 1996 Act also required tax-exempt organizations other than private foundations to provide copies of their three most recent tax returns to the public.
The Tax and Trade Relief Extension Act of 1998, enacted on October 31, 1998, (the "1998 Act") changed the law to require private foundations to permit inspection of and provide copies of their three most recent tax returns to the public.
4. New Regulations. On April 9, 1999, the IRS issued regulations detailing the new disclosure requirements. The new requirements apply to public inquiries received after June 8, 1999. Here is a synopsis of the new regulatory requirements:
A. What Must Be Disclosed.
(1) Application for Recognition of Tax Exemption. The tax-exempt organization must provide its Form 1023 or Form 1024 and all supporting documents filed by, or on behalf of, the organization in connection with its application. Any letter or document issued by the IRS in connection with the application must also be disclosed.
The tax-exempt organization need not disclose an application to the IRS when the IRS has not yet recognized the organization's tax exemption or has refused to recognize the organization's tax exemption. If the tax-exempt organization filed its application before July 15, 1987, the organization need not disclose the application unless that organization had a copy of the application on July 15, 1987.
(2) Tax Returns. Tax-exempt organizations must disclose their annual information returns, including Forms 990, 990-EZ, 990-BL, and Form 1065, for the preceding three years. The tax-exempt organization generally must also disclose all schedules associated with such information returns, including Schedule A of Form 990 and those parts of the return that show compensation paid to specific persons. The general disclosure requirement with regard to tax returns is subject to several important exceptions. The tax-exempt organization need not reveal the name or address of any of its contributors. Similarly, the tax-exempt organization does not have to disclose Schedule A of Form 990-BL, Form 990-T (Exempt Organization Business Tax Returns), Schedule K-1 of Form 1065, or Form 1120-POL (U.S. Income Tax Returns for Certain Political Organizations). Finally, the tax-exempt organization need not disclose returns more than three years old.
(3) Private Foundations. Even though the 1998 Act applied to private foundations the same disclosure rules governing other tax-exempt organizations, the 1998 Act will not bind private foundations until the IRS issues new regulations governing private foundations. Until the IRS issues said regulations, private foundations must comply with rules as they existed before passage of the 1998 Act, i.e., private foundations must disclose, and provide copies of, their applications for recognition of tax exemption. Private foundations must disclose, but need not provide copies of, their annual tax returns. The IRS promises to issue new regulations for private foundations "soon".
B. Where Documents Must Be Available for Public Inspection. Generally, the documents must be available at the tax-exempt organization's principal office and, if the tax-exempt organization is large, at certain regional or district offices. A "regional or district office" is one where the tax-exempt organization maintains (1) at least three employees and (2) administrative or management staff other than those who manage the delivery of services that further the organization's exempt purpose. Members of the public who request to examine the tax-exempt organization's documents must be permitted to freely examine them and take notes. An employee may remain in the room while the visitor examines the documents.
C. Copies. Generally, a tax-exempt organization must provide copies of the documents at the offices where said documents are available for inspection. Normally, when a request is made in person, the copies must be provided the same day. When unusual circumstances exist (e.g., all management staff are away at a meeting) the organization can delay providing copies until the next business day following the day the unusual circumstances cease to exist. However, in no event may the period of delay exceed five (5) business days.
When a request for copies is made in writing, the organization must mail the copies within 30 days after the date of receipt of the request. The tax-exempt organization may adopt a policy requiring prepayment of copying and postage fees. If the organization adopts such a policy, the organization must mail the requested copies within 30 days after receiving payment. If the organization receives a written request for copies with no payment enclosed, and the organization requires advance payment, the organization must request payment within 7 days after the date it receives the request.
The regulations permit a tax-exempt organization to charge $1.00 for the first page and $.15 for each subsequent page as reasonable copying charges, plus postage. However, the tax-exempt organization must receive consent from a requester before providing copies for which the fee charged for copying and postage exceeds $20.00.
D. Internet Posting. A tax-exempt organization need not comply with requests for copies if the organization posts the documents available to the public on the organization's World Wide Web page. The posted documents must be exact facsimiles of the originals and must be downloadable.
E. Harassment Campaigns. A tax-exempt organization may disregard requests for copies in excess of two per month or four per year made by a single individual or sent from a single address. In addition, a tax-exempt organization may petition the IRS's district director for the district in which the organization's principal office is located for permission to cease complying with document requests if a harassment campaign develops.
5. Recommendations. The new regulations obligate tax-exempt organizations to respond quickly to requests to inspect or copy the documents described above. In light of the short deadlines, all tax-exempt organizations should establish policies now for handling requests for inspections and requests for copies. Such policies should include designation of personnel to process requests, prior assembly of documents subject to disclosure and copying, and prior calculation of copying and postage costs. All tax-exempt organizations should adopt a policy requiring prepayment of copying and postage costs. If you have questions, please do not hesitate to contact us for additional guidance.