The Internal Revenue Service has recently published its final regulations on public inspection of material relating to tax-exempt organizations, which affects organizations that were exempt but are no longer exempt from federal income tax, and organizations that were denied tax-exempt status.
In TD 9581, the IRS issued final regulations pertaining to the public inspection of material relating to tax-exempt organizations and final regulations pertaining to the public inspection of written determinations and background file documents. These final regulations amend sections of the Tax Code to eliminate the portions of the previous regulations that the U.S. Court of Appeals for the District of Columbia Circuit, in the case of Tax Analysts v. IRS, held violated Section 6110 of the Code.
Prior to the Tax Analysts decision, the IRS relied on those regulations to withhold letter rulings denying or revoking tax-exempt status from public inspection under Section 6110. In accordance with the Tax Analysts decision, the IRS now makes those letter rulings available for public inspection pursuant to Section 6110. The final regulations also update Section 301.6104(a)–1 to conform to other current laws and administrative practices.
The final regulations affect organizations exempt from federal income tax under Section 501(a) or Section 527, organizations that were exempt but are no longer exempt from federal income tax, and organizations that were denied tax-exempt status.
Last year, the IRS revoked the tax-exempt status of 275,000 nonprofit organizations across the country that failed to file their Form 990 series returns for three years in a row. After hearing an outcry, the IRS later provided some relief to organizations that had overlooked the requirements (see What to Do When a Nonprofit Client Loses Tax-Exempt Status).
The IRS has also come under pressure from Democrats and Republicans alike in Congress over the question of how it treats political organizations seeking a tax exemption under Section 501(c)4 of the Tax Code, which allows them to avoid disclosing their donors. In general, Democratic lawmakers have pushed for denying tax exemptions to many of the 501(c)4 groups which are allied with the so-called Super PACs that formed in the wake of the Supreme Court's Citizens United decision, while Republican lawmakers have pressed the IRS to grant the tax exemptions, particularly to Tea Party affiliated groups.
The IRS has denied that it is taking the groups' political views into account when making determinations of their tax-exempt status or when asking for further information from them. IRS Commissioner Doug Shulman addressed the question in a congressional hearing last week (see IRS Says Tea Party Groups Aren’t Targets).
In TD 9581, the IRS said if it determines that an organization described in Section 501(c) or Section 501(d) is exempt from federal income tax for any taxable year, the application upon which the determination is based, together with any supporting documents, would be open to public inspection, even after any revocation of the IRS’s determination that the organization is exempt from federal income tax. In the past, however, some applications were destroyed and therefore are not available for inspection, the IRS added.
The letters or documents open to public inspection could include favorable rulings and determination letters, such as group exemption letters, along with technical advice memoranda.
They could also include letters issued in response to an application for tax exemption that propose a finding that the applicant is not entitled to be exempt from federal income tax, if the applicant is subsequently determined, on the basis of that application, to be exempt from federal income tax. In some cases outside groups have written to the IRS urging the agency to revoke or deny the tax-exempt status of religious or social action organizations they accuse of advocating on behalf of political candidates or providing financing to suspected terrorist groups. Also open to inspection would be a determination letter that an organization is or is not a private foundation.