The Boomerang Effect and Tax Exempt Organizations

The Protecting Americans from Tax Hikes (“PATH”) Act of 2015, contained a provision by which tax-exempt organizations (a “TO”) could challenge revocation of exempt status by virtue of the filing of a declaratory judgment in federal court.  The language of the Act appears to indicate that this was an attempt by Congress to provide TOs with expanded rights in the revocation process by permitting all TOs, not just certain categories of them, to challenge rulings on their status, as was the case in the past.  According to published reports, however, what Congress giveth, the Internal Revenue Service taketh away.

A recently issued memorandum from the Tax Exempt and Government Entities Division (“TEGE”) of the IRS states that TEGE will not modify a TO’s status by shifting it from one Internal Revenue Code exempt organization section (or subsection) to another.  In other words, since all organizations applying for or operating under Internal Revenue Code §501 may seek declaratory relief upon denial or revocation of exempt status, the IRS will not try to “help” such organizations by modifying their status.  The IRS will merely deny or revoke exempt status and let the organization take its battle to federal court, albeit at some time and expense to the TO.  Alternatively, the TO may reapply for exempt status, again at some time and expense (legal, accounting and application fees) to the TO.

Agents conducting audits of exempt organizations are now prohibited from proposing a modification of exempt status for an organization.  Form 6018 (“Consent to Proposed Adverse Action”) will be modified to eliminate such a proposal.  Specific instructions have been issued to agents regarding development of an “administrative record” regarding IRS adverse TO actions and the issuance of “thirty day letters” and “ninety day letters” regarding adverse actions.

PK Law Tax Attorneys can assist with tax issues and controversies.  To contact a PK Law Attorney for additional information or to schedule an appointment go to information@pklaw.com

 

This information is provided for general information only.  None of the information provided herein should be construed as providing legal advice or a separate attorney client relationship. Applicability of the legal principles discussed may differ substantially in individual situations. You should not act upon the information presented herein without consulting an attorney of your choice about your particular situation. While PK Law has taken reasonable efforts to insure the accuracy of this material, the accuracy cannot be guaranteed and PK Law makes no warranties or representations as to its accuracy.