Issues for Private Foundations and Other Donors in the Wake of the IRS Automatic Revocation of Exemption List
Tax-Exempt Organizations Update 06/20/11
The Pension Protection Act of 2006 directed the Internal Revenue Service to revoke automatically the tax-exempt status of any organization that fails to file its annual information return (Form 990-N, Form 990-EZ, Form 990, or Form 990-PF) with the IRS for three consecutive years. This rule particularly affects small organizations who, prior to the advent of the small organization Form 990-N requirement that was adopted as part of the Pension Protection Act, did not have to file a return. Since that time, the IRS has conducted significant outreach to tax-exempt organizations in an effort to bring endangered organizations into compliance. As part of this outreach, the IRS released a preliminary list of organizations whose tax-exempt status was in danger due to repeated failures to file. On June 8, 2011, the IRS issued its final list of organizations whose status has now been revoked for failure to file information returns. The "Automatic Revocation of Exemption List" (the "List") is organized by state and can be found in a searchable format on the IRS website.
The revocation of tax-exempt status has serious consequences for a listed organization as well as the organization's donors and supporters. Private foundations and other grant-making organizations can no longer treat a listed organization as tax-exempt under Code Section 501(c)(3) or as a public charity effective as of the due date of the third missed filing. As a result, a private foundation must either discontinue further payments to a listed organization or exercise expenditure responsibility over any additional grants to a listed organization in order to avoid the imposition of an excise tax under the private foundation rules. All grant-makers must ensure that grants to listed organizations continue to serve charitable purposes. Finally, gifts by individuals or businesses to listed organizations are no longer income tax-deductible.
The List constitutes notice to the general public that donors may no longer rely on the letter a listed organization previously received from the IRS recognizing the organization's tax-exempt status. Therefore, even if a donor was not aware that a listed organization's exemption was revoked, the IRS will treat the donor as if it should have been aware of the revocation. Accordingly, private foundations and other donors cannot be passive about reviewing the tax status of the organizations they support. In light of the release of this List, we recommend that private foundations and other donors take the following steps:
- Check the tax-exempt status of grantees on Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986, and the IRS Business Master File ("BMF");
- Although the IRS indicated that Publication 78 and the BMF have been updated, donors should additionally check for the name of the grantee on the List itself.
- Immediately cease further distributions to any grantee that is a listed organization until its tax-exempt status can be verified or, if the donor is a private foundation, until expenditure responsibility procedures can be put in place, if desired;
- For a new grantee or prior to the next disbursement of funds to an existing grantee, request a statement that the grantee has timely filed information returns for the last three years and that there has been no change in its tax-exempt status; and
- In any new grant agreement or deed of gift, require the grantee to inform the donor of any future change in the grantee's tax-exempt status.
Many organizations use third-party tools, such as GuideStar's Charity Check, to research potential grantees, rather than checking Publication 78 and the BMF directly. We understand that many of these third-party tools have or are in the process of incorporating the List into their databases. The IRS has indicated that a donor may rely on a due diligence report on a potential grantee obtained from a third party, such as GuideStar, if it meets all of the following criteria:
- The report information is extracted from the BMF;
- The report includes the name, EIN, and foundation status of the potential grantee as well as whether contributions to the organization are deductible;
- The report indicates that it is based on the most recent version of the BMF and the date of the BMF extract revision; and
- The donor retains a hard copy of the report in its files.
If you have any questions regarding this update or would like to discuss these issues further, please contact any member of the Tax-Exempt Organizations Team or your Quarles & Brady attorney.