IRS Issues New Disclosure Rules for Tax-Exempt Organizations

Healthcare Financial Management, Dec, 1999 by Randall W. Luecke, Kevin J. Shortill

Tax-exempt organizations must follow specific guidelines recently set up by the IRS in disclosing to the public their applications for recognition of tax exemption and annual information returns.

The IRS earlier this year issued new regulations that tax-exempt organizations must follow in disclosing to the public certain documents as directed by the Omnibus Budget Reconciliation Act of 1987 (OBRA87) and the Taxpayer Bill of Rights 2 of 1996. The new rules went into effect June 8, 1999. Complying with these rules may pose difficulties in terms of the increased exposure of the documents that must be disclosed, increased labor, time limitations, and penalties, some of which can be imposed upon a director or officer. An organization can escape some of the burden of responding to requests by posting the documents on its Web site, but it still must make the documents available for inspection at its principal office and certain regional offices.

On April 9, 1999, the IRS issued new rules for all tax-exempt organizations, except private foundations, that are described in section 501(c) or 501(d) of the Internal Revenue Code, regarding document dissemination. The rules are intended to increase the availability, accessibility, and uniformity to the format of documents that are placed on the Internet to allow users to make comparisons among tax-exempt organizations more easily. Although the rules are not particularly burdensome, healthcare financial managers will need to deal with increased document exposure, increased labor required to comply with the rules, and new deadlines for responding to requests for documents. Finally, the penalties for noncompliance will personally affect financial managers, since such penalties may be imposed first on the officer or director failing to make the disclosure, not on the organization.

Background

The Omnibus Budget Reconciliation Act of 1987 (OBRA87) required certain tax-exempt organizations to allow public inspection of their applications for recognition of tax exemption, as well as their three most recent annual information returns (eg, Form 990) at the organization's principal office and certain regional or district offices. The Taxpayer Bill of Rights 2 (TBOR2), enacted on July 30, 1996, expanded these disclosure requirements by requiring tax-exempt organizations to provide copies of these documents upon proper request. The 1996 legislation does not supersede the prior legislation--that is, the public retains the right to inspect these documents upon demand, but the legislation expands this right to include receiving copies of the documents upon request. TBOR2 relieves the tax-exempt organization of the latter requirement in the event that the organization makes the documents widely available or the organization is the subject of a harassment campaign. The new IRS regulations provide guidance to tax-exempt organizations on complying with the expanded disclosure requirements of TBOR2. The regulations took effect June 8, 1999.

Implementation Guidance

If they have not already done so, tax-exempt healthcare organizations should immediately assemble the information required to be available for inspection and/or copied for distribution upon request, including the following documents:

* The organization's tax-exemption application (eg, IRS Forms 1023 or 1024), including all documents that are required to be filed with the application and any correspondence with the IRS concerning the application. The organization need not make available any application that is pending with the IRS or any application that was filed prior to July 15, 1987, unless the organization was in possession of a copy of the application on July 15, 1987.

* The organization's annual information returns (eg, IRS Forms 990, 990-EZ, 990-BL, and Form 1065, but not Form 990-T or 1120-POL) for the past three years, inclusive of all schedules, attachments, and supporting documents except for the names and addresses of contributors to the organization.

Copies of these documents must be provided immediately to a requester who appears at the tax-exempt healthcare organization. Under unusual circumstances, the organization is allowed to respond on the business day following the business day that the unusual circumstance ceases to exist, but the delay must not exceed five business days. Examples of unusual circumstances would include the absence due to illness or travel of the individual(s) normally responsible for responding to the request or the volume of requests exceeding the capacity of the organization to respond immediately.

Any office, branch, or site of the tax-exempt healthcare organization is expected to be able to comply with the request for documents, provided that there are at least three or more employees present at the location or unless the particular office does not have a management staff and operates only to provide services consistent with the organization's exemption (eg, an outpatient clinic).

Tax-exempt healthcare organizations also must be prepared to respond to requests in writing. The written request may be delivered by United States Postal Service, e-mail, fax, or private delivery service. The organization receiving a written request has up to 30 days to respond. In the event that the organization requires an advance payment for copies of the requested documents, the deadline for responding is within 30 days of receiving full payment. Telephone requests for copies of documents need not be honored; instead, the requester should be instructed to make the request in writing or in person.