The Internal Revenue Service yesterday announced rule changes that will streamline its approval process for organizations seeking tax-exempt status as charities and other nonprofit organizations, some of which issue municipal bonds.
The changes are to bring the IRS rules in line with its redesigned Form 990, which is the annual tax return filed by these groups.
The streamlining comes at the same time that Sen. Chuck Grassley, R-Iowa, the ranking minority member on the Senate Finance Committee, has been investigating whether certain charitable hospitals have taken actions that jeopardize their tax-exempt status.
Last week, the senator announced that he had sent letters and questionnaires to M.D. Anderson Cancer Center in Houston and the University of Chicago Medical Center about whether they had pressed patients for payments or drove under- and uninsured patients to other clinics - actions that could undermine their exempt status.
Both hospitals stated that they plan to answer the questionnaire and defended their charitable bona fides.
A spokesperson for Grassley yesterday said the senator favored the change since it will likely reduce the burden on small organizations and free up IRS resources for more compliance work.
IRS officials said the streamlining made sense because the vast majority of organizations that preliminarily receive tax-exempt status retain it after a five-year period.
"Given the high 'recognition' rate and the redesigned Form 990, it makes sense to eliminate the burdensome advance ruling process," Lois G. Lerner, director of the IRS exempt organizations division, said in a statement. "Not only will the streamlined process aid exempt organizations, but it will also allow the IRS to redirect staffing to other program areas without compromising compliance."
In the notice announcing the changes, the IRS said that roughly 95% of charities that have received a tax-exempt advance ruling have retained the status at the end of the review period.
Before these rules changes, an organization seeking tax-exemption as a 501(c)(3) charitable organization would receive an advance ruling that it was granted preliminary tax-exempt status, contingent upon review. After five years, the organization would have to demonstrate to the IRS that it has received substantial support from public sources and in fact functioned as a public charity. At that point, the IRS would grant the organization permanent tax-exempt status.
Under the changes to the rules and form, organizations will be granted tax-exempt charitable status upon application, and the IRS will simply monitor their Form 990s to determine if their status needs to be reexamined. Organizations currently under the review process will be allowed to take advantage of the new rules, and will be deemed to have permanent tax-exempt status unless their Form 990 filings merit a reevaluation.
Thanks to the enhanced information-gathering and transparency brought on by the redesigned form, the IRS said it is able to end its lengthier approval process, lessening the burden for charitable organizations and freeing up IRS staff for other projects.
"The revised Form 990 enhances transparency for exempt organizations and makes it easier for them to show that they are 'publicly supported' charities, rather than private foundations," IRS commissioner Doug Shulman said in a statement.
