IRS Considers Changes in Disclosure Rules for Many Groups

Washington

Many nonprofits and their affiliates could face expanded requirements to disclose information to the Internal Revenue Service if some tax-agency officials and advisers get their way. What’s more, the IRS might require each affiliate to prove it deserves tax exemption, rather than granting one exemption to cover every affiliate.

Such changes could be a big deal—250,000 charities are part of big national organizations, the IRS estimates. Organizations like the American Cancer Society, Habitat for Humanity, and the NAACP all would be affected by a change.

Under current IRS rules, nonprofits with affiliates can apply for tax-exempt status as a group. They can then choose to file one informational return each year with the tax agency that covers all the affiliates. That eliminates paperwork for local groups, but it also means that neither the tax agency nor the public will be able to find out details about how much each local affiliate pays its leaders or what percentage of its donations go toward the mission—or other key pieces of information.

Concerned about the lack of information available about affiliates, Holly Paz, a top official in the IRS’s tax-exempt unit, said today the 70-year-old practice of approving one group application for tax-exempt status may no longer make sense.

“Times have changed, but the group-exemption process has not,” said Ms. Paz. “The IRS has evolved a great deal since 1940 when the group exemption was first issued. There is now an expectation of transparency and accountability. This is an issue whose time has come.”

She said the IRS was especially concerned that it was in essence delegating to national headquarters the job of checking whether affiliates met the basic rules for tax exemption.

Dean Zerbe, a Washington lawyer who previously was a top aide to Republicans on the Senate Finance Committee, said the move by the IRS to consider changing how big groups report their finances is wise.

“It’s a good idea to say, Let’s get a better picture,” Mr. Zerbe said. “Any time in the charitable sector that you don’t have the sun shining, mischief can be happening.”

Group Returns

Ms. Paz made her remarks at a meeting of an IRS advisory committee, made up of five lawyers and an accountant who specialize in advising nonprofit groups. The panel recommended today that the tax agency eliminate the option of filing group tax returns. About 600 to 700 organizations choose to file a group return, including groups like Susan G. Komen for the Cure.

James P. Joseph, a Washington tax lawyer who serves on the advisory committee, acknowledged that “some people might be upset” by the paperwork change. But, he said, if groups are already preparing their returns properly, it would not be a big change because parent organizations are supposed to ask their affiliates to fill out an informational tax return; the headquarters then aggregates the information.

“It shouldn’t be that much more work, but we just don’t know whether groups have actually been doing that,” Mr. Joseph said.

Concerns Raised

While Ms. Paz said she and her colleagues at the tax agency are still considering whether to continue to allow groups to apply for a single tax exemption, the advisory panel urged the tax agency not to.

“The original objective of the group-exemption procedures was to lessen the administrative burden on subordinate organizations and on the IRS,” the advisory panel said in a report, and we believe that remains a valid rationale.”

Ending the group tax exemption would increase accountability “to a limited degree” the report said, but it could also raise legal objections from groups that would lose their tax-exempt status.

Even if such a change was forward-looking and didn’t apply to those groups that already have the group tax exemption, new groups could raise legal objections that they had received disparate treatment, the report said.