IRS Issues Final Rules for Charities on Making Tax Forms Available to Public

The Internal Revenue Service has released final rules explaining what charities and many other non-profit groups must do to comply

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How New Rules on Charity Disclosure Work

Text of the New Rules

with the law that requires them to make copies of their informational tax returns, called Forms 990, readily available to the public. The rules take effect on June 8.

The I.R.S. regulations do not apply to private foundations, even though Congress passed legislation last fall to bring the disclosure requirements for foundations into line with those for charities. The I.R.S. said it would issue proposed rules for private foundations “shortly.”

When the new rules for charities take effect, organizations will be required to provide copies of their three most-recent tax returns immediately to anyone who requests them in person. Non-profit groups will have 30 days to send out copies to people who make written requests. Charities must also provide upon request copies of the applications they submitted to the government when they first applied for tax-exempt status.

Those are significant changes. Charities have been required only to show copies of their returns and applications to anyone who visited their offices; they have not been required to provide photocopies.

The regulations give charities a high-technology alternative to providing paper copies of their tax forms: putting an “exact reproduction” of them on a World-Wide Web site.

Congress made the changes in charity-disclosure policy — and increased the penalities for failing to comply — in legislation it passed in 1996. But the disclosure provisions were not to take effect until 60 days after the I.R.S. issued final rules explaining how it would enforce the statute. The revenue service published proposed regulations more than a year ago (The Chronicle, October 16, 1997) that were very similar to the final rules.

“The final regulations will lead to sharply increased oversight of tax-exempt organizations’ activities by the public as well as by state and federal charity regulators,” said James J. McGovern, a former top charity regulator at the I.R.S. who now works for the accounting firm KPMG.

He added: “It’s generally been perceived that the law on disclosure simply hasn’t been enforced. But the expectation is that, with the change in the law and the increase in penalties, the I.R.S. will begin a relatively significant enforcement effort.”

Charity officials who refuse to allow public inspection or to provide copies of tax returns will face a personal penalty of $20 for every day they fall behind in providing a form, up to a maximum of $10,000 per return. An additional penalty for “willful failure” to follow the statute is $5,000.

“The penalty is going to come as a rude awakening to many organization managers when they realize that the liability is theirs as opposed to the organization’s,” said Mr. McGovern.

The new regulations spell out how charities must respond when people ask for copies under various circumstances.

Requests in person. The rules make clear that when someone requests a copy of the Form 990 in person, the non-profit group generally must hand over a copy on the same day the request is made. But the organization could have more time in “unusual circumstances,” such as when the request is made late in the day and an “extensive amount” of copying is required, or when a charity’s managerial staff is out of the office at a meeting.

In such cases, the charity would be allowed to provide the copy no later than the business day after the unusual circumstances no longer exist. However, charities could not allow more than five business days to pass between the initial request and the mailing of the returns.

Fee for copies. Under the government’s rules, charities will be able to charge only a “reasonable fee” for making copies, plus the actual cost of mailing them. The I.R.S. defines reasonable as no more than the copying fee that the revenue service itself charges when it provides the tax returns to the public: $1 for the first page and 15 cents for each subsequent page.

Location of copies. Charities must make the copies available at their principal, regional, and district offices during regular business hours. The rules say that a regional or district office is one with employees whose aggregate number of paid hours a week is at least 120. A site is not considered a regional or district office if the only services provided further the charity’s mission (such as day care, health care, or scientific or medical research), and the site does not generally serve as an office for “management staff” members.

Written requests. Written requests for forms, which must be answered by charities within 30 days, could be sent in various ways, including through the mail, in e-mail messages, or in faxes, the rules say.

A tax-exempt organization could require advance payment for the photocopies and mailing. In such cases, the 30-day period for providing the form would start at the time the organization received the payment, not on the date of the initial request. Groups that did not require prepayment would have to notify those requesting the forms in advance if the copying and postage costs exceeded $20.

Charities can receive exemptions from the photocopying requirement — but not from the requirement that they make returns available for inspection in their offices — if they make their tax returns “widely available” through the Internet. The I.R.S. said a charity could post an electronic version of its return on its own World-Wide Web site or on another group’s site as part of a data base of similar documents of other organizations.

Charities that go that route must make sure that:

* The Web site through which the form is available clearly informs readers that the document is available and provides instructions for downloading it.

* Anybody with Internet access can download, view, and print the document free without special computer hardware or software (other than software that is readily available to the public at no charge).

* The document is posted in a format that “exactly reproduces the image” of the real Form 990. In an explanation that accompanies the final rules, the I.R.S. noted the name of a format that currently satisfies the criteria: “PDF” or Adobe Acrobat files. The format makes it easy to provide electronic replicas of paper forms, but it also requires users to download a free software program to read them.

The I.R.S. said it was not endorsing any one approach and added that it expected that a number of formats would qualify in the future as technology advances.

When it drafted the law, Congress said that it did not want charities to be compelled to provide copies of their returns to people who simply wanted to harass an organization.

The final regulations carry out that intention by stating that charities do not have to accede to requests for information when it is clear that the purpose of the requests is to disrupt the organization’s operations.

The rules say charities that saw a sudden increase in the number of requests for forms, or received an extraordinary number of requests made through form letters or similarly worded correspondence, or were inundated with requests that contained language “hostile” to the organization could make a case with the revenue service that they were right to reject such requests.

A tax-exempt group could refuse to send copies of its tax returns to those suspected of harassment if, within 10 business days of the date it stopped sending the forms, it asked the I.R.S. to investigate and determine whether a harassment effort was indeed under way. The rules allow a charity to disregard requests from individuals who ask for more than two copies a month or four per year.

In the explanation that accompanied the rules, the government said that it intends to publish a policy statement that will provide details about how it will identify harassment campaigns, and impose and reduce fines.

The new regulations include hypothetical examples to show a charity how to figure out if it would be considered the target of a harassment campaign.

The Internal Revenue Service says that a tax-exempt group cannot claim harassment just because a story in a national news magazine discussed information contained in the group’s return and inspired a sudden jump in the number of public requests for its Form 990.

Even if a group is genuinely being harassed by its opponents, the service said, it must still comply with requests from journalists who have no apparent ties to the harassment campaign but who in the past have written stories “hostile” to the organization.

“Normally, the Internal Revenue Service will not consider a tax-exempt organization to have a reasonable belief that a request from a member of the news media is part of a harassment campaign,” the rules say, “absent additional facts that demonstrate that the organization could reasonably believe the particular requests from the news media to be part of a harassment campaign.”

The I.R.S. regulations say that anyone having trouble obtaining a copy of a charity’s tax return or application for tax-exempt status should blow the whistle by contacting the director of the local I.R.S. “key district” in which the non-profit organization’s principal office is located, or anyone designated by the Internal Revenue Commissioner.

Mr. McGovern, the former I.R.S. official, noted that the proposed rules issued in 1997 advised people to turn to the director of the Exempt Organizations Division, in Washington, for help.

Going straight to the top would have been better, said Mr. McGovern. “Diffusing oversight to the key district offices makes it less likely that an aggrieved individual will know with whom to file a complaint and — based on past history of enforcement — less likely that the I.R.S. will aggressively and effectively oversee violations.”

The final regulations do not affect private foundations, which currently follow separate rules that allow them to restrict public access to their informational tax returns.

Foundations are only required to make their Forms 990-PF available for inspection — not for photocopying — if a request for the forms is made by a U.S. citizen within 180 days of foundations’ publishing a notice that they have filed the annual returns with the government. For half the year, private foundations may keep their forms secret.

Last year, Congress changed the law so that foundations would have to conform to the requirements set for charities. But the law’s provisions will not take effect until 60 days after the I.R.S. issues final regulations to explain how it will enforce the statute. Because the government has yet to issue even temporary rules, many months, if not years, are likely to pass before private foundations will have to change the way they make their forms public.

The final rules for non-profit organizations were published in the April 9 issue of the Federal Register, Pages 17,279-291.