New Rules for Charity Disclosure

IRS issues proposals to govern how charities must comply with law requiring wide access to tax returns

A new law that will make it easier for the public to get information about charities’ finances has moved a big step closer to taking effect.

The Internal Revenue Service has released proposed regulations on what charities and other non-profit groups must do to make copies of their informational tax returns, called Forms 990, readily available to the public. Congress had passed legislation last year requiring the change, but the provision was not to take effect until 60 days after the I.R.S. had issued final rules explaining how it would enforce the statute.

The revenue service will hold a hearing on its proposal in Washington on February 4 and says that it hopes to release its final rules soon thereafter.

Now, charities are only required to show copies of their tax returns to anyone who visits their offices in person. Organizations do not have to provide visitors with their own photocopies to keep.

When the law takes full effect, charities will be required to immediately provide copies of their three most-recent tax returns to anyone who requests them in person. Non-profit groups will have 30 days to send out copies to people who make written requests for them.

By year’s end, the I.R.S. hopes to release proposed regulations on a second key part of the law: new penalties that the government can impose on non-profit officials who receive or approve unreasonably high salaries or other inappropriate benefits. Most of the provisions of that part of the new law went into effect last year even though no regulations explaining how it would work had been issued.

Charities can receive exemptions from the photocopying requirement if they make their tax returns available through the Internet or if they can show that requests for copies are being made by opponents who simply want to make them do extra work.

Charities that refuse to allow public inspection or to provide copies of returns face a penalty of $20 for every day they fall behind in providing the forms, up to a maximum of $10,000. The penalty for “willful failure” to follow the statute is $5,000.

Neither the law nor the proposed regulations affect private foundations, which are allowed to follow separate rules that restrict public access to their 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.

The I.R.S.’s proposed regulations flesh out the law by describing in detail what tax-exempt organizations would have to do to comply with it. For example, the rules define “reasonable” photocopying fees — $1 for the first page and 15 cents for each subsequent page — and explain the format that non-profit groups must use to post their Forms 990 on the Internet.

Representatives of non-profit groups generally praised the way the rules were designed.

Bob Smucker, senior vice-president of Independent Sector, a coalition of charities and grant makers, said the proposed rules seemed at first glance to be appropriate. “They send a terribly important message that compliance with the law is important and openness to the public is important,” Mr. Smucker said.

Nevertheless, some in the non-profit world worry that neither the proposed rules — nor the legislation passed by Congress — would make it easy enough for the public to obtain information about charities. “Non-profits have had to show copies in the past, and lots of them have refused to,” said Harriet Bograd, founder and coordinator of the Nonprofit Cyber-Accountability e-mail discussion group, which examines how technology can help make tax-exempt groups more accountable to the public. The discussion group was an outgrowth of a two-year study of accountability in the non-profit world conducted by Ms. Bograd and Peter Swords, president of the Nonprofit Coordinating Committee, a coalition of New York groups.

“We don’t know that their behavior will change, but we do know there will be a law now saying that their behavior should change,” she said.

Ms. Bograd maintains that Congress would do more to insure access to the forms if it required charities and foundations to file their Forms 990 with the I.R.S. electronically. That way, she says, the revenue service could make all returns public by posting them on the Internet. Under the proposed rules, Internet posting is optional and people who want information about charities have to check with each group to see whether its return is available on line.

A key section of the I.R.S.’s proposal focuses on an issue dear to many charities: how much they can charge to make photocopies of their Forms 990.

Under the government’s plan, charities could 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. That fee is $1 for the first page and 15 cents for each subsequent page.

The limit on photocopying charges concerned some organizations. “Setting the maximum copy fee at the level charged by the I.R.S. does not take into account special circumstances where such copying might be more expensive,” said a newsletter published by the American Society of Association Executives. Some smaller groups could face higher costs if they did not have up-to-date photocopying machines, said George Constantine, the organization’s associate director for government affairs. “I don’t foresee many instances of this, but we always like to see allowances for special circumstances,” he said.

The proposed rules say 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. In “unusual circumstances” — such as when the request is made late in the day and an “extensive amount’’ of copying is required — the organization could provide the copy on the next business day.

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 proposed 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.

Some non-profit organizations are not waiting for the law to go into effect before shipping out copies of their Forms 990 to those who request them.

Chip Watkins, a Washington lawyer who represents tax-exempt groups, said he tells his clients not to wait. “It’s an opportunity for good P.R.,” said Mr. Watkins. “If an organization sends out a well-prepared Form 990 — which provides a good description of its program accomplishments — and an annual report, it can make a lot of friends.”

When Congress drafted the new legislation, it made clear that it did not want charities to be compelled to provide copies of their returns to people who just wanted to harass an organization.

The proposed rules 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 proposed 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 five 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 proposed regulations include hypothetical examples to show a charity how to figure out if it would qualify for an exception under the harassment rules.

The I.R.S. 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 be reasonable,” the proposed regulations say, “if it disregards requests from members of the news media.”

Marc Owens, director of the I.R.S.’s Exempt Organizations Division, said that this example “was intended to send the message” that all requests from bona fide representatives of the press must be answered. “If the news media asks for it, you’ve got to give it,” Mr. Owens said.

Even so, William J. Lehrfeld, a Washington lawyer who represents non-profit groups, said the I.R.S.’s proposed rules should be more explicit about the rights of journalists.

“There is nothing in the regulations that makes it absolutely certain that the press will in all events be entitled to a copy of the 990,” Mr. Lehrfeld said.

He added: “The declining number of I.R.S. auditors and audits leaves the press as the watchdog of the non-profit sector. The press must have immediate and complete access to the information that the law expects it to have.”

In its explanation of the proposed rules, the I.R.S. estimated that about 50 non-profit groups each year would ask for a determination that they were the subject of a harassment campaign.

The I.R.S.’s proposed regulations were published in the September 26 issue of the Federal Register, Pages 50,533-41.

The revenue service will hold its February 4 public hearing in the auditorium at its national headquarters in Washington.

Comments about the proposal — and requests to speak at the hearing that include outlines of oral comments — must be submitted to the I.R.S. by December 26.

Comments should be mailed to: CC:DOM:CORP:R (REG-246250-96), Room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington 20044.

Comments also may be sent to the I.R.S. electronically by following the instructions on the revenue service’s World-Wide Web site at http://www.irs.ustreas.gov/prod/tax_regs/comments.html.

Questions about the proposed rules should be directed to Michael B. Blumenfeld in the I.R.S.’s Exempt Organizations Division at (202) 622-6070. For information on the hearings and on sending in comments, call Michael Slaughter in the I.R.S.’s Chief Counsel’s office at (202) 622-7190.