January 9, 2008
National Taxpayer Advocate 2007 Annual Report to Congress
On January 9, 2008, the National Taxpayer Advocate's Office issued its 2007 Annual Report to Congress. Among the Exempt Organization items of interest are two "most serious problem[s] encountered by taxpayers" and two "legislative recommendation[s]." Here are some excerpts from the Executive Summary of the Report:
"most serious problems encountered by taxpayers"
1. Exempt Organization Outreach and Education. The U.S. tax-exempt sector consists of more than 1.6 million organizations (not including most churches). These exempt organizations (EOs) are diverse in size, ranging from large hospitals and universities to small volunteer-run charities. Approximately half of all EOs have all-volunteer staffs and another third have fewer than ten employees. Smaller EOs frequently lack professional tax guidance. The IRS has increased enforcement actions against EOs and the resources dedicated thereto. However, resources devoted to EO education and outreach, which were never adequate, have continued to decline. Existing IRS outreach and education programs for EOs are beneficial. However, the National Taxpayer Advocate believes the IRS can and should do more to help EOs, particularly small organizations, comply with the complex requirements to which they are subject. The National Taxpayer Advocate urges the IRS to conduct research to assess the service needs and preferences of the spectrum of EOs and to develop a strategic plan to enhance the scope and effectiveness of its outreach to these organizations.
2. Determination Letter Process. Unreasonable delays in the processing of applications for exemption from federal income tax have persisted for several years. Three years after the National Taxpayer Advocate raised concerns about these delays in the 2004 Annual Report to Congress, the processing time for many organizations’ applications still exceeds the IRS’s goal. These delays can have a serious, detrimental effect on charitable organizations’ finances and activities. The IRS has employed a number of measures to fix the problem but must do more to eliminate processing delays and keep organizations informed about the status of their applications.
1. Extend Exempt Organizations’ Advance Ruling Periods in Cases of Extreme Application Processing Delays. An advance ruling provides that an organization will be treated as a publicly supported organization for its first five taxable years. Delays in processing Forms 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, result in some organizations’ receiving advance ruling letters only months before the advance ruling period ends. Organizations unable to obtain a favorable determination letter until shortly before the expiration of the advance ruling period are likely to have difficulty garnering financial support and therefore are likely to be reclassified as private foundations. Private foundations are subject to various operating restrictions and excise taxes for failure to comply with such restrictions, making private foundation status far less favorable than public charity status. The National Taxpayer Advocate recommends that Congress provide for the extension of the advance ruling period by one year when, as a result of a delay of 270 days or more in the processing of an exemption application, an advance ruling letter is issued not more than eight months prior to the end of the advance ruling period.
2. Legislative Recommendations to Reduce the Compliance Burden on Small Exempt Organizations. More than 73 percent of public charities reported annual expenses of less than $500,000 in 2004. Approximately half of all exempt organizations (EOs) have all-volunteer staffs and another third have fewer than ten employees. The National Taxpayer recommends that Congress lessen the burden on these small EOs by (i) amending the Code to provide that non-private foundations with gross receipts not normally more than $25,000 may submit a short-form application for recognition of IRC § 501(c)(3) status (i.e., a Form 1023-EZ), (ii) requiring the IRS to continue to offer a separate short-form ("EZ") version of Form 990 that may be filed by small organizations in lieu of the long-form Form 990 or parts thereof, and (iii) requiring the IRS to create a broad-based, formal, and ongoing voluntary compliance program for EOs similar to those offered in the areas of employee plans, tax-exempt bonds, and Indian tribal governments.
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