IRS publication explains recent new law changes affecting tax-exempt organization's filing and disclosure requirements
IRS Publication 557, Tax-Exempt Status for Your Organization (Rev. June 2008)
IRS has recently updated Publication 557, Tax-Exempt Status for Your Organization, which provides guidance to Code Sec. 501(c) tax-exempt organizations on the rules and procedures they must follow. In particular, it explains the changes made by the Pension Protection Act of 2006 (PPA), which in addition to massive changes for retirement plans, contains numerous changes affecting tax-exempt organizations. This article examines some of those changes affecting filing and disclosure requirements.
Public disclosure of unrelated business income tax return. For returns filed after Aug. 17, 2006, the PPA extends the public inspection and disclosure requirements (and penalties) applicable to Form 990 (Return of Organization Exempt from Income Tax) to the unrelated business income tax return (Form 990-T, Exempt Organization Business Income Tax Return) for Code Sec. 501(c)(3) organizations. (Code Sec. 6104(d)(1)(A)) Unrelated business income is income from a trade or business, regularly carried on, that isn't substantially related to the charitable, educational, or other purpose that is the basis for the organization's exemption. An exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T. Clarifying a modification of this PPA rule by the 2007 Technical Corrections Act, Pub 557 explains that a Code Sec. 501(c)(3) organization must make its Form 990-T open for public inspection for a period of 3 years from the date the Form 990-T is required to be filed (determined with regard to any extension of time for filing) or is actually filed, whichever is later.
Pub 557 cautions that this disclosure requirement applies, regardless of whether the organization is otherwise subject to the Code Sec. 6104 disclosure requirements. For example, although churches aren't required to file Form 1023 (Application for Recognition of Exemption) or Form 990, they must file Form 990-T with IRS to report unrelated business taxable income (UBTI). Thus, churches must disclose Form 990-T to the public. While state colleges and universities that have been recognized by IRS as exempt organizations under Code Sec. 501(c)(3) must disclose Form 990-T to the public, state colleges and universities that are subject to tax under Code Sec. 511(a) solely because of Code Sec. 511(a)(2)(B), and haven't been recognized by IRS as exempt under Code Sec. 501(c)(3), don't have to disclose Form 990–T.
RIA observation: Revised guidance in Notice 2008-49, 2008-20 IRB 979, makes it clear that schedules, attachments, and supporting documents filed with Form 990-T, that don't relate to the imposition of unrelated business income tax don't have to be made available for public inspection and copying, see Federal Taxes Weekly Alert 05/15/2008.
Filing the e-Postcard. For notices and returns with respect to annual periods beginning after 2006, the PPA requires that tax-exempt organizations that do not have an annual filing requirement because their gross receipts are less than $25,000 still have to electronically file an annual notice with IRS containing basic contact and financial information. ( Code Sec. 6033(i) ) Pub 557 advises exempts that Form 990-N, Electronic Notification (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or 990-EZ, is due by the 15th day of the fifth month after the close of the tax year. For tax years beginning after Dec. 31, 2006, any organization that fails to meet its annual reporting requirement for 3 consecutive years will automatically lose its exempt status and have to reapply to be recognized as an exempt organization. Pub 557 also explains some of the exceptions to this filing requirement for:
- Churches, their integrated auxiliaries, and conventions or associations of churches;
- Organizations that are included in a group return;
- Private foundations required to file Form 990-PF, and Code Sec. 509(a)(3) supporting organizations required to file Form 990 or Form 990-EZ.
RIA observation: Temporary regs issued late in 2007 (Preamble to TD 9366, 11/21/2007, Reg. § 1.6033-6T(b)(2)) provide rules on which exempt organizations aren't required to file the e-notice information returns, see Federal Taxes Weekly Alert 11/21/2007.
Supporting organization annual information return. The PPA eliminated for Code Sec. 509(a)(3) supporting organizations the discretionary exception under which IRS could waive the information return filing requirement (Code Sec. 6033(a)(3)(B)), and required such supporting organizations to file an annual return. (Code Sec. 6033(l)) Pub 557 points out that for tax years ending after Aug. 17, 2006, all such supporting organizations must file an annual information return with IRS regardless of the organization's gross receipts. On its annual information return, a supporting organization must:
- list the Code Sec. 509(f)(3) organizations with respect to which it provides support;
- indicate whether it is a Type I, Type II, or Type III supporting organization; and
- certify that the organization is not controlled directly or indirectly by disqualified persons (other than by foundation managers and other than one or more publicly supported organizations).
Observation: Pub 557 also reminds taxpayers about the requirement in Reg. § 301.6033-4 (see Federal Taxes Weekly Alert 11/15/2007) that for tax years ending on or after Dec. 31, 2006, organizations that have total assets of $10 million or more must file Form 990 electronically. If an organization doesn't file its required Form 990, Form 990-EZ, or Form 990-PF (for private foundations), and related forms, schedules, and attachments electronically, it's considered not to have filed a return. However, Pub 557 notes that IRS may waive the requirement to file electronically in cases of undue hardship.
RIA observation: IRS has issued an updated version of Form 990, to be used for the 2008 tax year (see Federal Taxes Weekly Alert 12/27/2007). The 2008 Form 990 consists of an 11-page core form that must be completed by each Form 990 filer. The form also has 16 schedules designed to require reporting of information from those organizations that conduct particular activities, for example, political campaign and lobbying activities, schools, and hospitals.
RIA Research References: For a tax-exempt organization's annual return, Form 990, see FTC 2d/FIN ¶ S-2801; United States Tax Reporter ¶ 60,334; TaxDesk ¶ 688,001.