New Treas. Reg. Provides New Guidance on IRS and State Investigations of Non-Profit Tax Status

Today, the Internal Revenue Service officially published a new Treasury Regulation entitled “Disclosure of Information to State Officials Regarding Tax-Exempt Organizations.” Prior to enactment, the IRS was often unable to communicate with a state Attorney General regarding an ongoing investigation pertaining to the status of a non-profit organization. At times, this often amounted to both organizations investigating substantially similar issues, however, the IRS was unable to disclose the status of an ongoing investigation unless it had been finalized.  

While the IRS was able to share some information with certain state officers, the IRS is now directed to inform a so-called “appropriate State officer” (“ASO”) of (1.) a refusal to recognize an entity as a charitable organization; (2.) a charitable organization which no longer meets the guidelines to be tax-exempt; and (3.) mailing a notice of deficiency for any tax imposed under IRS Section 507 or Chapters 41 or 42 of the Internal Revenue Code. Additionally, the ASO will be notified when a charitable organization has been dissolved. Upon request, the IRS will also now be authorized to provide supporting documents to the ASO as requested. Previously, privacy guidance would have prevented this type of disclosure from being made. 

Furthermore, the IRS will have broader leeway to disclose other sorts of information to the ASO. The IRS will be able to disclosure refusals to recognize a tax-exempt entity, proposed revocations of recognition, and notices of deficiency of excise tax. Likewise, the IRS was only previously able to disclose of returns and return information of organizations, these were required to be related to the final determinations by the agency. The Treas. Reg., naturally includes numerous other regulations which similarly provide for an extended ability of the Treasury to communicate with ASOs. 

In order to assure compliance with other privacy interests, any agency on the receiving end of return information must file a report providing for the safeguards which have been implemented to ensure there will be no unauthorized disclosure or review of the records. 

In reviewing the comments received pertaining to the proposed Regulation, a major issue discussed was regarding the aforementioned disclosure requirement. While one commentator indicated that states might be unwilling to receive information as necessary to comply with the disclosure requirement, the Treasury ultimately decided that there are similar agreements in place with all 50 states and District of Columbia which apply to the administrative agency tasked with carrying out the state tax laws. The final decision to keep this in, according the Treasury, also is “important in fulfilling the… enforcement of State law regarding exempt organizations consistent with statutory requirements.” 

Read the entire Treas. Reg. for yourself.