Applying for Tax Exemption? Toy with the IRS at Your Peril
The Tax Court recently delivered some sound advice – do not play “cat and mouse” with the IRS. In Ohio Disability Association v. Commissioner, a Tax Court Memo filed November 12, 2009, the Tax Court rejected the petitioner’s request for a declaratory judgment that it qualified as a public charity. The court’s rejection was based on its inability to conclude that the organization would operate exclusively for exempt purposes.
The opinion is instructive on how not to deal with the IRS in the exemption process. Organizations seeking IRS recognition of tax exemption (which is required of almost all charities, except for churches) must file a 26-page Form 1023, which is explained in 38 pages of instructions. The IRS also has extensive questions and answers further explaining Form 1023.
Notwithstanding the broad scope of the questions on the Form 1023, it is quite typical to receive further extensive questions from the IRS following its review of the Form 1023 submission package. These questions usually seek elaboration on the current and proposed activities of the organization, compensation structure, information about the Board members, copies of documents referred to in the application (e.g., bond offering, leases, and employment agreements). Some practitioners sometimes treat these supplemental IRS questions in a cavalier manner, considering them a nuisance. This type of response is a mistake, as the petitioner in Ohio Disability Association v. Commissioner learned. At a minimum, responding to IRS questions in this manner often leads to extensive delay in obtaining an IRS exemption letter.
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