© 1999 KPMG

Final Disclosure Regulations Published The long-awaited final regulations requiring broader disclosure of exempt organizations’ Form 990 returns were published on April 9th. The new rules will lead to sharply increased scrutiny and a higher level of accountability for the nation’s tax-exempt organizations. The rules require that exempt organizations, other than private foundations, provide copies of the three most recent annual returns and the exemption application, upon personal request, or within 30 days of any written request, without charge, other than a reasonable fee for reproduction and mailing costs. While the regulations do not apply to private foundations, the IRS stated that it would issue proposed regulations on their disclosure requirements "shortly."

The requirement to provide copies is waived for organizations that post their documents on the Internet in a prescribed way and for those organizations that are subject to a harassment campaign with respect to their disclosure responsibilities. Exempts will still be required to make their returns and exemption applications "available for public inspection."

The clock is running for most exempt organizations. Exempts have a narrow window of opportunity to implement policies and procedures to meet the regulations’ detailed requirements before the new rules become effective on June 8th. The rules are backed by significantly increased penalties that impose personal tax liability on organization officials.

Public Disclosure and Return Filing Penalties The penalty for failure to allow public inspection or provide copies of information returns was increased from $10 to $20 per day, with a maximum penalty of $10,000 per return. This penalty applies to "any officer, director, trustee, employee, or other individual who is under a duty to allow inspection or provide copies."

The penalty for failure to allow public inspection or provide copies of exemption applications was increased from $10 to $20 per day with no limit. This penalty applies to "any officer, director, trustee, employee, or other individual who is under a duty to allow inspection or provide copies."

The penalty for willful failure to allow public inspection or provide copies of information returns or applications was increased from $1,000 to $5,000 per return or application. This penalty applies to "any officer, director, trustee, employee, or other individual who is under a duty to allow inspection or provide copies."

The penalty for failure to file a timely or complete return was increased to $20 a day, with a maximum penalty with respect to any one return of the lesser of $10,000, or 5 percent of the organization’s gross receipts. However, the penalty for organizations with annual gross receipts exceeding $1 million, is $100 a day, with a maximum penalty of $50,000. These penalties apply to the organization. However, managers of organizations are subject to a penalty of $10 per day, with a maximum penalty of $5,000, for each return not filed or completed within a reasonable time after a demand by the IRS.

Which Documents are Subject to the Rules Annual Information Returns An "exact copy" of the three most recent annual returns and all information furnished to the IRS on Form 990, Form 990-EZ, or Form 990-BL must be provided. This includes schedules, attachments, and supporting documents, except for the name and address of any contributor to the organization. The following forms are excepted from the disclosure requirements: Form 990-T, Form 1120-POL, Schedule A of Form 990-BL, and Schedule K-1 of Form 1065.

Organizations are not required to provide any return after the expiration of 3 years from the date the return is required to be filed (including any extension of time that has been granted for filing such return) or is actually filed, whichever is later. However, if an organization files an amended return, the amended return must be made available for a period of 3 years beginning on the date it is filed with the IRS.

The Exemption Application Applications for tax exemption (Forms 1023 and 1024), including all supporting statements and documents submitted by the organization, and any letter or document issued by the IRS in connection with the application are subject to the new rules. For organizations for which there is no prescribed application form, the regulations identify specific information that must be made available to the public.

Exceptions Organizations are not required to disclose exemption applications that have not yet been approved or any material containing non-disclosable information such as trade secrets or the identities of donors. Organizations that filed applications before July 15, 1987, need only make them available if they had copies on that date.

When Documents Must Be Made Available Effective June 8, 1999, organizations generally must provide copies of the three most recent annual returns and the exemption application on the same day an individual appears in person at an organization’s office and requests copies. In unusual circumstances, an organization will be permitted to provide the requested copies on the next business day following the day that the unusual circumstances cease to exist or the fifth business day following the day after the date of the request, whichever occurs first. Unusual circumstances include receipt of a volume of requests that exceeds the organization’s daily capacity to make copies, requests received shortly before the end of regular business hours that require an extensive amount of copying, or requests received on a day when the organization’s managerial staff is conducting special duties, such as student registration or attending an offsite meeting, rather than its regular administrative duties.

When the request is in writing, the organization generally must provide the copies within 30 days of the date it receives the request. The written request must be addressed to, and delivered by mail, electronic mail, facsimile, or a private delivery service, to the organization’s principal, regional, or district office, and it must set forth the address to which the copy of the documents should be sent.

"In the absence of evidence to the contrary," a request that is mailed shall be deemed to be received 7 days after the date of the postmark. Requests transmitted by electronic mail or facsimile shall be deemed received the day the request is transmitted successfully. If an individual making a request consents, copies of the requested document may be provided exclusively by electronic mail. In such case, the material is provided on the date the organization successfully transmits the electronic mail.

If an organization requires advance payment of a reasonable copying and mailing fee, the 30-day period begins to run when the organization receives payment. If the organization receives a written request without payment or with an insufficient payment, the organization, "must" within 7 days from the date it receives the request, notify the requester of its prepayment policy and the amount due.

Where Documents Must Be Made Available Organizations are required to provide copies of their Forms 990 and exemption applications at their principal, regional, and district offices during normal business hours. An office is considered a regional or district office if it has paid employees - whether part-time or full-time - whose aggregate number of paid hours per week is at least 120. A site is not considered a regional or district office if the only services provided at the site further exempt purposes (such as day care, health care, or scientific or medical research), and the site does not serve as an office for management staff (other than those involved solely in managing the exempt function).

Regional or district offices are not required to make annual information returns available for inspection or to provide copies until 30 days after the date the return is required to be filed, including any extension of time granted, or is actually filed, whichever is later.

Note: Large organizations that operate at multiple locations, or operate in conjunction with affiliated exempt organizations, need to carefully consider the rules providing where the documents must be made available. The common practice of providing documents only at a central location (for example -- at "main campus" or at the "health system administration building") may not be in compliance with the rules requiring that returns be provided or made available for inspection at all of the organization’s principal, regional, and district offices.

Request for a Copy of Parts of a Document An organization must fulfill a request for a copy of the organization’s entire application for tax exemption or annual information return or any specific part or schedule of its application or return. A request for a copy of less than the entire application or less than the entire return must specifically identify the requested part or schedule.

Use of an Agent to Provide Copies The regulations permit an organization to retain an agent to process written requests for copies of documents, or a local agent in close geographic proximity to process personal requests for copies. Agents are subject to the same rules that apply to the organization. The use of an agent does not absolve organization managers from liability for the penalties, and the penalties will apply to organization managers if the agent fails to provide the documents as required.

Note: It is important to note that exempt organizations officials who are responsible for compliance with the disclosure rules will remain personally liable for penalty taxes if the agent fails to comply with the regulations’ detailed requirements.

Fees for Providing Copies A reasonable fee for providing copies may be no more than the fees charged by the IRS for copies of exempt organizations information returns and related documents. That fee is currently $1.00 for the first page and $.15 for each subsequent page, plus actual postage costs. Organizations may require payment before providing documents. If, upon demand, the fee is not paid within 30 days, or if a check does not clear upon deposit, the organization may disregard the request.

Form of Payment An organization is required to accept payment by cash or money order for requests made in person. Organizations are permitted, though not required, to accept other forms of payment, such as credit card or personal check. For requests made in writing, organizations are required to accept payment by certified check, money order, and either personal check or credit card.

Responding to Inquiries The regulations provide that an organization shall respond to any questions from potential requesters concerning its fees for copying and postage. Where an organization does not require prepayment and a requester does not enclose payment with a request, an organization must receive consent from a requester before providing copies for which the fee charged for copying and postage exceeds $20.00.

The proposed regulations permit an organization to require payment in advance of providing the requested copies. Requests received without payment must be acknowledged within seven days of receipt, notifying the requester of the prepayment policy and the amount due. Payment will be deemed to occur on the day an organization receives the cash, check (provided the check subsequently clears), or money order. Organizations may disregard requests in those situations where individuals do not pay the fee within 30 days of notification of the requirement of advance payment, and in situations when the check does not clear when deposited.

Note: Treasury and IRS rejected the suggestions that the fee be greater than the amount that the IRS charges under its FOIA obligations on the grounds that "permitting organizations to charge a higher fee could hinder the public’s ability to receive a copy of an application or a return."

"Dropping a Dime" The regulations provide that complaints that an organization failed to comply with the new disclosure provisions should be made to the "district director for the key district in which the applicable tax-exempt organization’s principal office is located" (or such other person as the Commissioner may designate).

Note: The proposed regulations previously provided that complaints should be directed to the Exempt Organizations Division in Washington, D.C. Diffusing oversight to the key district director who oversees the organization’s principal office makes it less likely that an aggrieved individual will know with whom to file a complaint, and - based on past history of enforcement - less likely that the IRS will aggressively and effectively oversee violations.

Making Applications and Information Returns "Widely Available" Organizations are not required to comply with requests for copies of exemption applications or annual information returns if they have made the requested documents widely available. The regulations provide that organizations can meet this exception by posting the applicable document on their World Wide Web page on the Internet or by having the documents posted on another organization’s World Wide Web page as part of a database of similar materials. To meet this exception for Internet posting, "the entity maintaining the World Wide Web page must have procedures for ensuring the reliability and accuracy of the application or return that it posts on the page and must take reasonable precautions to prevent alteration, destruction, or accidental loss of the application or return posted on its page." In addition, the application or return will be considered widely available only if:

• the World Wide Web page through which it is available clearly informs readers that the document is available and provides instructions for downloading it;
• the document is posted in a format that, when accessed, downloaded, viewed, and printed in hard copy, exactly reproduces the image of the application for tax exemption or annual information return as it was originally filed, except for any information permitted by statute to be withheld from public disclosure; and
• any individual with access to the Internet can access, download, view and print the document without special computer hardware or software required for that format (other than software that is readily available to members of the public without payment of any fee) and without payment of a fee to the organization maintaining the World Wide Web page.

An organization that makes its exemption application and returns widely available must inform individuals who request copies how and where to obtain the requested document. If the request is made in person, the organization shall provide such notice to the individual "immediately." If the request is made in writing, the notice shall be provided within 7 days of receiving the request.

Note: The widely available exception applies only to the requirement to provide copies. It does not excuse organizations from the pre-existing requirement to make returns available for public inspection. Tax-exempt organizations, other than private foundations, have been obligated since 1987 to make their three most recent information returns available for public inspection at their principal, regional, and district offices. Tax-exempt organizations, including private foundations, have been obligated since 1987 to make their applications for exemption available for public inspection at their principal, regional, and district offices. These rules are complemented, not superseded, by the broader disclosure requirements that copies be provided. The penalties on management for failure to allow public inspection or willfully allow public inspection identified above are applicable. While the public inspection requirements have generally not been enforced in previous years, it is anticipated that the IRS will step-up enforcement when the new disclosure rules become effective on June 8th.

This appears to be a prime example of regulatory overkill. The government could have eliminated this duplicative requirement when section 6104 was amended in 1998 to extend the rules to private foundations. It chose not to do so. The IRS and the Treasury Department rejected a suggestion that organizations be able to retain a local agent to satisfy the organization’s public inspection obligation. The stated rationale for the rejection was "to avoid potential inconvenience to members of the public, it is important that tax-exempt organizations make their applications available for inspection at their offices."

Harassment Campaigns An organization is not required to comply with a request for copies of its exemption application or annual information returns if the IRS determines that the organization is the subject of a harassment campaign, and the organization reasonably believes that the request is part of the harassment campaign. The regulations indicate that a group of requests that are part of a "singular coordinated effort" to disrupt the operations of the organization rather than to obtain information is indicative of a harassment campaign. Facts and circumstances that indicate the organization is subject to a harassment campaign include:

• A sudden increase in the number of requests;
• an extraordinary number of requests made through form letters or similarly worded correspondence;
• Evidence of a purpose to deter significantly the organization’s employees or volunteers from pursuing the organization’s exempt purpose;
• Requests that contain language hostile to the organization;
• Direct evidence of bad faith by organizers of the purported harassment campaign;
• Evidence that the organization has already provided the requested documents to a member of the purported harassing group; and
• A demonstration by the organization that it routinely provides copies of its documents upon request.

An organization is permitted to disregard requests for copies of any document in excess of two within a 30-day period or four within a one-year period made by a single individual or sent from a single address. Generally, organizations may not suspend compliance with a request for copies from a representative of the news media.

The regulations provide procedures for requesting a determination that an organization is subject to a harassment campaign. A written application must be submitted to the key district director for the key district where the organization’s principal office is located. The application must describe in detail the facts and circumstances the organization believes support such a determination. While the IRS is considering its application, the organization may suspend compliance with respect to any request for a copy of its documents based on a reasonable belief that the request is part of a harassment campaign, until it receives a response from the IRS with respect to its application. The organization may suspend compliance prior to filing an application, provided it files a request for a determination within 10 business days from the day it first suspends compliance with respect to a request for documents.

If the key district director determines that the organization is not subject to a harassment campaign, it will have 30 days to provide a copy of the requested document. If the IRS subsequently determines that the organization did not have a reasonable basis for its belief that it was subject to a harassment campaign, or that a particular request was part of such a campaign, the organization manager remains personally liable for penalties.

Action Plan for Organizations Organizations that have not already done so, should consult with their management information systems professionals to determine their capabilities to meet the requirements for posting Forms 990 and the exemption application (and all supporting documents) on the Internet. Organizations that decide against Internet posting should establish and be ready to implement policies and procedures to ensure compliance with the regulations’ detailed requirements. In addition, organizations should have in place policies and procedures for public inspection of their returns and exemption application. Organizations should also establish institutional responsibility for complying with the new rules; ensuring that the return is properly prepared; and ensuring that it reflects the organization’s mission accomplishment and contribution to the community.

Action Plan for the IRS Under Treasury regulation sections 301.6104(a)-6 and 301.6104(b)-1, IRS has the obligation to provide for the inspection and publicity of exempt organizations returns. However, IRS procedures to request copies of Forms 990 often take at least 30 days to process. Ironically, it is likely that after June 8th, IRS agents will find it more expedient to request copies of Forms 990 from an exempt organization than from a Service Center. The reason for the IRS’s inability to meet its disclosure requirements in a timely manner is budgetary. However, as noted above, the Treasury Department and the IRS adversely decided a number of issues that have a direct economic impact on exempt organizations in meeting their disclosure responsibilities under the regulations. For example, exempts cannot charge more than $1.00 for the first page and $.15 cents for each additional page because "permitting organizations to charge a higher fee could hinder the public’s ability to receive a copy of an application or return."

Currently, IRS officials have stated that they are in the process of scanning images of all Forms 990 onto CD-ROMs. Once done, this will give the IRS the ability to post those images on its own website. Such an initiative on the IRS’s part (none is presently planned) will enable it to meet its disclosure requirements in a timely manner. It will also make the returns "widely available" and most likely reduce the demand for copies of returns and thus the regulatory burden on many exempt organizations. This is a prime example of how the promises and rhetoric of "customer service" can become a reality.