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IRS Focuses on Group Exemption

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The IRS can recognize a group of organizations as tax exempt if they are affiliated with a central organization. This avoids the need for each of the organizations to individually apply for exemption. A group exemption letter has the same effect as an individual exemption letter except that it applies to more than one organization.

A central organization maintains a group exemption by filing annual reports with the IRS, at least 90 days before the close of its fiscal year, confirming that the subordinates are still active and included in the group exemption. The central organization can remove or add subordinates as appropriate. Separate from this annual report, both the central organization and the subordinates also must comply with Form 990 filing requirements. The central organization may elect to file an annual group Form 990 (distinct from its own Form 990) for all subordinates covered in its exemption letter (most choose not to do so) or it may choose to have subordinates file on their own.

The group exemption has become an area of interest for the IRS in recent years. In October 2012, the IRS issued an extensive 80 question voluntary questionnaire, aimed at understanding how tax-exempt organizations that hold a group exemption ruling oversee their subordinates and comply with annual filing and disclosure requirements. The form was sent to a random selection of over 2,000 central organizations and was to be completed online.

The questionnaire focused on the following areas:

  1. The level of control and interaction between the central organization and its subordinates.  These sections and questions were aimed at determining the extent to which a central organization has actually taken the responsibility for determining whether its subordinates should be included in a group exemption.  Questions included:
    • Basic information about the central organization and its subordinates
    • Information on structure of the subordinates and their similarity to one another in terms of services and activities
    • Fees paid by subordinates in order to be included in the group exemption
    • Questions about whether any subordinates are involved in political activity, lobbying and non-tax-exempt activities
    • Information about the level of control the central organization exercises over its subordinates
    • What services, such as training and fundraising assistance, the central organization provides
  2. How IRS filing requirements are being met.  These questions focused on how the central organization maintains its responsibility to file both group exemption updates and an annual Form 990 and how its subordinates also comply with Form 990 filing requirements. Also, there is focus on how the central organization has added and removed subordinates to and from its group exemption in its annual reports and about its internal guidelines for adding and removing subordinates.
  3. This part of the questionnaire was most concerned with the specific requirements of a group return.  The questions focused on which subordinates were included, the assets of those subordinates and whether a written statement was obtained for each subordinate before inclusion.Due to the extensive nature of the questionnaire, it seems that the IRS is focused on how organizations have been handling filing Form 990s.  Group exemption organizations should be looking at their current processes and documentation and see where they can improve and ensure compliance with the current requirements due to the IRS’s heightened interest in the group exemption area.

Disclaimer: Under U.S. Treasury Department guidelines, we hereby inform you that (1) any tax advice contained in this communication is not intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service (or state and local or other tax authorities), and (2) no part of any tax advice contained in this communication is intended to be used, and cannot be used, by any party to promote, market or recommend any transaction or tax-related matter(s) addressed herein without the express and written consent of Blum, Shapiro & Company, P.C.

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