FINAL DISCLOSURE RULES ARE ISSUED

Barbara Schwartz Bromberg

INTRODUCTION

The Treasury Department recently issued the long-awaited final Treasury Regulations regarding the obligation of all tax-exempt organizations such as fraternal organizations and fraternal foundations (other than private foundations) to provide copies of its exemption application (Form 1023 or 1024) and its annual Federal tax returns (Form 990) to any person requesting copies. The effective date of these Regulations was June 8, 1999. The key provisions of the  final Regulations are described below.

Please note that the IRS interprets the penalty provisions described below as being imposed personally upon responsible organization managers and not on the organization.

What Documents are Affected?

If requested in writing, an organization must provide copies of its exemption application (unless it filed its application before July 15, 1987 and it did not have a copy of its application on that date) and its 3 most recent annual Federal tax returns. For example, if you receive a request for copies of your exemption application, you must provide copies of the following documents:

• The filled out application form as filed (Form 1023 or Form 1024);
• All documents and statements filed by the organization, or on its behalf, in connection with the exemption application;
• Any letter or other document issued by the IRS (this would include the organization’s favorable determination letter or a list of questions from the IRS about the application and written responses to such questions).

If you receive a request for copies of your 3 most recent annual Federal tax returns, you must provide copies of the following documents for each of those years:

• The filled out forms as filed (Form 990, 990-EZ, 990-BL, or Form 1065);
• Any amended returns that may have been filed relating to the above years;
• All schedules, attachments, and supporting documents filed with the returns

However, note that you are not required to disclose the names and addresses of the contributors to your organization, nor are you required to disclose Form 990-T (unrelated business taxable income information). Since you will be required to provide copies immediately in some instances, all organizations should consider having a copy of each year’s return ready for copying or distributing from which contributor information and the Form 990-T have been removed. In this way, you can avoid inadvertently distributing this sensitive information.

Instead of requesting the entire exemption application or an entire tax return, a requester can request copies of only a specifically identified part or schedule of the organization’s exemption application or annual Federal tax returns. If you receive such a request, you need only provide copies of the part or schedule requested.

In Which Offices Must You be Prepared to Handle Copy Requests?

You must be prepared to handle copy requests in your organization’s principal office and, in some cases, at your regional or district offices, if any. The rules  for  whether your regional or district offices must comply with the final rules are complex, but generally if (a) the office has paid employees whose aggregate number of paid hours per week are normally 120 hours or more and (b) the office has one or more management staff employees (with administrative responsibilities), you must be prepared to handle copy requests made to that office. Regional or district offices that are obligated to respond to copy requests, however, do not have to provide copies of annual Federal tax returns until 30 days after the date the return is filed.

What are the Time Requirements for Providing Copies?

If a request for copies is made in person during regular business hours at the organization’s principal office or at a regional or district office that is obligated to respond to copy requests, you must provide the requested copies on the day the request is made, unless “unusual circumstances” exist. (Examples of unusual circumstances identified in the final Treasury Regulations include (a) receipt of a volume of requests that exceeds the organization’s daily capacity to make copies; (b) requests received shortly before the end of regular business hours that require an extensive amount of copying; or (c) requests received on a day when the organization’s managerial staff capable of fulfilling the request is conducting special duties, including attending an off-site meeting or convention. If a request for copies is made at one of your offices on a day when unusual circumstances exist, you must provide the copies no later than the earlier of the next business day following the day that the unusual circumstance ceases to exist or the fifth business day after the date  of the request.)

If a request for copies is made in writing (i.e., by mail, e-mail, facsimile, or private delivery service) generally you must mail the copy of the requested documents within 30 days from the date you receive the request. If your organization adopts a prepayment policy (see the following section), you must mail the requested copies within 30 days of receipt of the payment, rather than within 30 days of the receipt of the request.

Only requests that are made in person or in writing must be honored. Telephone requests do not have to be honored.

How Much Can You Charge for Copying and Postage?

For all requests for copies (whether made in person or in writing), you can charge a reasonable fee for copying the requested documents. The final Treasury Regulations set the fee at a maximum of$ 1.00 for the first page and $0.15 for each additional page. This fee is tied to the copying fees the IRS charges, so it may change over time. You may also charge actual postage costs and demand payment in advance.

If you choose to charge a fee for copying and postage and to demand payment in advance, there are a number of applicable rules. You will be required, for example, to respond to questions from potential requesters concerning your fees for copying and postage so that requesters may include payment with their requests for copies. You must provide upon request your charges for copying and mailing your exemption application and each of your annual Federal tax returns, with and without attachments. If you receive a request in writing without payment or with insufficient payment, you must notify the requester of your prepayment policy and the amount due within 7 days of receiving the request.

If your organization adopts a prepayment policy, it is advisable to prepare in advance a form letter acknowledging receipt of the request for copies and advising the requester of your prepayment policy. This memorandum or letter should be supplied to each requester promptly, but in no event, later than 7 days following the request.

For requests made in person, you must accept payment by cash and money order; for requests made in writing, you must accept payment by certified check, money order, and either personal check or credit card.

You Can Avoid Having to Respond to Requests for Copies by Posting Your Exemption Application and Your Annual Federal Tax Returns on the Internet

If your organization is willing to post its exemption application and returns on the Internet, you can avoid having to comply with the requirements discussed above. There are, however, numerous technical requirements that must be complied with to achieve an acceptable Internet posting. For example, your exemption application and annual Federal tax returns must be posted on a World Wide Web page that you establish and maintain or on a World Wide Web page established and maintained by another entity as part of a database of similar documents of other tax-exempt organizations. Additionally, your documents must be available for downloading free of charge and without the need for special computer hardware or software.

The Treasury Department expects that less than 1% of the tax-exempt organizations will comply with the Regulations through a posting on the Internet. If you choose to comply through an Internet posting, you will need to review the technical requirements set forth in the Regulations.

Harassment Campaigns

The Regulations provide relief for a tax-exempt organization that is the object of a harassment campaign. Generally, a group of requests for an organization’s exemption application or annual Federal tax returns is indicative of a harassment campaign if the requests are part of a single coordinated effort to disrupt the operations of that organization rather than to collect information about the organization. Among the facts and circumstances that indicate that a tax exempt organization is the target of a harassment campaign are: (1) a sudden increase in the number of requests; (2) an extraordinary number of requests made through form letters or similarly worded correspondence; and (3) requests that contain language hostile to the organization.

A tax-exempt organization that reasonably believes it is the target of a harassment campaign may suspend compliance with respect to any request for copies that it reasonably believes is part of the harassment campaign, provided that  the tax-exempt organization files an application for a determination by the IRS within 10 business days of the date it first suspended compliance. A tax-exempt organization is liable for all penalties resulting from failing to provide copies in a timely fashion if the IRS determines that the organization did not have a reasonable basis for requesting a harassment determination or a reasonable belief that a request was part of a harassment campaign. The IRS intends to publish additional guidance concerning harassment campaign determinations.

What are the Penalties for Failure to Comply?

If a tax-exempt organization fails to comply with the requirement to provide copies of its annual Federal tax returns, the responsible person will be subject to a $20 penalty for each non-compliance day, with a maximum penalty for a single return of $10,000.00. If a tax-exempt organization fails to comply with the requirement to provide copies of its exemption application, the responsible person will be subject to a $20 penalty for each non-compliance day. There is no maximum with respect to this penalty. Moreover, a responsible person will be subject to a penalty of $5,000.00  for  each willful failure to provide an annual Federal tax return or exemption application.

CONCLUSION

Because the above penalties are personal to organization managers and may be substantial for inadvertent failure to comply with a request, it is recommended that all organizations subject to these rules adopt a log-in and compliance procedure to carefully track all requests and responses and that it be reviewed periodically to ensure that the requirements of the final Regulations are being met.