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IRS Considers Changes to Group Exemption Procedures

Posted on by bentakis

At the recent Western Conference on Tax Exempt Organizations, which took place at Loyola Law School on November 29 and 30, Holly Paz (a senior official in the Internal Revenue Service’s Exempt Organization division) discussed considerations at the IRS regarding “group exemptions” and “group returns.”

Under the “group exemption” process, a central or national organization may certify the tax-exempt status of smaller organizations that are under their general supervision or control. The IRS has recognized group exemptions dating back to 1940, but it was not until 1968 that formal procedures for group exemptions were issued. The current procedures for group exemptions are set forth in Revenue Procedure 80-27, which is now over thirty years old. The group exemption process is an essential tool for organizations looking to expand nationally and create local affiliates (something we deal with often at Tax-Exempt Solutions). Rather than pay the $400 or $850 fee for a separate Form 1023 for each local affiliate, a central organization may pay a one-time fee of $3,000 to maintain an exemption for all current and future affiliates, subject to certain requirements discussed Publication 4573, available here. In addition, a central organization may submit a consolidated Form 990 on behalf of all of the organizations covered under the group exemption.

The group exemption process presupposes that the central organization will exercise considerable scrutiny over its local affiliates. The central organization is, in effect, responsible for determining the tax-exempt status of its local affiliates in place of the IRS. The IRS has been concerned about the lack of transparency and accountability in the group exemption process, and in June 2011 the Advisory Committee on Tax Exempt and Governmental Entities (ACT) issued a report recommending (among other suggestions) the elimination of the group 990, and the issuance of more detailed guidance regarding the responsibilities of central organizations. More recently, in October 2012 the IRS began sending a compliance check questionnaire to central organizations that are part of a group exemption, which can be found here. At the Western Conference last week, Holly Paz reported that the questionnaire has been sent to about 2,000 central organizations so far, and that the results will be reported to the public for comment in 2013.

Organizations currently acting as central organizations, and those considering expanding nationally in the future, should take note of the deliberations at the IRS on this subject, and be prepared for more detailed guidance regarding their supervisory responsibilities.

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