On January 6, 2023, Andrew Steinberg was quoted in Bloomberg Tax on self-declared tax-exempt organizations hitting roadblocks when filing a form that details their financial information to the IRS.
According to the article, exempt groups typically are required to submit an application that notifies the IRS, before filing Form 990, that they plan to operate as tax-exempt entities. Organizations that want to self-declare their status, such as 501(c)(4) social welfare organizations and 501(c)(6) professional societies and trade associations, don’t have to submit an application.
Ideally, not filing the application would reduce the barriers to treatment as a tax-exempt entity and relieve the IRS of the additional burden of reviewing the application. However, without filing the application, the IRS has no record of the self-declared organization’s existence when they file their Form 990. The filing then requires an IRS employee to evaluate the return and manually create a tax module.
“These challenges require disproportionate resources to resolve relative to the compliance effort that should be required,” Steinberg said. “The law establishes a self-declared path to tax-exempt status, but the administrative challenges are so high that it disincentivizes that option.”
For the organizations, this could mean increased expenses to hire professionals to work with the IRS and deal with penalty notices for the late filing of returns. Some self-declared organizations are choosing to file the tax-exempt status application anyway, just to head off potential roadblocks in the future, which Steinberg said is the most cost-effective path.
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