October 5, 2006

New Tax Law Permits IRS to Disclose Proposed Revocation of Tax-Exempt Status to State Officials

4 min

The Pension Protection Act of 2006 (H.R. 4), signed into law by President Bush on August 17, 2006, contains a little-noticed provision that provides new authority for the Internal Revenue Service to notify States of proposed revocations of tax-exempt status, along with additional information about tax-exempt entities.1 The result is likely to be increased requests by State regulators for such information and documentation, with significant potential consequences - in terms of state licensing and related decisions - for those tax-exempt organizations about which the IRS discloses adverse information.

Up until the enactment of H.R. 4, the IRS could only disclose such adverse information to the States when an organization's tax-exempt status is ultimately revoked. This meant that when the IRS Audit Division proposes revocation and the tax-exempt entity files a "protest" letter to appeal the proposed decision, unless and until the appeals process was concluded with the revocation upheld, no disclosure could be made by the IRS to the States or otherwise. This has changed under the new law.

The bill amends the Internal Revenue Code, providing new authority to the IRS to disclose information related to section 501(c)(3) organizations - including a notice of proposed revocation of tax exemption, as well as information regarding applications for recognition of tax-exempt status. It effectively means that this adverse information about a 501(c)(3) organization's tax-exempt status will be available to State officials and may be used in connection with the enforcement of State laws. Prior to this change, the IRS could not disclose such information without the organization's permission, as it was considered confidential under the federal tax code.

Specifically, now the tax code provision provides that, upon written request by an "appropriate State officer," the IRS may disclose:

  • a notice of proposed refusal to recognize an organization as a section 501(c)(3) organization;
  • a notice of proposed revocation of tax-exemption of a section 501(c)(3) organization;
  • the issuance of a proposed deficiency of tax;
  • the names, addresses and taxpayer identification numbers of organizations that have applied for recognition as section 501(c)(3) organizations; and
  • returns and return information of organizations with respect to which information has been disclosed under one through four above.

The provision permits the IRS to disclose or open to inspection the returns and return information of an organization that is recognized as tax-exempt under section 501(c)(3), or that has applied for such recognition, to an "appropriate State officer," if the IRS determines that such returns and return information may constitute evidence of noncompliance under the laws within the jurisdiction of the "appropriate State officer."

For this purpose, "appropriate State officer" is defined as the State attorney general, the State tax officer, or any other State official charged with overseeing organizations of the type described in section 501(c)(3).

In addition, the tax code provision provides that any returns and return information described above may be disclosed in civil administrative and civil judicial proceedings pertaining to the enforcement of State laws regulating the applicable tax-exempt organization in a manner determined by the IRS.

The new authority and procedures are in addition to pre-existing federal tax law requirements that the IRS notify State officials and make specified information available to States when it issues a final adverse determination on an organization's qualification for exemption under section 501(c)(3) - both exemption application denials and exemption revocations.

The new provisions are effective as of August 17, 2006 (the date H.R. 4 was signed into law), but do not apply to requests made before that time.

Lastly, this new tax code provision does not alter any affirmative obligation that may be placed on an organization to disclose any of the above information (or any other information) under applicable federal or State laws and regulations (including certain initial and renewal State license/registration applications).

This article is not intended to provide legal advice or opinion and should not be relied on as such. Legal advice can only be provided in response to specific fact situations.

1Public Law No: 109-280 § Section 1224.