IRS Announces Important Filing Changes for Nonprofits with Group Tax Exemptions

5 min

As part of a broader shift in reducing its administrative burdens, the Internal Revenue Service (IRS) will no longer send "central" organizations that hold group tax exemptions a yearly roster of each affiliated "subordinate" organization covered by the group ruling. For decades, this roster, also known as the "List of Parent and Subsidiary Accounts," served as a filing reminder and as a simple way to keep the IRS' records of the subordinates included on a group exemption accurate and up-to-date. While every central organization's obligation to file an annual group exemption information update with the IRS remains unchanged, any nonprofit that holds or is covered by a group exemption should consider taking a more proactive role in completing the update and keeping its tax-exempt status intact, without relying on receiving a reminder from the IRS.

Annual Group Exemption Information Update

In order to keep a group exemption ruling active, a central organization must submit annually, at least 90 days before the close of its accounting period, the following information required by Revenue Procedure 80-27:

  1. Revisions in its official subordinate roster, which includes the names, addresses, and EINs of each recognized subordinate;
  2. Any changes in the "purposes, character, or method of operation" of the subordinates included in the group exemption; and
  3. For any newly added subordinates, specific information that is sufficient to verify that each subordinate organization qualifies both for federal tax-exempt status and for inclusion on the group exemption.

Organizations with accounting periods that end on June 30 should file the group exemption update by March 31 of that year, and calendar year filers ending December 31 by September 30 of each year. The fact that the filing deadline is 90 days before the end of the fiscal year, not after, is a trap for the unwary, with organizations mistakenly filing 180 days late. Filing an incomplete or late annual group exemption information update can result in termination of the group ruling and the revocation of the tax-exemption of all covered subordinates.

The group exemption information update is in addition to a central organization's requirement to file an annual Form 990-series return, unless a filing exception applies. If the central organization fails to file its required annual returns for three consecutive years, the IRS will automatically revoke the tax-exempt status of the organization and cease recognition of all of the subordinates under the group exemption. Similarly, individual subordinates are subject to automatic revocation of tax-exempt status for failure to file their own Form 990, or to appear on a group Form 990 return if the subordinate does not file its own Form 990, for three consecutive years. If a subordinate organization's tax exemption is auto-revoked for failure to file, that subordinate may not simply be added back to the group exemption, but rather must apply for a separate exemption from the IRS.

Elimination of Verification of IRS-Generated Annual Roster

Historically, about halfway through a central organization's accounting year, the IRS would send a roster detailing the subordinates included on the group exemption ruling, and requesting that the organization return it with any appropriate updates written in by hand, in order to help facilitate the annual group exemption information update. This process, completed entirely by correspondence, enabled the central organization to validate and annotate any changes, additions, or deletions and return the roster to the IRS for processing.

Despite this longstanding format for annual information updates, the newly revised IRS Publication 557 states that the IRS will no longer generate and send a roster of the group exemption list to central organizations. Rather, the IRS has directed central organizations to provide the IRS with a list containing only changes to names or addresses of subordinates on file and subordinates to be added or deleted from the group exemption letter. If there are no additions or deletions, the central organization is required to submit a statement to that effect. In other words, the IRS appears to want a separate, shorter list only reflecting changes to a roster previously submitted to the IRS.

However, the IRS has not provided any further guidance on how the central organization should indicate updates without receiving the list from the IRS, or how inaccurate or incomplete IRS records can be discovered and corrected. Although a copy of the group exemption roster can be requested, the IRS may not respond quickly due to continuous correspondence backlogs, especially in light of January's government shutdown.

In order to file an annual informational update in a timely manner, central organizations should consider basing their updated list off of the most recent list that was sent to the IRS. To accompany the separate list of additions and deletions, a central organization may also choose to send a complete list of subordinates on file to cover all bases, now that organizations will be unable to see in any errors in the complete group exemption list on file with the IRS.

More Changes Ahead?

Nonprofits whose fiscal year ends on June 30, 2019 will be among the first set of organizations impacted by this not-widely-reported process change. For now, all nonprofits with group exemptions should take steps to revise their internal filing reminders and information-gathering procedures to accommodate the revised reporting process for annual updates. Given the IRS's focus on the group exemption program over the past several years, further revisions may be in store.