Senate bill would guarantee charities an IRS appeal

The Senate on September 30 unanimously passed the Taxpayer Assistance and Service Act, S. 5441, a package of 65 bipartisan changes to how the IRS works. One provision is aimed at nonprofits. It would write into law that an organization can take a denial or revocation of its tax-exempt status to the IRS Independent Office of Appeals, and that the IRS must tell it so in writing.

The bill still has to pass the House, which has been moving IRS changes in smaller pieces, according to Accounting Today.

What the provision says

Section 605 rewrites the right of appeal in the tax code. It says the Appeals process "shall be available to all taxpayers" for a list of IRS decisions, and the list includes "any determination to deny or revoke the tax-exempt status of an organization." A separate paragraph requires the IRS to give the organization written notice that Appeals is available. The bill lets the IRS limit access to Appeals in a few situations that apply to every taxpayer, such as cases under criminal investigation or designated for litigation.

The language came from an amendment by Senators James Lankford, an Oklahoma Republican, and Raphael Warnock, a Georgia Democrat, and was backed by Independent Sector, the national membership organization for nonprofits and foundations. Independent Sector says it covers both existing organizations that lose exemption and new applicants that are turned down, and that telling organizations about the right to appeal is current IRS practice but not law.

"This trust depends on an IRS that is rigorous, transparent, and protected from political or ideological pressures," said Akilah Watkins, Independent Sector's president and chief executive.

The rest of the bill

Another part of the bill would let the Appeals office hire its own attorneys and require it to weigh all hazards of litigation in resolving cases. The Finance Committee approved the package 26 to 1 in July. Senator Ron Wyden of Oregon, the committee's ranking Democrat, said the bill would also crack down on "predatory tax prep scammers."

Why exemption is in the news

The vote comes during a busy season for exemption questions. In September, Treasury and the IRS proposed rules under which private schools, colleges, and universities that discriminate on the basis of race, color, or national or ethnic origin would not qualify for exemption. They estimate the rules could affect as many as 18,000 institutions. Comments are due November 3, and a hearing is set for December 2.

What to do now

Nothing changes until the House acts and the bill is signed. In the meantime, keep your determination letter and the records that show your exempt purpose where the board can find them, and make sure the IRS has your current mailing address. Exemption can also end automatically, without any IRS decision to appeal, after three missed annual filings, as we explained in Three missed filings, and a charity's exemption is gone.