Donations to many tax exempt organizations (for example, charities to help the poor, schools, hospitals, museums, and youth organizations) are usually thought of as being deductible on the donor’s US income tax return. (If the taxpayer is an individual or married couple, the taxpayer must itemize deductions in order to claim the deduction.) But, what if the organization has lost its tax exempt status; or suppose the organization never qualified as tax exempt in the first place? If the donor is going to claim a US income tax deduction for the contribution does the donor have an obligation to determine if the organization is tax exempt?[NOTE – If the donor is an individual, a similar question arises as to claiming charitable contribution deductions for US gift tax purposes. For simplicity, however, this Update will only refer to the US income tax.]
Recently, the IRS updated its position on the responsibility of donors to verify that donee organizations are tax exempt. (Rev. Proc. 2011-33)
According to the IRS, a contribution is not deductible for US income tax purposes if the donee organization is not tax exempt at the time of the contribution. This could occur in two ways – either the organization was never exempt, or the organization was exempt but stopped being exempt.
An organization may stop being exempt if it surrenders its exempt status (something that does occur, but rarely); or the IRS has determined that the organization has not conducted its activities in a way that justifies continued exempt status; or the organization has failed to file its own annual US “income tax” return for three years in a row (Int. Rev. Code sec. 6033(n)).
In effect, if the donor is claiming a charitable contributions deduction, the donor has the burden of making sure that the organization is tax exempt when the contribution was made.
To do this, the donor may first consult – on the IRS’ website – “Publication 78”. [http://www.irs.gov/app/pub-78]. This lists most exempt organizations that have applied to the IRS for, and have received, tax exempt status. Publication 78 is updated quarterly. (The document was formerly published in hard copy, but the IRS now only publishes it electronically.) There is also, on the same website, an “Additions to Publication 78” which lists the most recently blessed exempt organizations that didn’t make it into the last quarterly update of Publication 78. Also, Publication 78 contains a list of organizations whose exemption was revoked over the past several years.
Alternatively, if the donor is more ambitious, the donor can consult – also on the IRS website – an “extract” from the IRS “Business Master File” (“BMF”). [http://www.irs.gov/taxstats/charitablestats/article/0,,id=97186,00html] This contains somewhat more information about the exempt organizations and is updated monthly. The information is in compressed ASCII Text or Excel spreadsheet files. Most donors will not need to consult the “extract”.
Nevertheless – if the IRS has revoked an organization’s tax exempt status and if the IRS has otherwise made a “public announcement” of the revocation, then – even if the revocation has not made its way onto the latest version of Publication 78 or the “extract” from the BMF – contributions made after the IRS’ public announcement are generally not deductible, even if the donor was unaware of the public announcement of revocation. Typically, this would happen if the IRS revoked an organization’s exempt status after the most recent version of Publication 78 or the “extract” from the BMF but before a new edition of Publication 78 or the BMF has been issued.
How would the IRS make such a public announcement?
A public announcement of revocation due to IRS audit and failing the audit is typically published in the “Internal Revenue Bulletin”. This appears in both hard copy (one can often find it at the local public library’s reference room) or on-line at the IRS website. [http://www.irs.gov/irb/ ]. The public notification usually takes the form of an “Announcement” in the “Internal Revenue Bulletin”. The Internal Revenue Bulletin is published weekly.[Perhaps not surprisingly, this may not be the end of the story. If the organization has responded to the revocation by going to court to seek a judicial “declaratory judgment” of the organization’s exempt status, a very limited amount of deduction may still be allowable. However, that would be an unusual case and the amount of allowable deduction is relatively small.]
However, there is another kind of revocation, and another kind of announcement of revocation, that the careful donor should also check. This is the so-called “auto-revocation”, which occurs if an organization has not filed a “tax return” for three consecutive years. When the IRS notices this failure, the IRS announces an automatic revocation on the IRS website, at the “Automatic Revocation of Exemption List”. [http://www.irs.gov/charities/article/0,,id-240099,00.html ] This is updated weekly.
Interestingly, there is a very large class of exempt organizations that can receive deductible contributions that may not even appear in Publication 78. This category consists of institutions of worship like churches, synagogues, mosques, temples, etc., integrated auxiliaries of such “churches”, and conventions or associations of such “churches”. These institutions are not required to apply to the IRS for tax exempt status and, if they do not apply for exempt status, they do not appear in Publication 78. Nevertheless, many such institutions do choose to go through the application process (even though not legally required to) and, in that case, they would appear in Publication 78 (and in the Publication’s list of revocations). Also, such institutions are nevertheless required to file annual “income tax” returns.
If you have been reading this Update carefully you may have noticed that one way of checking an organization’s tax exempt status has not been mentioned. That way is relying on what the organization says about itself in its own publications or on its own website. An organization’s self-description will not protect the donor from losing a claimed charitable contributions deduction if the IRS has made a public announcement that the organization had lost its exempt status before the donation was made (or if the organization was never tax exempt in the first place). Put another way, the title of this Update was a trick question.
What about real life? Should a donor always verify tax exempt status (and that tax exempt status has not been lost) by going on line to check the various IRS announcements? Technically, yes, if the donor wants to be absolutely sure. But, assuming the donor has other things to do with his/her time and energy, the real life answer may depend upon several considerations: (a) Does the donor have a legal obligation to others to make certain that the contribution will qualify for the charitable contributions deduction? For example, if the donor is a fiduciary (trustee of a trust, or executor of an estate), the donor may want to be extra careful and go through the process of checking the various IRS announcements. (b) Has the donee organization been prominent for a long time, so that if it lost its tax exemption the loss would have made the news? For example, if the American Red Cross, or the American Cancer Society, or a famous and venerable university located in New Haven, Connecticut were to lose tax exempt status it’s likely that this would quickly become front page news, and it would be difficult to imagine any donor remaining oblivious to the public tumult. (c) Is the organization so big that it is likely to have a large internal staff monitoring the organization’s operations so that any activity that might risk loss of tax exemption will be headed off? (d) Is the donee organization the US government, a state government, or a municipal government? (These are always exempt). (e) Is the amount of the donation so small that the donor doesn’t care if the deduction may be lost (even though the loss may be increased if the IRS imposes interest and penalties)?
On the other hand, if the donor (usually an individual) is considering making a donation to an organization that the donor is unfamiliar with, or to an organization that is relatively small or relatively new, it may be worth the donor’s while to take the extra steps of going online to the IRS website and verifying that the organization is exempt and has not lost its exemption. Beyond the question of tax deductibility, such an exercise might reveal that the organization is not what it has represented itself to be – and, in learning that, the potential donor may have saved himself or herself more money than just a lost or jeopardized income tax deduction.
Suppose the donor contributes to an organization when it is not exempt (either it never was or it lost its exemption). Would it do the donor any good to make a copy of the organization’s written representation (perhaps from its web site) claiming to be exempt and claiming that contributions to it are deductible – or even obtain a letter from the organization at the time of the donation stating that it is exempt and that contributions are deductible? This is unlikely to save a deduction if the IRS audits the donor’s tax return and disallows the claimed charitable deduction. As to helping the donor avoid penalties – there doesn’t seem to be a clear answer.
This Update is intended only to provide generalized information. It is not intended to provide information or advice with respect to specific situations. To address real life, specific situations you should obtain appropriate professional assistance.
Under the rules of the Supreme Judicial Court of Massachusetts this Update may be considered advertising.