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MSP #21: EXEMPT ORGANIZATIONS (EOs)

The IRS’s Delay in Updating Publicly Available Lists of EOs Harms Reinstated Organizations and Misleads Taxpayers

TAS Recommendations and IRS Responses

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1.

TAS RECOMMENDATION #21-1

Update EO BMF and Select Check on a weekly basis as is the case for Form 990-N updates.

IRS RESPONSE TO RECOMMENDATION: TAS recommends that the online publication of EO BMF and Select Check be updated on a weekly basis.  The online publication of this information is dependent on monthly extracts that are obtained from the IRS Business Master File (BMF).  Modification to the extract would require significant programming changes which are cost prohibitive. Because funding levels are not sufficient, the IRS cannot make the programming changes that would allow for the more frequent updating of EO BMF and EO Select Check as requested.

TAS observes that donors may rely on an organization’s inclusion on EO BMF and Select Check in determining the deductibility of their contributions.  However, the determination letter issued by the IRS to an organization upon the reinstatement of its tax-exempt status after automatic revocation represents proof of the organization’s tax-exempt status.  An organization is required to make that letter available for public inspection upon request.  Donors may rely on an IRS determination letter to confirm an organization’s tax-exempt status in lieu of or in the interim before an organization’s listing can be published on EO BMF and Select Check after reinstatement.  Interested parties may also call the IRS toll-free number to obtain this information.

Lastly, TAS mentions erroneous revocations, stating that “even if the IRS promptly reinstates the organization or discovers its error, IRS databases will not immediately reflect the organization’s restored exempt status.”  The IRS implemented a process in March of 2015 to identify and prevent erroneous revocations.  The IRS now proactively reviews and researches internal listings of pending automatic revocations to identify and address erroneous revocations that may occur in connection with a determination made on an organization’s initial or reinstatement application for tax-exempt status.  In this process, correction is made before notification to the organization and publication of the revoked status occurs.  Since implementation, over 2,400 erroneous revocations have been prevented using this process.

CORRECTIVE ACTION: N/A

TAS RESPONSE: TAS commends the IRS for implementing a new process to prevent and reduce the number of erroneous automatic revocations.  TAS also understands and appreciates the IRS’s challenging budget environment.  However, TAS strongly disagrees with the IRS’s contention that donors and grantors to reinstated automatically revoked organizations can rely on a determination letter or make a phone call to the IRS to verify the exemption.  This statement runs contrary to the IRS’s own recognition of grantor and donor reliance on the IRS’s EO databases.  It also does not accurately reflect realities of the exempt organizations world, where donors and grantors often look solely to the IRS’s EO databases.  An exempt organization that is not listed on these online databases can be adversely impacted by losing out on donations and grants.  Therefore, updating these databases on a weekly basis is critical.  This strong business case can be presented to Congress as the basis for additional IT funding.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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2.

TAS RECOMMENDATION #21-2

Until appropriate programming changes can be made, update EO Select Check manually.

IRS RESPONSE TO RECOMMENDATION: The IRS lacks the necessary staffing to manually update EO Select Check on a systemic basis.  On average, the IRS approves approximately 1,800 applications for recognition of exempt status each week.  Adding each of these organizations to EO Select Check manually would require additional staffing which is cost prohibitive at this time.

Even if IRS had the resources to manually update EO Select Check, doing so could result in issues in light of the current programmatic updates.  For example, weekly manual EO Select Check updates together with monthly programmatic updates could corrupt data if the programmatic updates overwrite the manual updates.  Making manual updates also would introduce increased risk of erroneous entries, such as transposed EINs, resulting from manual (as opposed to programmatic) input of data.

Moreover, manually updating EO Select Check would result in inconsistent information on the IRS website regarding the status of an organization because an organization’s corresponding entry on the online EO BMF Extract cannot be updated manually.  This could result in taxpayer confusion and burden where a donor or other interested party could locate an organization on EO Select Check because it was manually updated, but could not locate the same organization in the online EO BMF extract, which would still update monthly.

Finally, manual updating of EO Select Check would not necessarily result in more frequent posting of information.  Before EO Select Check could be manually updated, the IRS would need to verify that the approved organization’s information was posted to BMF.  This process can take anywhere from two business days to two weeks depending on the type of organization and the nature of the required BMF updates and systemic posting delays.

CORRECTIVE ACTION: N/A

TAS RESPONSE: After reviewing the IRS’s concerns regarding the risk of corrupted data if the IRS performs regular manual updates, TAS agrees with the IRS that the risks of manual updating outweigh the benefits in this particular circumstance. However, the difficulties and concerns that the IRS has articulated about routine manual updates make it even more urgent that it begin the process for scoping and requesting weekly systemic updates, discussed above, and for improved emergency updates, discussed below.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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3.

TAS RECOMMENDATION #21-3

Implement an emergency process that, even when there is weekly updating, allows for manual database updates within 24 hours of the restoration of exempt status.

IRS RESPONSE TO RECOMMENDATION: ​​NTA Recommendation Not Adopted as Written, but IRS Actions Taken to Address Issues Raised by NTA.  For the reasons described in the response to Recommendation 21-2, the IRS generally does not make manual updates to EO Select Check, and is unable to manually update EO BMF (and the EO BMF Extract that appears on the IRS website).

As indicated in the MSP, the IRS already has in place processes to make emergency manual updates to EO Select Check where appropriate, generally where updates that should have occurred via automated programmatic updates did not for some reason occur.  The IRS will continue its existing process for emergency manual updates.  The IRS will continue to prevent erroneous revocations, which has successfully reduced the need for emergency manual updates.

As described above, the IRS also has taken and continues to make efforts to mitigate the risk that organizations will erroneously be listed as having their tax-exempt status automatically revoked.  Where an organization is erroneously listed, the IRS corrects the error and issues the organization a letter affirming its exempt status that the organization and donors may rely on for the interim period until the organization’s entry on EO Select Check and the EO BMF Extract can be updated.

CORRECTIVE ACTION: N/A

TAS RESPONSE: TAS commends the IRS for having an emergency process for manual EO Select Check updates and for its new process to reduce the number of erroneous automatic revocations. However, a 24-hour emergency manual updating process is necessary in situations where a donation or grant to an exempt organization hangs in the balance, particularly since, as discussed above, the IRS will not do routine manual weekly updates.  As previously noted and as recognized by the IRS, some donors and grantors rely exclusively on EO Select Check to confirm an organization’s exempt status.  An affirmation letter is thus of little value in these situations.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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