[Senate Report 114-28]
[From the U.S. Government Publishing Office]
Calendar No. 51
114th Congress } { Report
SENATE
1st Session } { 114-28
======================================================================
NOTICE FOR ORGANIZATIONS THAT INCLUDE CHARITIES IS ESSENTIAL (NOTICE)
ACT
_______
April 14, 2015.--Ordered to be printed
_______
Mr. Hatch, from the Committee on Finance,
submitted the following
R E P O R T
[To accompany S. 918]
The Committee on Finance, having considered an original
bill, S. 918, to amend the Internal Revenue Code of 1986 to
provide notice to charities and other nonprofit organizations
before their tax-exempt status is automatically revoked, having
considered the same, reports favorably thereon without
amendment and recommends that the bill do pass.
CONTENTS
Page
I. LEGISLATIVE BACKGROUND............................................1
II. EXPLANATION OF THE BILL...........................................2
A. Require Internal Revenue Service to Notify Exempt
Organizations Before Revoking Exempt Status for
Failing to File Information Returns (sec. 2 of the
bill and sec. 6033(j) of the Code)................... 2
III.BUDGET EFFECTS OF THE BILL........................................6
IV. VOTES OF THE COMMITTEE............................................6
V. REGULATORY IMPACT AND OTHER MATTERS...............................7
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED.............7
I. LEGISLATIVE BACKGROUND
The Committee on Finance, having considered S. 918, the
``Notice for Organizations That Include Charities is Essential
(NOTICE) Act,'' to amend the Internal Revenue Code of 1986 to
provide notice to charities and other nonprofit organizations
before their tax-exempt status is automatically revoked,
reports favorably thereon without amendment and recommends that
the bill do pass.
Background and need for legislative action
Background.--Based on a proposal recommended by Senators
Coats and Cardin, and on S. 400 (114th Cong. 1st Sess.), co-
sponsored by Senators Coats and Cardin, the Committee on
Finance marked up original legislation (the ``Notice for
Organizations That Include Charities is Essential (NOTICE)
Act'') on February 11, 2015, and, with a majority present,
ordered the bill favorably reported.
Need for legislative action.--Under present law, the IRS
does not have the discretion to reinstate an organization's
exempt status without requiring a formal reapplication for
exempt status (Form 1023 or Form 1024) if the organization has
had its exempt status automatically revoked for failing to file
information returns. This reapplication requirement has added
tens of thousands of applications to the IRS's backlog of
unprocessed applications. Furthermore, present law does not
require the IRS to notify an organization that has already
failed to file a return for two consecutive years that it is at
risk of revocation if it fails to file for a third consecutive
year. Many of the affected organizations are small and poorly
funded, yet face increased demand for their services from the
communities they serve. As a result, requiring reapplication
can pose a significant financial burden on these organizations
and their communities. The Committee therefore believes it is
appropriate to require the IRS to notify organizations that are
at risk of losing exempt status for failure to file and to
permit the IRS to reinstate an organization's exempt status
without requiring reapplication in certain situations.
II. EXPLANATION OF THE BILL
A. Require Internal Revenue Service to Notify Exempt Organizations
Before Revoking Exempt Status for Failing to File Information Returns
(sec. 2 of the bill and sec. 6033(j) of the Code)
PRESENT LAW
Applications for tax exemption
Section 501(c)(3) organizations
Section 501(c)(3)\1\ organizations (with certain
exceptions) are required to seek formal recognition of tax-
exempt status by filing an application with the IRS (Form 1023
(Application for Recognition of Exemption under section
501(c)(3) of the Internal Revenue Code) or Form 1023-EZ
(Streamlined Application for Recognition of Exemption under
section 501(c)(3) of the Internal Revenue Code)).\2\ In
response to the application, the IRS issues a determination
letter or ruling either recognizing the applicant as tax-exempt
or not. Certain organizations are not required to apply for
recognition of tax-exempt status in order to qualify as tax-
exempt under section 501(c)(3) but may do so. These
organizations include churches, certain church-related
organizations, organizations (other than private foundations)
the gross receipts of which in each taxable year are normally
not more than $5,000, and organizations (other than private
foundations) subordinate to another tax-exempt organization
that are covered by a group exemption letter.
---------------------------------------------------------------------------
\1\All section references are to the Internal Revenue Code of 1986,
as amended (the ``Code''), unless otherwise noted.
\2\See sec. 508(a).
---------------------------------------------------------------------------
A favorable determination by the IRS on an application for
recognition of tax-exempt status generally will be retroactive
to the date that the section 501(c)(3) organization was created
if it files a completed Form 1023 within 15 months of the end
of the month in which it was formed.\3\ If the organization
does not file Form 1023 or files a late application, it will
not be treated as tax-exempt under section 501(c)(3) for any
period prior to the filing of an application for recognition of
tax exemption.\4\ Contributions to section 501(c)(3)
organizations that are subject to the requirement that the
organization apply for recognition of tax-exempt status
generally are not deductible from income, gift, or estate tax
until the organization receives a determination letter from the
IRS.\5\
---------------------------------------------------------------------------
\3\Pursuant to Treas. Reg. sec. 301.9100-2(a)(2)(iv), organizations
are allowed an automatic 12-month extension as long as the application
for recognition of tax exemption is filed within the extended, i.e.,
27-month, period. The IRS also may grant an extension beyond the 27-
month period if the organization is able to establish that it acted
reasonably and in good faith and that granting relief will not
prejudice the interests of the government. Treas. Reg. secs. 301.9100-1
and 301.9100-3.
\4\Treas. Reg. sec. 1.508-1(a)(1).
\5\Sec. 508(d)(2)(B). Contributions made prior to receipt of a
favorable determination letter may be deductible prior to the
organization's receipt of such favorable determination letter if the
organization has timely filed its application to be recognized as tax-
exempt. Treas. Reg. secs. 1.508-1(a) and 1.508-2(b)(1)(i)(b).
---------------------------------------------------------------------------
Other section 501(c) organizations
Most other types of section 501(c) organizations--including
organizations described within sections 501(c)(4) (social
welfare organizations, etc.), 501(c)(5) (labor organizations,
etc.), or 501(c)(6) (business leagues, etc.)--are not required
to provide notice to the Secretary that they are requesting
recognition of exempt status. Rather, organizations are exempt
under these provisions if they satisfy the requirements
applicable to such organizations. However, in order to obtain
certain benefits such as public recognition of tax-exempt
status, exemption from certain State taxes, and nonprofit
mailing privileges, such organizations voluntarily may request
a formal recognition of exempt status by filing a Form 1024
(Application for Recognition of Exemption under section
501(a)).
If such an organization voluntarily requests a
determination letter by filing Form 1024 within 27 months of
the end of the month in which it was formed, its determination
of exempt status, once provided, generally will be effective as
of the organization's date of formation.\6\ If, however, the
organization files Form 1024 after the 27-month deadline has
passed, its exempt status will be formally recognized only as
of the date the organization filed Form 1024.
---------------------------------------------------------------------------
\6\Rev. Proc. 2015-9.
---------------------------------------------------------------------------
Annual information returns
Exempt organizations are required to file an annual
information return, Form 990 (Return of Organization Exempt
From Income Tax), stating specifically the items of gross
income, receipts, disbursements, and such other information as
the Secretary may prescribe.\7\ Exempt from the requirement are
churches, their integrated auxiliaries, and conventions or
associations of churches; the exclusively religious activities
of any religious order; certain State institutions whose income
is excluded from gross income under section 115; an interchurch
organization of local units of a church; certain mission
societies; certain church-affiliated elementary and high
schools; and certain other organizations, including some that
the IRS has relieved from the filing requirement pursuant to
its statutory discretionary authority.\8\
---------------------------------------------------------------------------
\7\Sec. 6033(a). An organization that has not received a
determination of its tax-exempt status, but that claims tax-exempt
status under section 501(a), is subject to the same annual reporting
requirements and exceptions as organizations that have received a tax-
exemption determination.
\8\Sec. 6033(a)(3); Treas. Reg. secs. 1.6033-2(a)(2)(i) and (g)(1).
---------------------------------------------------------------------------
An organization that is required to file an information
return, but that has gross receipts of less than $200,000
during its taxable year, and total assets of less than $500,000
at the end of its taxable year, may file Form 990-EZ. If an
organization normally has gross receipts of $50,000 or less, it
must file Form 990-N (``e-postcard''), if it chooses not to
file Form 990 or Form 990-EZ. Private foundations are required
to file Form 990-PF rather than Form 990.
Revocation of exempt status
In general
An organization that has received a favorable tax-exemption
determination from the IRS generally may continue to rely on
the determination as long as ``there are no substantial changes
in the organization's character, purposes, or methods of
operation.''\9\ A ruling or determination letter concluding
that an organization is exempt from tax may, however, be
revoked or modified: (1) by notice from the IRS to the
organization to which the ruling or determination letter was
originally issued; (2) by enactment of legislation or
ratification of a tax treaty; (3) by a decision of the United
States Supreme Court; (4) by issuance of temporary or final
Regulations by the Treasury Department; (5) by issuance of a
revenue ruling, a revenue procedure, or other statement in the
Internal Revenue Bulletin; or (6) automatically, in the event
the organization fails to file a required annual return or
notice for three consecutive years (discussed in greater detail
below).\10\ A revocation or modification of a determination
letter or ruling may be retroactive if, for example, there has
been a change in the applicable law, the organization omitted
or misstated a material fact, or the organization has operated
in a manner materially different from that originally
represented.\11\
---------------------------------------------------------------------------
\9\Treas. Reg. sec. 1.501(a)-1(a)(2).
\10\Rev. Proc. 2015-9, sec. 12.
\11\Ibid.
---------------------------------------------------------------------------
Upon revocation of tax-exemption or change in the
classification of an organization (e.g., from public charity to
private foundation status), the IRS publishes an announcement
of such revocation or change in the Internal Revenue Bulletin.
Contributions made to organizations by donors who are unaware
of the revocation or change in status ordinarily will be
deductible if made on or before the date of publication of the
announcement.
Automatic revocation for failure to file information
returns
If an organization fails to file a required Form 990-series
return or notice for three consecutive years, the
organization's tax-exempt status is automatically revoked.\12\
A revocation for failure to file is effective from the date
that the Secretary determines was the last day the organization
could have timely filed the third required information return
or notice. To again be recognized as tax-exempt, the
organization must apply to the Secretary for recognition of
tax-exemption, irrespective of whether the organization was
required to make an application for recognition of tax-
exemption in order to gain tax-exemption originally.
---------------------------------------------------------------------------
\12\Sec. 6033(j).
---------------------------------------------------------------------------
If, upon application for tax-exempt status after an
automatic revocation for failure to file information returns,
the organization shows to the satisfaction of the Secretary
reasonable cause for failing to file the required annual
notices or returns, the organization's tax-exempt status may,
in the discretion of the Secretary, be reinstated retroactive
to the date of revocation. An organization may not challenge
under the Code's declaratory judgment procedures (section 7428)
a revocation of tax-exemption made for failure to file annual
information returns.
The Secretary is authorized to publish a list of
organizations whose exempt status is automatically revoked.
REASONS FOR CHANGE
Under present law, the IRS does not have the discretion to
reinstate an organization's exempt status without requiring a
formal reapplication for exempt status (Form 1023 or Form 1024)
if the organization has had its exempt status automatically
revoked for failing to file information returns. This
reapplication requirement has added tens of thousands of
applications to the IRS's backlog of unprocessed applications.
Furthermore, present law does not require the IRS to notify an
organization that has already failed to file a return for two
consecutive years that it is at risk of revocation if it fails
to file for a third consecutive year. Many of the affected
organizations are small and poorly funded, yet face increased
demand for their services from the communities they serve. As a
result, requiring reapplication can pose a significant
financial burden on these organizations and their communities.
The Committee therefore believes it is appropriate to require
the IRS to notify organizations that are at risk of losing
exempt status for failure to file and to permit the IRS to
reinstate an organization's exempt status without requiring
reapplication in certain situations.
EXPLANATION OF PROVISION
The provision requires that the IRS provide notice to an
organization that fails to file a Form 990-series return or
notice for two consecutive years not later than 300 days after
the date of the second failure. The notice must state that the
IRS has no record of having received such a return or notice
from the organization for two consecutive years and inform the
organization about the consequences of failing to file such a
return or notice by the date of the next filing deadline. The
notice must also contain information about how to comply with
the annual information return and notice requirements under
sections 6033(a)(1) and 6033(i).
The provision also provides that the Secretary may
reinstate the exempt status of an organization that had its
exempt status automatically revoked for failing to file an
information return or notice for three consecutive years if (1)
the organization demonstrates to the satisfaction of the
Secretary that it did not receive the above-described notice
from the IRS, and (2) files an annual return or notice for the
current year. Under such circumstances, the exempt status is
reinstated as of the date of revocation.
EFFECTIVE DATE
The provision is effective for notices and returns required
to be filed after December 31, 2014.
III. BUDGET EFFECTS OF THE BILL
A. Committee Estimates
In compliance with paragraph 11(a) of rule XXVI of the
Standing Rules of the Senate and section 308(a)(1) of the
Congressional Budget and Impoundment Control Act of 1974, as
amended (the ``Budget Act''), the following statement is made
concerning the estimated budget effects of the revenue
provision of the ``Notice for Organizations That Include
Charities is Essential (NOTICE) Act'' as reported.
The provision is estimated to have a negligible effect on
Federal fiscal year budget receipts for the period 2015-2025.
B. Budget Authority and Tax Expenditures
Budget authority
In compliance with section 308(a)(1) of the Budget Act, the
Committee states that no provisions of the bill as reported
involve new or increased budget authority.
Tax expenditures
In compliance with section 308(a)(1) of the Budget Act, the
Committee states that no provisions of the bill as reported
affect the levels of tax expenditures.
C. Consultation with Congressional Budget Office
In accordance with section 402 of the Budget Act, the
Committee advises that the Congressional Budget Office has not
submitted a statement on the bill. The letter from the
Congressional Budget Office will be provided separately.
IV. VOTES OF THE COMMITTEE
In compliance with paragraph 7(b) of rule XXVI of the
Standing Rules of the Senate, the Committee states that, with a
majority present, the ``Notice for Organizations That Include
Charities is Essential (NOTICE) Act,'' was ordered favorably
reported by voice vote on February 11, 2015.
V. REGULATORY IMPACT AND OTHER MATTERS
A. Regulatory Impact
Pursuant to paragraph 11(b) of rule XXVI of the Standing
Rules of the Senate, the Committee makes the following
statement concerning the regulatory impact that might be
incurred in carrying out the provisions of the bill.
Impact on individuals and businesses, personal privacy and paperwork
The bill requires the Internal Revenue Service to notify
organizations before exempt status is revoked for failing to
file information returns. The provisions of the bill are not
expected to impose additional administrative requirements or
regulatory burdens on individuals or businesses.
The provisions of the bill do not impact personal privacy.
B. Unfunded Mandates Statement
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
The Committee has determined that the tax provision of the
reported bill does not contain Federal private sector mandates
or Federal intergovernmental mandates on State, local, or
tribal governments within the meaning of Public Law 104-4, the
Unfunded Mandates Reform Act of 1995.
C. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service Reform and
Restructuring Act of 1998 (``IRS Reform Act'') requires the
staff of the Joint Committee on Taxation (in consultation with
the Internal Revenue Service and the Treasury Department) to
provide a tax complexity analysis. The complexity analysis is
required for all legislation reported by the Senate Committee
on Finance, the House Committee on Ways and Means, or any
committee of conference if the legislation includes a provision
that directly or indirectly amends the Internal Revenue Code
and has widespread applicability to individuals or small
businesses. The staff of the Joint Committee on Taxation has
determined that there are no provisions that are of widespread
applicability to individuals or small businesses.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL,
AS REPORTED
In the opinion of the Committee, it is necessary in order
to expedite the business of the Senate, to dispense with the
requirements of paragraph 12 of rule XXVI of the Standing Rules
of the Senate (relating to the showing of changes in existing
law made by the bill as reported by the Committee).
[all]