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Proposed Regulations Highlight Expanded IRS Authority to Disclose EO Information to State Officials

By Bruce R. Hopkins May 1, 2011

(Complete article originally published in the May issue of Bruce R. Hopkins Nonprofit Counsel, available online to current subscribers.)

The IRS, on March 14, issued proposed regulations concerning the scope of its authority (IRC § 6104(c)(2)), as expanded by the Pension Protection Act of 2006 (see the October 2006 issue), to disclose information about charitable and certain other tax-exempt organizations to eligible state officials (REG-140108-08). The essence of this new body of law is that more information is now available to the states and the sharing of it will come at earlier stages in the IRS’s administrative and enforcement processes.

The proposed regulations, which essentially adhere to the statutory scheme, reflect the authorization the IRS has (IRC § 6104(c)(2)(A), (B)) to disclose information about certain proposed revocations and proposed denials of recognition of exemption, concerning ostensible charitable (IRC § 501(c)(3)) entities, before an administrative appeal has been made and a final revocation or denial has been issued. The information to be provided is expanded to embrace the names, addresses, and identification numbers of applicants. This broader authority applies where an organization is required to apply for a determination letter and where an entity elected to apply.

The IRS is authorized (IRC § 6104(c)(2)(D)) to disclose returns or return information of any charitable organization to state officials on its own initiative, regardless of whether it has initiated an examination, if it determines that the information may be evidence of noncompliance with state law. All disclosures may be made only if the state receiving the information is following applicable disclosure, recordkeeping, and safeguard procedures.

Proposed determinations, identifying information, and the related returns and return information with respect to charitable organizations and applicants may be disclosed to a state official only in response to the official’s written request and only as necessary to administer state laws regulating charitable organizations, such as laws governing tax-exempt status, charitable trusts, charitable solicitation, and fraud (IRC § 6104(c)(2)(C)).

The IRS may disclose returns and return information of tax-exempt organizations in general (IRC § 501(c) entities, other than those that are federal instrumentalities (IRC § 501(c)(1)) on a state official’s written request but only to the extent necessary in administering state laws relating to the solicitation or administration of charitable funds or assets (IRC § 6104(c)(3)).

Returns and return information of organizations and taxable persons may be disclosed in civil administrative and civil judicial proceedings pertaining to the enforcement of state laws regulating these organizations, pursuant to certain procedures (IRC § 6104(c)(4)). Return or return information may not be disclosed to the extent the IRS determines that the disclosure would seriously impair federal tax administration (IRC § 6104(c)(5)).

A state official who can receive this disclosed information is termed an appropriate state officer (ASO), which has been expanded to mean a state’s attorney general, a state’s tax officer, any other state official charged with overseeing charitable organizations (in the case of charitable organizations and applicants), and the head of the agency designated by the state attorney general who has primary responsibility for overseeing the solicitation of funds for charitable purposes (in the case of tax-exempt organizations generally) (IRC § 6104(c)(6)(B)).

Under the proposed regulations, the IRS may (and currently does) require an ASO to enter into a disclosure agreement with the IRS, which stipulates the procedures for the disclosure, as well as the restrictions on use and redisclosure. [26.8]

Note: These regulations, when issued in final form, will replace the current regulatory regime (Reg. § 301.6104(c)-1) in its entirety.

(Complete article, including commentary from the editor, is available online to current subscribers.)


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