By Robert W. Wood
Wood LLP, San Francisco, CA
To be recognized as tax-exempt, you ask the IRS, right? Many Tea Party groups-and perhaps pro-Israel groups too-were singled them out for extra scrutiny. The whole scandal would never have happened if there was not an IRS application process. You apply, face the IRS gauntlet, and hope for the best.
But must you apply for a coveted IRS Determination Letter saying your group is tax-exempt? It seems downright heretical to go rogue without an IRS ruling. But, in some cases you can be exempt in operation without asking.
You can emulate Dorothy in the Wizard of Oz. She always had the power to go back to Kansas. She just clicked her ruby slippers three times saying, "there's no place like home." Tax exemption can follow Dorothy's lead.
Rather than applying to the IRS you just operate as exempt. If you are audited, be prepared to prove it. It sounds offbeat, but it is looking more attractive these days in some cases.
The bad news? This "self-declaration" is not for everyone and is risky. No organization (budding or old) should try it without talking to a tax lawyer with exempt organization experience.
The IRS knows that organizations are doing this, and the IRS is asking questions. As explained in a Self-Declarers Questionnaire, the IRS is looking into organizations claiming tax-exempt status without being recognized by the IRS. The IRS has asked over 1,000 self-declared §501(c)(4), (c)(5) and (c)(6) organizations to participate. See IRS checking 1300 `self-declared' tax-exempt groups.
The Tea Party fracas was over 501(c)(4) organizations, but there are many types of exemptions. The "best" are public charities exempt under 501(c)(3). See IRS Requirements for Exemption. That includes churches. Comparing the tax perks of exempt organizations, church status is the cre`me de la cre`me.
But do you need a coveted IRS determination letter for a church? All the major religions have them and many small ones too. See Christian Crusade For Tax Benefits. Historically, some of the toughest ruling fights have involved churches. For example, the IRS denied that Scientology was a church for decades.
Then in 1993, the IRS abruptly reversed course and ruled that Scientology is a church after all, settling litigation. The New York Times cried foul. Now, 20 years later, some claim the IRS should examine Scientology anew. See IRS vs. Scientology: Here We Go Again.
So is self-declaring viable? It depends on the type of organization and on circumstances, but sometimes yes. Still, most organizations are best advised to seek a ruling. The IRS maintains a list of charities. To check particular organizations, use the IRS Exempt Organizations Select Check online search tool.
For more information, in the Tax Management Portfolios, see Webster, 450 T.M., Tax-Exempt Organizations: Organizational, Requirements, Webster, 451 T.M., Tax-Exempt Organizations: Operational Requirements, Webster, 613 T.M., Lobbying and Political Activities, Webster, 614 T.M., Trade Associations, and in Tax Practice Series, see ¶6510, Charitable Organizations, ¶6520, Other Tax-Exempt Organizations, and ¶2180, Lobbying and Political Activities.
© Robert W. Wood 2013
Originally published by Forbes.com.
1 Robert W. Wood is a tax lawyer with a nationwide practice (www.WoodLLP.com). The author of more than 30 books including 522 T.M., Tax Aspects of Settlements and Judgments, he can be reached at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)