News and analysis
May 15, 2013

Groups With Delayed Applications Could Have Sued IRS

Richard White/Chronicle of Philanthropy

At least 32 groups that filed applications to become tax-exempt charities could have sued the Internal Revenue Service last year for taking too long to make a decision, according to a Treasury Department audit released Tuesday that faulted the agency for mishandling applications from groups that could be politically oriented.

“Potential political cases took significantly longer than average to process due to ineffective management oversight,” said the report, which found that the IRS had inappropriately singled out conservative organizations that had words like “Tea Party,” or “patriots” in their names or focused on issues like government spending or taxes.

The audit, prepared by the Treasury’s inspector general for tax administration, said groups have the right to sue the IRS if it does not rule on an application for status as a 501(c)(3) charity within 270 days. When it conducted its review last May, it found that 32 out of 89 such applications that had been set aside for extra scrutiny as “potential political cases” had been open longer than that, even though the organizations had responded to all requests for additional information in a timely way.

“As of the end of our fieldwork, none of these organizations had sued the IRS, even though they had the legal right,” the audit said. It added that 38 similar cases were still open at that time and that those groups would also have the right to sue the agency if it did not meet the 270-day deadline.

The IRS was flagging the groups for extra review because it wanted to determine whether they were engaged in partisan political activities, which are banned for 501(c)(3) charities. It also reviewed applications for status as 501(c)4 “social welfare” groups, which are allowed to engage in politics as long as it is not their primary activity.

The delays may have harmed groups seeking the charitable designation by denying them benefits like postal-rate discounts, exemption from certain state taxes, or donations from foundations or individuals, the report said.

“In addition, some organizations withdrew their applications and others may not have begun conducting planned charitable or social welfare work.” it said.

The IRS took an average of 238 calendar days to process all applications requiring additional information in the 2012 fiscal year, the report said. But the average time a potential political case had been open as of last December was 574 calendar days, it said.

The delays arose partly because a team of specialists stopped working on potential political cases from October 2010 through November 2011 while waiting for help from the agency’s technical unit.

In its response to the audit, the IRS agreed that its unit that oversees tax-exempt organizations would set up procedures for tracking and monitoring such requests for help.

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