January 12, 2012

IRS Urged to Improve the Process of Reinstating Dropped Charities

Nonprofits that automatically lost their tax-exempt status last year face unnecessary obstacles if they attempt to get reinstated, the Internal Revenue Service's internal monitor said this week, as part of her annual report to lawmakers.

More than 385,000 nonprofits were knocked off the tax-exempt rolls after they failed to file their tax returns with the IRS for three consecutive years. But while the IRS allows groups to regain their tax-exempt status, Nina E. Olson, the tax agency's national taxpayer advocate, says the process is marred by bureaucracy.

She says under the current process, groups can't challenge whether the IRS was wrong to take away their status. Instead, they are simply told to send in the same form they originally submitted to seek tax-exempt status.

That form can take as long as seven months to process, and groups must then wait several more months before the IRS offers a decision, Ms. Olson said.

Ms. Olson, who operates independently of other IRS offices, recommended in her annual report that Congress require the tax agency to allow direct challenges, rather than relying solely on the process it uses now. She also recommends that the IRS create an easy form to fill out for those seeking reinstatement and increase the number of staff members who handle those forms.

To help groups avoid the hassle of losing their status at all, she urged the agency to send a warning to groups that have failed to file a tax form for two consecutive years that they are at risk.

In a response to Ms. Olson's report, the IRS said its procedures simply follow a federal law that requires it to revoke automatically the tax-exempt status of  groups that fail to file their tax forms.

The IRS said about 5,500 groups—less than 1.5 percent of the organizations that lost their tax-exempt status under the law—had applied for reinstatement as of October. Groups that had been improperly included on the list of revoked organizations were immediately reinstated, it said.