News and analysis
June 10, 2011

Mistakes in IRS List Cause Headaches for Some Nonprofits

Richard White/Chronicle of Philanthropy

Nonprofits around the country have found both alarming and reassuring news as they have reviewed the list of 275,000 groups whose tax exemptions the Internal Revenue Service revoked on Wednesday. The IRS took action against charities that, it says, failed to file required paperwork for three consecutive years.

But the list is misleading in places, with some well-established groups listed that have, in fact, filed their paperwork. On the list were the names of some of the biggest and most well-established colleges in the United States, George Washington University and the University of Michigan at Ann Arbor. So, too, was the Islamic Center, a prominent Washington nonprofit established in 1957 and located just a few blocks away from the vice president’s official residence.

While those were among the mistakes on the public IRS list, there was also plenty of good news for leaders of umbrella nonprofits who were relieved to discover that their affiliates had filed the required paperwork to keep their exemptions. Many such groups had been warned by the IRS last year that their exemptions were in jeopardy.

Orders From Congress

The IRS began the effort after Congress passed a law in 2006 ordering it to get rid of tax exemptions for charities that were not filing annual returns. The tax agency said it believed most of the groups that didn’t file paperwork were defunct, but not all were, as interviews and news-media articles have revealed. In Philadelphia, for example, the Philadelphia Housing Authority Development Corporation lost its exemption, the Philadelphia Inquirer reports.

And for established groups whose names mistakenly appeared on the list, their lawyers and other officials now have to deal with public perception that their exemptions were pulled.

In the case of George Washington, for example, officials think the IRS meant to list a student group, says Candace Smith, a university spokeswoman. She noted that the IRS gave a federal employer identification number that did not match the university’s. “The university continues to be a valid tax-exempt organization, and our exemption is not at risk of being revoked,” she said.

The University of Michigan’s identification number also did not match, another sign of a mistake.

In both cases, and in the cases of other mistakes on the public list, the names were likely truncated versions of a much longer name, says Lois G. Lerner, director of the agency’s tax-exempt organizations division. The IRS’s list limits the number of characters that can appear in an organization’s name. As a result, fraternities and sororities that are affiliated with a university, for example, might appear publicly under the name of the university.

Lax Review

Nonetheless, the mistakes on the list angered tax experts.

“I don’t think the list has done much for the charitable sector. The IRS has created an enormous waste of time and resources, and clearly there doesn’t seem to have been any judgmental review of even a sampling of the list,” said Marcus S. Owens, a Washington lawyer who formerly headed the IRS’s tax-exempt division.

He said he worried that the process of creating the list every year, and fixing the mistakes, would now cause “a workload issue for the IRS and the sector.”

However, Ms. Lerner says the IRS did a number of checks of the list to limit mistakes and had delayed its release—originally slated for March—until it was confident that it was as accurate as possible.

“We did do a lot of vetting on this list,” Ms. Lerner says. “But I’m sure there are some mistakes. It’s a huge list.”

The IRS, she says, is contacting all of the affected groups by mail and plans to correct any mistakes that are brought to its attention.

“We don’t want to put any organizations out there that shouldn’t be out there,” she said. “We are actively standing by to help people if they are on that list incorrectly and we are willing to correct them.”

Relying on Volunteers

While the list has caused confusion for some, for others, it has created a feeling of relief.

Kristy Spires, chief financial officer at the Grand Aerie Fraternal Order of Eagles, in Grove City, Ohio, said despite her initial fears that a large number of its active groups would have their tax-exempt status revoked, the list mainly contained affiliates that had two tax-exemption numbers instead of the one that is required. A search of the revocations list found 146 groups with “Fraternal Order of Eagles” in their names, but she said she is confident that is because of duplicate numbers.

“There were a few that weren’t able to make it, and we’ll work with them to get them to re-file, but I’m pretty happy at this point,” Ms. Spires said. “When you are an organization our size who depends on the efforts of volunteers, it is a challenge to make sure that every chartered sub-unit is in compliance. Our volunteers are not accountants or tax specialists, so any help we can give them is a good thing.”

Misleading Information

There are many possible reasons a well-known charity in good standing might appear to be on the list. A search of the list for “United Way” turned up 69 organizations with those words in the name. But those groups aren’t currently affiliated with United Way Worldwide, said Bill Meierling, communications director for the organization. “No accredited local United Ways are included on the Internal Revenue Service list,” Mr. Meierling said. “All organizations included on the list that employ the United Way name are former members or independent groups which were never a part of United Way Worldwide.”

When the IRS published a list last year of groups that were at risk of losing their tax-exempt status, only three official local United Ways were on that list, and United Way Worldwide worked with them to submit their paperwork so that they wouldn’t be revoked, Mr. Meierling added.

Beverly E. Ledbetter, general counsel at Brown University, was scanning the list to see if it included any of the university’s alumni clubs. Two groups on the list contained the words “Brown University,” but neither of them is an official alumni organization of the university, Ms. Ledbetter said.

“The university has a process for recognizing legitimate alumni clubs. Occasionally well-meaning groups organize without getting advance proper approval for use of the university’s name and without the oversight that the university provides,” Ms. Ledbetter said.

One active group that was on the IRS list has already contacted Lisa Nachmias-Davis, a New Haven, Conn., tax lawyer, about how to reapply for a tax exemption. Ms. Nachmias-Davis said she’s glad the IRS has agreed to reduce filing fees for small nonprofits like this one that want to apply to get their tax-exempt status back.

“They are active, they have an annual budget of $20,000 to $30,000 a year, and they even had a lawyer on the board who kept saying to the treasurer that they needed to get around to it,” she said. “But they never got to it.”