On August 16, 2013, Caplin & Drysdale's Exempt Organizations Group issued an alert entitled "Stalled Application for Section 501(c)(3) Status: Is it Time to Sue the IRS?." The alert and Marcus S. Owens are featured in an August 20, 2013 Bloomberg BNA Daily Tax Report article, shown below in its entirety.
Suing IRS May Be Alternative to Speed Charity Exemption,
Caplin & Drysdale Says
Suing the Internal Revenue Service may not be a bad option for organizations that have applied for tax exemption as charities and have heard no word from the government in 270 days, Caplin & Drysdale advised clients in an Aug. 16 alert.
The backlog of unprocessed applications for tax exemption has reached unprecedented proportions with applications received in April 2012 assigned for evaluation in August 2013, the alert said. If some type of correspondence is involved, it can take more than a year for an application that needs "further development" to be assigned to an IRS agent and until that time, the application is going nowhere.
Both the Treasury Inspector General for Tax Administration and the National Taxpayer Advocate have suggested seeking a declaratory judgment to get relief, and Marcus Owens, Caplin & Drysdale attorney, Aug. 19 concurred.
"The big problem is that charities cannot tell donors their contributions are deductible, so it really restricts the ability of the organization to raise money to exist," he said.
While 501(c)(4) applications have received most of the attention lately as Congress explores how applicants for tax-exempt social welfare status were treated by IRS, Owens noted that there is no tax benefit involved for those organizations, but there is for 501(c)(3)s, and there are many more organizations seeking status as charities than social welfare organizations.
There shouldn't be a delay for any type of organization seeking exemption, Owens said, but for charities, in particular, Congress felt that 270 days was plenty of time for the government to process an application for exemption. "It's outrageous that the IRS is so dysfunctional in processing applications," he said. Litigation is expensive for these charities and many are reluctant to do it, but when the government is so slow in making decisions, he said their institutional back is against the wall.
He attributed the delays to staffing shortages and no plan for resolving hard technical questions raised by the applications. The process is slowing down even more now, due to management shake-ups over the scandal involving the handling of conservative groups, in which senior management of the exempt unit at IRS was replaced with people who have no familiarity with the area, Owens said.
In her 2012 report to Congress released recently, National Taxpayer Advocate Nina Olson said the inventory of open applications increased from 15,570 in fiscal year 2010 to 33,505 in FY 2012. According to the alert, it is clear that the backlog has only continued to increase. Of the approximately 60,000 new applications IRS receives every year, 30 percent are assigned for further development.
Charities that have applied for tax exemption have a right to bring suit if IRS does not respond to the application within 270 days. If the application has been assigned to an agent, the charity must give the agent enough time to consider the charity's responses to questions before going to court. If the
charity has not responded in a timely way, it may not be able to sue.
Seeking a declaratory judgment is likely to be a much quicker process, Owens said, where a tax court or other court makes the decision that the organization qualifies for tax exemption.
Following that, IRS must issue a favorable determination letter and settle the case. The court does not engage in discovery but simply certifies the record, and "does the job the IRS should have done," he said.
The process is not desirable for IRS either, Owens said, in that a judge may grant exempt status to organizations the Service has questions about. In addition, the Service must spend attorney time on its own legal defense.
Reproduced with permission from Daily Tax Report, 161 DTR G-3 (Aug. 20, 2013). Copyright 2013 by The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>