August 27, 2010
Authored by: Keith Kehrer
When a charity significantly expands or changes its activities, it must inform the IRS by disclosing the activities on its next filed Form 990. The Form 990 includes questions regarding whether the filing charity has undertaken any significant activities not listed on a prior Form 990, whether the charity ceased conducting, or made significant changes in how it conducts any activities, and requires the charity to describe the changes in an attached schedule. The Form 990 also asks whether the charity made any significant changes to its articles or bylaws, and requires such documents be included with the Form 990. Although disclosing the changes on the next Form 990 satisfies a charity’s obligation to update the IRS, it does not provide any comfort that the new activities do not jeopardize the charity’s exempt status because there is no guaranty any IRS agent will review (or approve) such changes.
In addition to Form 990 disclosure, a charity may also inform the IRS of significant changes to its activities by filing with the so-called IRS “Correspondence Unit” (also referred to as the Adjustments Unit). The benefit of filing with the Correspondence Unit is that the charity has some additional assurance an IRS Agent will review the new activities (and assuming no negative response, at least implicitly approves the new activities). At one time, a charity could also request and receive an updated determination letter that, taking into consideration the new activities, the charity still qualifies under Section 501(c)(3). These updated determination letters were a great benefit to charities since they provided direct assurance that the new activities would not jeopardize their exempt status. Unfortunately, in response to our recent filings, the IRS Correspondence Unit has declined to issue an updated determination letter and merely informed our clients to ensure that they must disclose their significant changes on Form 990 (which, as provided above, they were required to do anyway). It is not clear if (and when) the IRS Correspondence Unit will again issue updated determination letters. Until then, there is some internal debate whether the additional cost of filing with the Correspondence Unit (in addition to the Form 990) exceeds the benefit the charity receives where it does not receive such an updated determination letter.