September 15, 2010
Authored by: Keith Kehrer
As we discussed in a prior post, a charity must notify the IRS of material changes in activities on its next Form 990. This process is beneficial to the IRS and the public. As I also discussed, in addition to the Form 990, a charity may (in its discretion) notify the IRS of material changes in activities through the Correspondence Unit (also referred to as the Adjustments Unit).
In the past, when it seemed appropriate (e.g., where the activities were in a gray area or the charity was very conservative), we would submit a letter explaining the changes in activities to the Correspondence Unit and request an updated determination letter from the IRS that the charity was still exempt taking into consideration the new activities. On several occasions, the Correspondence Unit issued such an updated determination letter, which was of great benefit to the charity, providing assurance and comfort that the charity’s new activities were exempt.
Recently, we have made similar filings and requests to the Correspondence Unit, which has declined to issue an updated determination letter – instead, the requesting charity merely received a confirmation letter from the Correspondence Unit acknowledging receipt of the filing and reminding the charity to disclose the changes on its next Form 990. Obviously, this mere confirmation letter is of significantly less benefit to the charity compared to an updated determination letter, making it difficult to recommend the additional filing with the Correspondence Unit in light of the additional time and legal cost to do so.
We propose that the IRS should introduce a formal process that allows a charity, in its sole discretion, to file a “Notice of Material Changes in Activities” with the Correspondence Unit and request an updated determination letter that such activities do not jeopardize the charity’s exempt status. Such a process is a “win-win” for the charity and the IRS. The IRS receives a detailed submission and an opportunity to review and confirm the proposed activities further an exempt purpose (similar to the opportunity afforded when the charity submits and the IRS reviews the Form 1023) and the charity receives an affirmative confirmation regarding its activities (similar to the initial determination letter).
This additional process should be solely within the charity’s discretion, and should not replace the Form 990 disclosure requirement. In addition, it would be fair for the IRS to charge a user fee for this process – maybe $500 for charities with receipts greater than $10,000 and a reduced fee for smaller charities (the fees should be less than the Form 1023 fee in light of the fact the amount of work would be similar to the Form 1023 review but relatively less since it would be more focused and would not include the other Form 1023 information).
I have no privy to the internal workings of the IRS Correspondence Unit. Therefore, it is possible my past experience receiving updated determination letters was an anomaly and/or my current experience of not receiving such letters is an anomaly. If this is the case, I hope that the IRS will issue an official statement regarding its current practices so it is clear.
It is also important to clarify that the updated determination letters we received in the past are different from the form confirmation letters a charity receives by calling the IRS EO general toll-free number – the updated determination letters we received expressly referenced the new activities, provided the new activities would not jeopardize the charity’s exempt status, and stated that the charity may continue to rely on its original determination letter.