The real story behind the IRS tax-exempt org. scandal

When the media gets hold of a controversial issue, it is always a good idea to hear what insiders on the issue think is the real story because it is often diametrically different than what we are hearing.

In this case of the IRS targeting political enemies of the ruling administration, what do tax lawyers for tax-exempt orgs think of the scandal?

If you are interested, click here to check out a post from the TaxGirl blogger (now on Forbes.com).

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In short, the IRS does this kind of stuff all the time (with or without the Obama administration)!  Just bad timing for getting caught during a particularly strong scandal season for the President.

My own two cents: in my experience, the IRS has no problems with overstepping their jurisdiction.  Orgs I have advised were held hostage over their exemption status over non-federal tax issues or issues irrelevant to tax-exempt status.  One organization was forced to sign an agreement that they would never again participate in raffles schemes (clearly a state law issue) if they wanted their 501(c)(3) letter.  Another organization was held hostage over their use of parsonage for their clergy-teachers (probably incorrectly and certainly not relevant to the 501(c)(3) application).  Basically, they used their strong bargaining position to push around the nonprofit for any issue they didn’t feel comfortable with – regardless of whether it had anything to do with the application being submitted.

The message I took from my limited experience was that when you go to the IRS for tax-exempt recognition, go in with as clean an application as possible, plain vanilla, nothing out of ordinary.  Nothing to give them reason to think twice.

3 comments

  1. It is rare that the nonprofits I form have issues getting tax-exempt status, but it is not unusual for the IRS to ask for clarification for mission or other issues, and sometimes amendment of Bylaws or Certificate of Incorporation to make certain nominal political activity is engaged in, it does not discriminate (unless religious affiliation is required), or. disposition of assets upon dissolution needs to be clarified.

    I have successfully sought and secured 501(c)(6) and (7) organizations, but I have never sought exemption of a (c)(4) .

    I have found that there are so many applications being made for nonprofit status, that the IRS, as a general principle, is looking at them more closely to determine if the entity can qualify. In one case I tried to have a “school” without walls or a set faculty or curriculum qualified as a (c)(3), and while the IRS said no, it did grant it nonprofit status under another provision.

    1. I actually believe the IRS went way beyond their normal “boundaries” (which shouldn’t be legal to begin with) in this case and if Congress can establish any linkage to the administration, it deserves to be a scandal on the level of Watergate (i.e. change in Chief Officer). Doubt that will happen as this administration seems very adept at slipping out of messes and it may very well have been IRS officials being overly “patriotic” on their own volition to their Commander in Chief. This whole IRS scandal could very well be diverting attention from a real scandal in Benghazi – makes no sense why the administration so bold-facedly lied in September unless there was a real problem they didn’t want exposed. Just my 2 cents, of course!

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