Toward increased accountability.

EXECUTIVE SUMMARY

* THE IRS ISSUED NEW DISCLOSURE RULES TO INCREASE the extent to which exempt organizations must distribute information to the public. Effective June 8, 1999, the rules put a greater burden on organizations to make copies of documents available upon request or to make them widely accessible through other means.

* THE NEW RULES SPECIFY THE DOCUMENTS AN organization must make available for public inspection and copy upon request, provide guidance on where those documents must be available, set conditions organizations may put on copy requests, describe the fees an organization can charge, offer alternative ways to make documents widely available and offer guidance on dealing with potential harassment.

* AN EXEMPT ORGANIZATION CAN AVOID THE BURDEN of having to copy documents if it makes them widely available to the public--through the Internet, for example. The organization could put the documents on its own Internet Web page or on that of another entity as part of a database of similar materials.

* IN THE EVENT AN ORGANIZATION BELIEVES THE requests for documents it receives represent harassment, the regulations offer relief. An organization can refuse to respond to such requests while it applies to the IRS district director for a determination.

* ORGANIZATIONS FACE AN INCREASED BURDEN IN STAFF hours when complying with the new rules. Failure to do so leaves the individual charged with making the required disclosures open to civil and criminal penalties.

New IRS disclosure rules for exempt organizations.

It a time when the public is pressuring charitable and other tax-exempt organizations to disclose details of their operations, the IRS issued new rules to increase the extent to which they must distribute such information. Affected entities include charitable, educational, scientific, literary and medical organizations, public radio and television stations, trade and professional associations, sports leagues, social welfare organizations, social clubs, cemeteries and fraternal beneficiary societies. It is important that CPAs who work for not-for-profit organizations, as well as those in public practice, be aware of the disclosure requirements, the policies and procedures that an entity should put in place to respond to them and the penalties for noncompliance.

The rules apply to entities described in sections 501(c) and 501(d) of the Internal Revenue Code and exempt from taxation under section 501(a). They expand the disclosure requirements for these exempt organizations--except for private foundations--and put an increased burden on them to make the documents available to the general public. Effective June 8, 1999, the regulations also bring conformity to the information organizations must provide. Regulatory authorities expect this to make exempt organizations more accountable for their operations and more forthcoming in their disclosures. The flowchart in exhibit 1, pages 52-53, summarizes the decisions an exempt organization should make to assure compliance with the new IRS regulations.

BUILDING ON THE PAST

Disclosure requirements have existed for some time. The Omnibus Budget Reconciliation Act of 1987 (OBRA) called for exempt organizations, including private foundations, to allow public inspection of their tax exemption applications. OBRA also called for exempt organizations, other than private foundations, to allow public inspection at their principal offices (and certain regional and district offices) of the three most recent annual information returns.

The Taxpayer Bill of Rights 2, enacted on July 30, 1996, called for additional public disclosures. On April 9, 1999, the IRS issued final rules interpreting the expanded requirements. The new regulations

* Specify the documents an organization must (1) make available for public inspection and (2) copy for individuals upon request--whether in writing or in person.

* Provide guidance on where the documents must be available for inspection.

* Set conditions an organization may place upon requests for copies of documents.

* Describe the amount, form and timeliness of payment of any fees for copying and postage the organization may charge.

* Outline how an organization, by making its documents widely available, can avoid having to respond to individual requests for copies.

* Furnish guidance to organizations that believe they are the victims of harassment campaigns.

DOCUMENTS TO MAKE AVAILABLE

The IRS regulations do not supersede the existing OBRA regulations. They do, however, require an exempt organization, other than a private foundation, to provide certain documents in response to requests (see exhibit 2, page 55, for the complete titles), specifically

* Its application for recognition of tax exemption (forms 1023 or 1024) including all supporting documents filed by, or on behalf of, the organization in connection with that application, as well as any correspondence with the IRS. The organization need not make available any application pending with the IRS or any application filed before July 15, 1987, unless the organization possessed a copy of the application on that date.

* The organization's three most recent annual information returns (forms 990, 990-EZ, 990-BL or form 1065, but not form 990-T or form 1120-POL) including all schedules and attachments filed with the IRS, but not including those parts of the returns that give the names and addresses of contributors.

Those seeking only certain information, or attempting to limit their costs, may ask for only parts of the above documents. For example, someone could limit his or her request to part V of form 990, the list of officers, directors, trustees and key employees. While this provision is certainly consumer-friendly, it will make implementing the new regulations more burdensome for exempt organizations by making it more difficult for them to deal with information requests.

DOCUMENT INSPECTION

The regulations say the documents described above must be made available at an organization's principal office, as well as certain regional or district offices. However, they do not have to be available in regional or district offices with fewer than three full-time employees. Also, such offices do not have to provide the documents for inspection if no management staff is on site and the services provided at the site simply further the organization's exempt purposes. An example would be an outpatient clinic, where the only on-site management is the clinical manager responsible for operating the facility.

When an individual inspects the specified documents, the organization is permitted to have an employee present in the room. The person inspecting the document is permitted to take notes and to copy the documents free of charge if he or she brings photocopying equipment.

Under the new regulations, a local or subordinate organization that is covered by a group exemption letter and receives a document inspection request, or a request for copies, must make available within a reasonable time (normally not more than two weeks) the group exemption application filed by the central or parent organization. It also must make available any IRS documents that include the subordinate organization. If the central or parent organization submits a list or directory of organizations covered by a group exemption letter, the local or subordinate organization need only provide the group exemption application and the pages of the list or directory that refer to it.

If a local or subordinate organization does not file its own annual information return, but is covered by a group return, the organization must make the group return available for inspection or provide copies within a reasonable time. However, if the group return includes separate schedules for each local or subordinate organization, the organization receiving the request may omit any schedules that relate only to other organizations.

Local or subordinate organizations enjoy one prerogative that is not generally available to other organizations. They can mail a copy of the requested documents, within a reasonable period of time, in lieu of allowing inspection. However, if they elect this option, they cannot charge for the copies without the requester's consent.

HANDLING REQUESTS FOR COPIES

An exempt organization must accept requests for copies of documents made in person at the same place and time the specified documents are available for public inspection. Individuals making such requests generally must be accommodated on the day of the request; however, the regulations provide that under unusual circumstances, the organization may respond on the next business day. Unusual circumstances include the illness or absence of the individual(s) responsible for responding to requests for document copies or an overwhelming volume of requests on a particular day. If one extra day is not enough, the organization may delay its response to the business day following the day the unusual circumstances cease to exist as long as the delay does not exceed five business days.

An organization must accommodate written requests (mail, e-mail, facsimile or private delivery) for copies within 30 days of receiving them. However, if the organization's policy calls for prepayment of reasonable fees for copying and postage, it must provide the copies within 30 days of receiving same. An organization is not required to respond to telephone requests for copies of documents, although it may do so. If the organization is not honoring telephone requests, it should instruct the callers to make their requests in writing or in person.

IMPOSING FEES

Under the new regulations, exempt organizations may not levy a charge for responding to document copy requests. The organization is, however, permitted to assess a reasonable fee for copying. The regulations define a reasonable fee as one that does not exceed the IRS fees for copies of exempt organization tax returns and related documents--currently $1 for the first page and 15 cents for each subsequent page. The organization can charge for the actual cost of postage to mail the copies.

An organization that has a prepayment policy and receives a written request without prepayment has seven days to inform the requester of the required prepayment. Requesters may pay for copies using cash, money orders, personal checks or credit cards (if the organization accepts credit cards). Organizations that take credit cards are not required to accept personal checks. If an organization does not require prepayment, and the requester does not prepay, the organization must receive his or her consent before providing copies when the copying and postage fee exceeds $20.

THE INTERNET SOLUTION

An exempt organization may avoid the burden of copying documents if it otherwise makes them widely available to the public. One way for the organization to do this is to put the documents on its Web page or that of another entity as part of a database of similar materials. The organization would then meet the requirements by instructing requesters where to find the information on the Internet. Placing the specified documents on the Internet relieves the organization only of the obligation to provide copies; it is not relieved of the obligation to allow public inspection.

The regulations specify a number of criteria for posting documents on the Internet. They must be posted in such a way as to allow people to access, view, download and print them in a format that exactly reproduces the original document filed with the IRS. In addition, people must be able to access the documents without a fee and without having any specialized computer hardware or software.

The IRS recognized its own documents currently do not meet this criteria. The regulations, therefore, allow organizations whose documents were available on the Internet on or before April 9, 1999, a transition period--until June 8, 2000--to meet the criteria.

SHIFTING THE BURDEN

An exempt organization wishing to relieve itself of the requirement to make the specified documents available for inspection or to provide copies may enlist an agent to perform these obligations on its behalf. However, the organization should consider these points before making such a choice:

* To relieve the inspection burden, the agent must be located in geographic proximity to the organization.

* The agent is subject to the same terms and conditions with regard to accessibility, fees and timeliness of response.

* The organization cannot indemnify itself for the agent's noncompliance. In the event the agent fails to comply, it appears the IRS could levy penalties both on the responsible officer or director of the organization and on the agent.

HANDLING HARASSMENT

The IRS recognized that these regulations provide individuals with malicious intent a way to become a nuisance to exempt organizations. Accordingly, the regulations say a harassment campaign exists when facts and circumstances show the purpose of a group of requests is to disrupt an exempt organization's operations rather than to obtain information. If an organization has reason to believe it is the victim of harassment, it can refuse to respond to those requests. Consider these examples:

Example 1. The Science Center, an exempt organization under section 501(c), normally receives five requests per month for copies of its annual information return. On November 5, a local newspaper publishes an expose based upon information it obtained from the center's most recent return. During November, the center receives 125 requests for copies of its return. There is no evidence to suggest the requests are part of an organized campaign to disrupt the center's operation. Accordingly, the regulations provide no relief. The center must respond to all 125 requests in a timely manner, consistent with its prepayment policy.

Example 2. The Gun Collectors Society, an exempt organization under section 501(c), normally receives 10 requests per month for copies of its annual information return. In the month of June, it receives 650 requests. Society personnel discover a message on the Internet from the president of a group encouraging its members to disrupt society operations by submitting as many document requests as they can, using an attached form letter. The society notes that 635 of the requests use wording identical to the form letter.

The facts and circumstances indicate the society is the subject of an organized harassment campaign. To confirm that it may disregard the 635 requests, it must apply to its IRS district director for a determination. While a determination is pending, the society does not have to respond to the 635 requests, but must comply with the remaining 15 on a timely basis.

PENALTIES FOR NONCOMPLIANCE

An individual (officer, director, trustee, employee or another charged with the duty to make the required disclosures) who fails without reasonable cause to comply with his or her disclosure obligations on behalf of the exempt organization is subject to a penalty of $20 per return or exemption application for each day the failure continues. The maximum penalty for failure to disclose

is $10,000 per return; there is no specified maximum for failure to disclose an exempt application. Any organization that willfully fails to properly discharge its duty to allow public inspection or to provide copies of returns or exemption applications upon proper request is liable for a $5,000 penalty (per return or application).

Criminal penalties may be applied to any person (including an exempt organization) who willfully furnishes information known to be false or fraudulent.

WHAT TO DO NOW

CPAs in exempt organizations will need to do several things to make sure their organizations comply with the new regulations. They first should confirm that all specified documents, including the organization's tax exemption application(s) and the three most recent annual information returns, are available for public inspection. They then should help management determine whether the organization will post the specified documents on the Internet or instead respond to individual requests for copies.

If management decides to make the documents available on the Internet, the CPA should take steps to put the documents on the organization's Web site or on the site of another organization--such as an industry trade group--that specializes in making such documents available to the public. The CPA should also prepare instructions employees can give callers to help them access the documents on the Internet.

If management decides to forgo the Internet, the CPA must determine which of the organization's satellite locations, if any, are covered by the regulations and therefore must comply with the disclosure requirements. The CPA then should establish policies and procedures to assure individuals requesting copies of the specified documents are accommodated in a timely manner. The CPA may wish to establish a prepayment policy for copies and position the organization to accept credit card payments, alleviating the need to accept personal checks. The CPA should also establish a pricing policy for photocopying.

Personnel within the exempt organization should be trained to spot a possible harassment campaign and report it to management so appropriate relief measures can be pursued with the IRS district director.

Finally, the CPA should conduct a training session for all personnel affected by the new IRS regulations and the organization's new compliance policies and procedures. This would be a good time to advise the staff of the penalties for noncompliance.

AN INCREASED BURDEN

The requirement to make copies of documents that already had been subject to inspection should not cause undue concern to most exempt organizations. The requirement to make annual information returns available to the public, however, is one exempt organizations have always been uncomfortable with--largely due to part V of form 990, which shows compensation paid to officers and directors--even though their counterparts in industry must make similar disclosures. The IRS and others who monitor the performance of not-for-profit organizations have decided the tax exemption offered to an organization that serves the public good negates the right of its officers to claim privacy with regard to their compensation.

The new regulations clearly increase the disclosure burden of exempt organizations. The need to acquaint personnel with the new regulations and establish policies and procedures for dealing with requests for copies of documents and the obligation to respond to requests quickly will likely require significant staff-hours, far beyond the IRS-estimated average of 30 minutes.

One "inside-the-Beltway" exempt organization specialist said the upside of the new regulations is that organizations have the opportunity to transform form 990 from a dry, annual tax return to an important public document that "tells the whole story of what the organization does for its community in return for the benefits of tax exemption." A counter argument could be that the exempt organization's interests would have been better served by allowing it to keep its annual tax return a "dry read," leaving the "whole story" of what the organization does for the community to its marketing brochures. In any event, the new IRS regulations, for good or ill, offer exempt organizations a substantial compliance challenge and significant penalties for failing to meet that challenge.

Compliance Takes Time

It will take a tax-exempt organization anywhere from 0 to 55 hours annually to comply with the new IRS disclosure rules, depending on the individual circumstances. The IRS estimates most organizations will average about 30 minutes.

[EXHIBIT 2 ILLUSTRATION OMITTED]

Exhibit 2: Tax Forms Exempt Organizations Must Provide(*)

Form 990, Return of Organization Exempt from Income Tax.

Form 990BL, Information and Initial Excise Tax Return for Black Lung Benefit Trusts and Certain Related Persons.

Form 990-EZ, Short Form Return of Organization Exempt from Income Tax.

Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.

Form 1024, Application for Recognition of Exemption Under Section 501(a) for Determination Under Section 120 of the Internal Revenue Code.

Form 1065, U.S. Partnership Return of Income.

(*) Not required to be available for public inspection, but mentioned in the text of the accompanying article, are Form 990T, Exempt Organization Business Income Tax Return and Form 1120POL, U.S. Income Tax Return for Certain Political Organizations.

RANDALL W. LUECKE, CPA, CMA, is vice-president of administration and treasurer of CSA America, Inc., in Cleveland, a wholly owned subsidiary of the Canadian Standards Association. His e-mail address is [e-mail]. KEVIN J. SHORTILL, JD, is an attorney with Covington & Burling in Washington, D.C., where he specializes in tax matters for exempt organizations. His e-mail address is [e-mail]. DAVID T. MEETING, CPA, DBA, is professor of accounting at Cleveland State University. His e-mail address is [e-mail].