April 17, 2019
By Janna Goudarzi, MST | Nonprofit Tax Manager
When similar nonprofit organizations can demonstrate a defined relationship, they may qualify for a group exemption by the IRS. Under this scenario, a “central organization” is the parent organization that has one or more subordinates under its general control and is also sometimes referred to as an “umbrella organization”. In order to maintain their group exemption, central organizations are required annually to submit a list of subordinates included in the group exemption. With recent changes to IRS policy however, central organizations should consider some new policies and procedures to make sure they are compliant.
Central organizations must submit their list of subordinates at least 90 days prior to the close of their annual accounting period and include the following information:
- Name, address, and EIN’s of each subordinate;
- Information regarding all changes in the purposes, character, or method of operation of subordinates included in the group exemption letter;
- A separate list for subordinates no longer to be included in the group exemption letter because they have ceased to exist, disaffiliated, or withdrawn their authorization to the central organization; and
- A separate list for subordinates to be added to the group exemption letter because they are newly organized or affiliated or they have newly authorized the central organization to include them, including information verifying that the newly added subordinate qualifies both for federal tax-exempt status and for inclusion in the group exemption.
Change in IRS policy
Historically, the IRS has sent central organizations with group tax exemptions an annual list that includes all subordinate organizations covered by the group ruling. This list served as both a reminder for the central organization to submit its annual requirement, as well as assurance that the subordinate list was up to date. However, in an effort to lessen its administrative burden the IRS will no longer be providing these lists to the central organization. Going forward, the central organization will be required to provide the IRS with a list containing only changes to names or addresses of subordinates on file and subordinates to be added or deleted from the group exemption letter. If there are no additions or deletions, the central organization is required to submit a statement to that effect.
This change may cause some confusion for those central organizations that relied on receiving the IRS update in order to make their timely submission to the IRS. Further, without receiving the list from the IRS, the nonprofit will not know if IRS records are accurate or complete.
New vigilance required by central organizations
Nonprofits with group exemptions need to establish policies and procedures to ensure compliance with this requirement that include updating internal filing reminders and ensuring the information regarding its subordinates is up-to-date and accurate. Going forward, central organizations should either contact the IRS directly to request an updated group exemption list or send a complete list of all subordinates each year to ensure accuracy.
For additional information on filing changes for nonprofits with group exemptions, please contact Richard J. Locastro, CPA, JD at firstname.lastname@example.org or 301-951-9090.
Richard J. Locastro, CPA, JD
Partner and Director, Nonprofit Tax