Penalty Relief Provided to Exempt Orgs That Relied on Revenue Procedure 2018-38

(Parker Tax Publishing September 2019)

The IRS is providing penalty relief to organizations that relied on Rev. Proc. 2018-38, a procedure in which organizations exempt from tax under Code Sec. 501(a), other than organizations described in Code Sec. 501(c)(3), were granted relief from the general requirement to report the names and addresses of their contributors on the Schedule B of their Forms 990 or 990-EZ filed for tax years ending on or after December 31, 2018. A U.S. district court, in Bullock v. IRS, 2019 PTC 290 (D. Mont. 2019), set aside Rev. Proc. 2018-38 as unlawful and ordered the IRS to follow the rulemaking procedures required by the Administrative Procedure Act. Notice 2019-47.

Background

In Rev. Proc. 2018-38, the IRS provided information reporting relief to organizations exempt from tax under Code Sec. 501(a), other than organizations described in Code Sec. 501(c)(3), that are required to file an annual Form 990, Return of Organization Exempt From Income Tax, or Form 990-EZ, Short Form Return of Organization Exempt From Income Tax. Pursuant to Rev. Proc. 2018-38, those organizations that are exempt from tax under Code Sec. 501(a), other than organizations described in Code Sec. 501(c)(3), were granted relief from the general requirement to report the names and addresses of their contributors on the Schedule B of their Forms 990 or 990-EZ filed for tax years ending on or after December 31, 2018. The information reporting relief did not apply to political organizations described in Code Sec. 527. The instructions to Schedule B of Forms 990 and 990-EZ were modified to conform to Rev. Proc. 2018-38.

Code Sec. 6652(c)(1)(A)(i) imposes a penalty for failing to file a return required under Code Sec. 6033(a)(1) on the date and in the manner prescribed. Code Sec. 6652(c)(1)(A)(ii) imposes a penalty for failing to include any of the information required to be shown on a return filed under Code Sec. 6033(a)(1) or to show the correct information. The Code Sec. 6652(c) penalty is not imposed if it is shown that the failure was due to reasonable cause. In general, an organization exempt from tax under Code Sec. 501(a) must file its Form 990 or Form 990-EZ by the 15th day of the fifth month after the organization's accounting period ends.

New Jersey and Montana challenged the issuance of Rev. Proc. 2018-38. They filed for summary judgment asking the courts to set aside Rev. Proc. 2018-38 and order the IRS to follow the rulemaking procedures required by the Administrative Procedure Act (APA). New Jersey explained that it had received the names and addresses of significant contributors through the Schedule B forms and used that information to identify suspicious patterns of activity, determine whether the entity was soliciting from individuals within New Jersey, and otherwise supplement investigations of tax exempt organizations. New Jersey also requires organizations claiming tax exempt status to submit their Forms 990 and all Schedules, and, as a result, obtains substantial donor information pursuant to that requirement. Montana requires entities claiming tax exempt status to report whether they have received a federal exemption. It claimed that it relies on the IRS's information regarding the IRS's exemption determinations when making its own exemption determinations under state law.

The Montana district court, in Bullock v. IRS, 2019 PTC 290 (D. Mont. 2019), granted the motion for summary judgment and held that Rev. Proc. 2018-38 was unlawful.

Observation: In challenging the change implemented by Rev. Proc. 2018-38, Governor Steve Bullock of Montana pointed out that the revised rules would make it harder to detect illegal spending in political campaigns, including the detection of foreign money in campaigns.

IRS Penalty Relief

As a result of the Bullock decision, the IRS issued Notice 2019-47, which provides that the IRS will not impose a penalty under Code Sec. 6652(c) for organizations exempt from tax under Code Sec. 501(a), other than those organizations described in Code Sec. 501(c)(3), that do not report the names and addresses of their contributors on the Schedule B of their Forms 990 or Forms 990-EZ filed for a tax year ending on or after December 31, 2018, and on or before July 30, 2019. Exempt organizations may still be liable for a penalty under Code Sec. 6652(c) for a failure to report any information required under Code Sec. 6033(a) that is unrelated to the donor information described in Rev. Proc. 2018-38.

For a discussion of the reporting of contributions by tax-exempt organizations, see Parker Tax ¶65,515.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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