Non profit corporations are allowed tax exempt status if approved by the IRS and relevant State taxing authority but to achieve that status they must surrender many of the prerogatives of the for profit corporations.
Most importantly, one’s assets are “owned” by the State, that is the public, and NOT by the founders or members of the Foundation and while one may control the use of the assets so long as one conforms to the appropriate purpose of the Foundation, if one closes one’s doors, the assets revert to the full control of the State. See the article on The Basics of Setting Up Your Own Foundation on the Articles Page of our web site for more details.
One is also subject to State and public scrutiny to make sure that you are qualified to remain tax exempt and that you are serving the purpose described in your organizational applications. One must assume that members of the public may have access to many (but NOT all) of one’s documents if one wishes to be a non profit organization with the tax benefits granted by the government.
This article shall discuss what documents the public may examine and which may be kept confidential by the Foundation.
INTERNAL REVENUE CODE SECTION 61204 (D)
The federal government has spelled out in detail in the above statute the right of the public to obtain access to the Foundation documents including stating in the Statute what is not required to be delivered, and most states follow the federal lead on this matter.
If you filed your first return on or after March 13, 2000, the following rules apply:
1. Annual Return. Without charge and upon request, the Foundation must make available for public inspection a copy of its original and amended annual informational returns. After three years from the filing of the return, it no longer need be made available.
2. Exemption Application. Further, the entity must make available without charge its application for tax exempt status, including all supporting documentation submitted to the IRS but NOT including “materials required to be withheld from public inspection which is defined as “ Trade secrets, patents, processes, styles of work or apparatus for which withholding was requested and granted,” as well as any “national defense material.” Additionally,
· The exempt organization also need not disclose documents relating to unfavorable rulings or determination letters issues in response to applications for tax exemption, or
· Ruling or determination letters revoking or modifying a favorable determination letter, or
· Technical advice memoranda relating to a disapproved application for tax exemption or the revocation or modification of a favorable determination letter, or
· Any letter or document filed with or issued by the IRS relating to whether a proposed or accomplished transaction is a prohibited transaction under section 503, or
· General communications between the IRS and the entity which may relate to its tax exempt status as an organization but does not relate to the “organization’s application for tax exemption.”
Clearly the intent of the above statute is to give the public access to documentation relating directly to the successful application but not to necessarily allow the public to wade through the efforts of the entity to achieve or maintain status or to gain access to trade secrets and the like. The public should know why exempt status was achieved; but not the details of how it was achieved or the proprietary assets of the entity.
The rules should be reviewed by any entity suddenly receiving such a request to make sure the refusal or agreement is in conformity with the latest law.
PRACTICAL ASPECTS OF THE RESPONSE TO REQUESTS FOR INFORMATION
The documents to be examined should be made available to the public at the organizations regular principal office during regular business hours. The organization may have an employee present during the examination but the examining party must be able to make notes and make copies at no charge if the examining party brings its own photocopying equipment.
If there is no regular office, the organization must still make the documents available for copying within two weeks at a “reasonable location” of the organization’s choice. Alternatively, the organization may copy and send the documents to the person requesting them, at no charge, again within two weeks.
COPIES OF ANNUAL INFORMATION RETURNS AND EXEMPTION APPLICATION
An exempt organization must also provide a copy of all or any specific part or schedule of its three most recent annual information returns and/or exemption applications to ANYONE who requests a copy either in person or in writing at its principal office. If the request is made in person, the copy must be provided the same business day the request is made unless there are unusual circumstances. If by mail, the request must be honored within thirty days from the date the request is received.
The request must meet three criteria, however:
1. The request must be addressed to the exempt organizations’ principal office
2. It is sent by mail or e mail, fax or a private delivery service approved by the IRS, and
3. Gives the address to where the copy of the document should be sent.
If the organization wishes to charge for the cost of copying such documents, it may charge a “reasonable fee” which the IRS defines as no more than the IRS charges for its own copying costs which, as of June 2001, was one dollar for the first page and fifteen cents for each additional page, plus actual postage costs. The thirty days to respond may run from when the money is received after request by the organization.
Should the organization make the information “widely available,” then it need not respond to the request. By “widely available” is meant posting on the web or equivalent means of wide dissemination.
PENALTIES FOR REFUSAL TO DISCLOSE
The IRS provides relatively stiff penalties for the entity that fails to comply with the law.
For failure to allow public inspection of annual returns, it is twenty dollars for each day after the deadline that the failure continues, with a maximum of ten thousand dollars total fine.
For failure to allow public inspection of the exemption application, the penalty is twenty dollars for each day the failure continues.
The penalty for willful failure to allow public inspection of a return or exemption application is five thousand dollars for each return or application and the same penalty also applies to a willful failure to provide copies.
The key question that will confront an organization receiving such a request is whether any of the information in the exemption application or annual information returns is a trade secret or so confidential that it should not be disclosed. At that point, discussions can ensue with the requesting party to determine the purpose of the inquiry and if a restriction can be voluntarily agreed upon. If not, then legal counsel should immediately be contacted so that the IRS may be brought into the discussion and a ruling achieved before a penalty ensues for at the least one should seek to avoid the high cost of the “willful failure” provision above.
Most people requesting the information wish to use it for their own application or wish to confirm that the foundation is operating in conformity with its exempt purposes. Such efforts, while time consuming for the foundation, are certainly appropriate given the special tax treatment afforded foundations and compliance with such reasonable requests is simply one more price one must pay for the advantages of tax exemption.