Cincinnati lawyer explains how tax-exempt applications usually work

Process can take time

CINCINNATI - As mysterious and confusing as it all sounds, applying for tax-exempt status from the Internal Revenue Service isn't usually all that complicated.

So says Noah Stern, a partner in the corporate department of the downtown Cincinnati law office of Dinsmore. Stern estimates that working with tax-exempt organizations makes up as much as a third of his practice.

"Creating an exempt organization is a relatively straightforward process," Stern told WCPO Digital.

Stern's description of the process comes a week after news broke, and a subsequent Treasury Department audit revealed, that agents in the Cincinnati IRS office improperly targeted conservative groups for scrutiny during the tax-exempt application process. That disclosure immediately ignited a political firestorm, launched congressional hearings, which started Friday in Washington, and led to the ouster of IRS Commissioner Steven Miller. 

Miller testified Friday that an increase in workload and not politically motivated or deliberate targeting was the source of "foolish mistakes" made by some IRS employees in the Determinations Unit based in Cincinnati. 

President Barack Obama has promised a full inquiry and is facing increasing political heat over what appears to be an improper practice that has been rooted in Cincinnati for more than two years. The office here processes applications and determines which organizations get tax-exempt status.

The examination of the IRS and how it grants tax-exempt status to groups has shined a light on the normally fairly secretive and obscure processes that most Americans rarely, if ever, see.

Stern has no direct knowledge of any of the current controversy. But he knows a lot about how the process typically works for his clients in Ohio.

Application Steps Are Clear

First, an organization must file papers with the Ohio Secretary of State. That filing should include language that the IRS prefers related to its charitable purposes and what would happen to the organization's money when it dissolves. (A charity can't legally raise a lot of money through donations and then dissolve and distribute that money to its board members, for example, he said.)

An organization must then create organizational documents, including a code of regulations or bylaws, that sets forth rules about how the organization runs, how many officers it will have and who its directors will be.

Then there's a standard form that an organization must complete. Groups applying for 501 (c)(3) status, which would typically include charities such as soup kitchens, homeless shelters or the United Way, fill out Form 1023, Stern said.

Groups applying for some other type of status, such as 501 (c)(4)s, fill out Form 1024, he said, which is a much shorter form.

Applicants must send in their completed forms along with a copy of their state filings, regulations and conflict of interest policies, and a check to cover a processing fee.

"Often, the IRS will review it, and you will get a determination letter that says, ‘Congratulations, you're a 501 (c)(3),'" Stern said. "Sometimes, however, it's not that easy. They'll call and say, ‘We don't quite understand what you're doing. We're not so sure you're exempt.'"

In those cases, the IRS sends additional questions to applicants asking for more information.

Approval Time Varies

"Those questions can be anything from please explain more about what you do, to tell me more about the people who will be serving as your directors and officers to send me the minutes of your meetings," Stern said. "Anything that has to do with the operation."

The amount of time it can take to get a determination from the IRS, he said, "is highly variable."

Stern said he's had some applications approved in as little as six weeks. Most take longer, although he's never had any take longer than 18 months.

The Treasury Department's audit of how applications by conservative groups were handled by the IRS found that in some cases, it took more than three years, over two election cycles, for the applications of some of the groups to be completed. And in some cases, many organizations received requests from the IRS that "included unnecessary, burdensome questions,'' the audit stated.

The audit concerned groups that sought tax exempt status under two classifications -- 501 (c)(4) and 501 (c)(3) organizations. There are significant differences between the two classifications. A 501 (c)(3) is a charity, as most people understand it. Donations to that type of organization are tax deductible, and 501 (c)(3)s can't support political candidates and have limits on lobbying.

But donations to 501 (c)(4)s are not tax deductible. And those organizations can lobby and participate in political campaigns as long as their primary purpose is the promotion of "social welfare." Additionally, those organizations can keep the names of their donors anonymous.

Most of the conservative organizations that got extra scrutiny from the IRS were applying for 501 (c)(4) status.

 

 

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