Law Firm: Lawsuits an Option for Tax-Exempt Status Applicants

While the recent IRS scandal involving targeting of political groups seeking 501(c)(4) status has delayed the process for those groups, delays also exist for the charitable sector.

The law firm Caplin & Drysdale advised clients in an August 16 alert  (opens in a new tab) that suing the IRS for a declaratory judgment is an option for organizations waiting for exempt status that have not heard back from the government in 270 days.

The IRS backlog of unprocessed applications for tax exemption has reached unprecedented proportions, with applications received in April 2012 assigned for evaluation in August 2013, the alert stated.

If applications need further correspondence, it can now take more than a year to have an IRS agent assigned, BNA reported  (opens in a new tab). Delays are often due to a shortage of staff and the lack of a clear plan to deal with difficult technical questions that are often involved with the applications. Adding to the slow pace are management changes after many senior officials resigned or were put on leave in response to the recent 501(c)(4) targeting scandal.

“The big problem is that charities cannot tell donors their contributions are deductible, so it really restricts the ability of the organization to raise money to exist,” Marcus Owens, an attorney for Caplin & Drysdale, told BNA.

The Treasury Inspector General for Tax Administration and the National Taxpayer Advocate have recommended a declaratory judgment to relieve the backlog. A declaratory judgment would allow a court to approve a charity’s application for tax-exempt status. The IRS would then follow up with a judgment and settle the case.

“It’s outrageous that the IRS is so dysfunctional in processing applications,” Owens said. While litigation is expensive, some charities feel they have no other option.

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