IRS controversy could cause tax-exempt processing slowdown

CPAs need to be prepared for a slowdown in certain work handled by the IRS Exempt Organizations Division in the wake of the recent controversy involving the processing of certain applications for tax exemption under Sec. 501(c)(4), the division’s former head said Thursday.

“Probably the whole system is frozen in time right now, like it was a mastodon stuck in a glacier,” said Marcus Owens, a member in the law firm Caplin & Drysdale’s Washington office and the former director of the IRS Exempt Organizations Division. “There are, I’m certain, distractions and delays.”

Owens was a late replacement as a speaker Thursday at the AICPA’s Not-for-Profit Industry Conference in Washington. He filled a speaking slot that originally was supposed to be filled by Lois Lerner, the head of the IRS Exempt Organizations Division who has been placed on administrative leave by the agency as a result of the controversy.

From 1990 to 2000, Owens held Lerner’s job. On Thursday, he discussed the fallout from the scandal that began with a May 14 report by the U.S. Treasury Inspector General for Tax Administration (TIGTA) that inappropriate criteria were used to identify tax-exempt applications for review.

The report found that the IRS used inappropriate criteria that identified for review “tea party” and other organizations applying for tax-exempt status as social welfare benefit organizations based on their names or policy positions instead of indications of potential political campaign intervention.

Owens said the IRS is equipped to handle congressional demands for records and employee interviews. But he said the criminal investigation launched by the Department of Justice will significantly slow the IRS’s processing of certain form applications.

“Everything shuts down, because there are allegations that your 501(c)(4) processing has been corrupt,” Owens said. “So what do you do? If you’re the manager, you don’t do it anymore. Period. Stop. Full stop. And maybe you go broader than that, because the 501(c)(3)’s were playing in this field, too.”

After his presentation, Owens said he thinks applications still will get processed at the division’s regional office in Cincinnati, which handles exempt organizations determinations work. But he said the Washington office handles any applications that are unusual or require judgment in areas where guidance has not been developed. Right now, these include applications involving health care organizations, he said.

Applications that go through the Washington office are likely to be significantly delayed, Owens said. According to Owens, practitioners affected by this slowdown have the following options:

• Hunker down and wait it out. “It will go away eventually,” Owens said.
• Consider involving the National Taxpayer Advocate, Nina Olson. Her office sometimes can shorten delays, Owens said.
• Write letters to new IRS executives and congressional representatives.
• Avoid requesting technical advice or rulings for now because they are handled by the office in Washington. “If they are going to go to the national office, everybody is [occupied],” Owens said.
• Consider legal action in certain cases. An applicant for tax exemption under Sec. 501(c)(3) can litigate to get a ruling on whether it is tax exempt, Owens said, but there is risk in this strategy. Owens said this can be a quick, inexpensive option if the IRS settles quickly, but a knock-down, drag-out fight can be expensive.

Delays are inevitable, though, Owens said.

“I have one [application] that’s an organization that’s going to make scholarships to bring foreign people to this country to learn about the United States and is going to send U.S. people to the foreign country. Pretty darn innocuous,” Owens said. “… It’s hung up now.”

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.