An audit by the Treasury Inspector General for Tax Administration (TIGTA) has found that nearly 10,000 new tax-exempt organizations failed to follow federal law to notify the IRS of their formation. Penalties, the auditors conclude, may be reserved for all but the most egregious laggards.

Why Was the Audit Done?

On Dec. 18, 2015, the Protecting Americans from Tax Hikes Act (also known as the PATH Act) was signed into law. Among other things, it requires Internal Revenue Code (I.R.C.) Section 501(c)(4) organizations to notify the IRS of their existence within 60 days of establishment.

The PATH Act also includes the assessment of penalties on late filers and nonfilers and, in some cases, on the officials responsible for filing the notification. Implementation of the new notification requirement involved development of new forms and changes to information technology systems as well as new guidance to help taxpayers comply with the notification requirement.

Findings

The audit revealed the IRS has not taken sufficient actions to identify noncompliant I.R.C. Section 501(c)(4) organizations despite having various sources of information that would allow it to do so. Once an organization notifies the IRS of its existence, the IRS can use this information to enforce filing compliance of the required annual return.

TIGTA identified 9,774 organizations that were potentially required to file a notification but did not.

“These organizations and their responsible officials were potentially subject to assessment of more than $48.4 million and $47.5 million in delinquency penalties, respectively,” TIGTA’s report states. “However, many of these organizations may not have understood or even been aware of the notification requirement because many of them filed other documents that informed the IRS of their existence.”

Only recently has the IRS begun looking at delinquency penalties for non-profits who fail to file their notifications in a timely manner. However penalties were not assessed for organizations who filed late before February 2019.

TIGTA found more than 1,700 organizations who filed late before penalties were being assessed. The organizations were potentially subject to nearly $5 million in delinquency penalties, while their responsible officials were separately potentially liable for another $3 million in penalties. The auditors noted, however that some of these organizations may have had reasonable cause for filing late, and so may not be truly subject to the penalty.

Recommendations

The Inspector General recommended that the IRS Exempt Organizations division determine if it’s possible to work with state governments in order to identify new non-profit organizations who are required to file with the IRS. Other recommendations include:

• Conduct research on organizations identified by TIGTA and determine if any compliance actions are necessary
• Use available information to enforce compliance of notification requirements
• Determine if untimely filers had reasonable cause for filing untimely or if assessing delinquency penalties is warranted
• Update notices and procedures to fully implement the law.

In response, IRS management agreed to use available information to enforce compliance and to update its notices and procedures. However, the IRS did not agree to work with state governments, take actions to bring organizations identified by TIGTA into compliance, or determine whether penalties should apply for late filers.

The Inspector General’s full report is available here.