IRS Clarifies Reliance on IRS Publications For Making Donations or Grants

6/27/2011 Articles

The IRS recently issued guidance that clarifies the extent to which grantors, donors and contributors can rely on IRS databases and other publications to confirm an exempt organization's tax status for purposes of deducting contributions or making grants. This guidance document, Revenue Procedure 2011-33 (Rev. Proc. 2011-33)[1], provides that donations or grants made to organizations in good standing as of the date of the donation or grant (as confirmed by checking IRS's electronically-maintained databases - Publication 78 (Pub. 78) and the Business Master File (BMF)) will be treated as a charitable deduction or qualifying distribution. This in and of itself does not reflect any significant change to donors and grantmakers' standard practice of checking an organization's status in these databases prior to making a grant or donation. 

However, Rev. Proc. 2011-33 also provides that when the IRS gives public notice that it has revoked a charity's tax-exempt status, then any donation or grant made after the date of IRS's public notice will not be deductible or a qualifying distribution, even if the current edition of  Pub. 78 or the BMF still lists the organization as being in good standing. The IRS will make these "public announcements" of revocation in its Internal Revenue Bulletin (IRB) or on its website   

By way of background, the two key databases maintained by the IRS, Pub. 78 and the BMF, list organizations that have received a ruling or determination letter from the IRS confirming that contributions or grants to the listed organization are deductible. Historically, the IRS has published and maintained a "paper version" of Pub. 78, an awkward and cumbersome document by which to check an organization's tax status.  IRS has finally migrated this information into an electronic database (in a slightly more user-friendly format), and declared that donors and grantmakers can no longer rely on the paper version for current information about an organization after June 20, 2011 (the effective date of Rev. Proc. 2011-33). Those wishing to access Pub. 78 must utilize IRS's electronic version on the IRS website.[2]  IRS expects to update Pub. 78 at least quarterly.  IRS's second key database, the BMF, provides more detailed information about an organization than Pub. 78, and this too is available electronically on the IRS website.[3]  IRS extracts and updates this information on a monthly basis.   

Prudent donors and grantmakers who wish to assure the deductibility of their funds (and foundations who wish to avoid any payment of excise tax) should contemporaneously verify that the recipient organization is in good standing in Pub. 78 and the BMF, and that the organization has not had its status revoked by publication in either the IRB or on the IRS website. 

Rev. Proc. 2011-33 also reaffirms that a grantor or donor may rely on information obtained from a third-party (e.g., Guidestar and other similar subscriptions), as long as the third-party report includes the organization's name, EIN, foundation and deductibility status, a statement that the information is from the most current update of the BMF extract and the BMF extract revision date, the date and time the information was provided to the grantor/donor, and the grantor/donor retains a copy of the report (either electronically or in hard copy).

Rev. Proc. 2011-33 was issued on the heels of the IRS's recent revocation of 275,000 organizations for failure to comply with tax reporting requirements. Most of these revocations were for small organizations with annual revenues of $25,000 or less who until 2007 did not have to file an annual tax return with the IRS. This "freedom from filing" changed when Congress passed the Pension Protection Act in 2006 (PPA). The PPA imposed a filing requirement for all non-profits for the first time beginning in 2007. Failure to file had its consequences - IRS promised to revoke the organization's tax exempt status if it failed to file an annual return for three consecutive years.

IRS made good on its threat of revocation. On June 8, 2011, the IRS published on its website the Automatic Revocation of Exemption List, identifying those organizations whose exemption has been automatically revoked.[4]  Despite this large number of revocations, the IRS has estimated the vast majority of the organizations were already defunct. As noted above, future notices of revocations will be published in the IRB or on IRS's website. Rev. Proc. 2011-33 is a cautionary note to donors and funders to check Pub. 78 and the BMF to ensure that a charity is in good standing, but also to check the IRB and IRS's website to ensure that the IRS has not revoked that charity's status since the last updating of Pub. 78 and the BMF. 

If you have questions or would like copies of these recently issued IRS documents, please feel free to call Deb Tellier at 415.954.4970/ [email protected] or Barbara Murphy at 415-954-4933/ [email protected]