The 2006 Pension Protection Act (PPA) expanded the ability of the Internal Revenue Service (IRS) to disclose information to states concerning §501(c)(3) organizations and applicants as well as certain other exempt organizations. In 2011, the IRS issued Proposed Regulation §301.6104(c)-1, which provides guidance regarding these additional disclosures. These new rules, among other things, allow the IRS to notify the state that it is planning to deny or revoke the exemption of a charity or private foundation before it issues a final determination letter to the organization. The new rules reveal the increasing trend of federal and state agencies combining resources and communicating with each other to effectively monitor a large and diverse sector.

PPA expanded the allowable disclosures under IRC §6104(c) to include proposed IRS actions, along with returns and return information about the charitable organizations that are the subject of the proposed actions. Among the proposed actions which can be disclosed are:

• A notice of proposed refusal to recognize the organization as a §501(c)(3) organization or a notice of proposed revocation of an organization's recognition as a tax-exempt organization;
• The issuance of a letter of proposed deficiency of tax under §507 or Chapter 41 or 42 (concerning prohibited transaction or private inurement excise taxes); and
• The names, addresses and taxpayer identification numbers of organizations that have applied to become §501(c)(3) organizations.

The information available under these new rules not only is greater in scope than what was available under §6104(c) before its amendment by the PPA, but the permitted disclosure of such information also comes at an earlier stage in the IRS' administrative and enforcement processes.

The proposed regulations provide guidance to appropriate state officers (ASO) regarding the process by which they may obtain certain returns and return information to administer state laws and to aid them in investigating abuses of charitable ventures, fraud, and noncompliance with state laws. ASOs are specifically defined to include:

• State attorneys general;
• State tax officers;
• With respect to a charitable organization or applicant, any other state officer charged with overseeing charitable organizations; and
• With respect to other §501(c) organizations, state officers charged with responsibility for overseeing the solicitation of funds for charitable purposes.

While ASOs may request such information, the disclosure is contingent upon the ASO adopting the same standards and procedures safeguards that apply to federal and state agencies when information is disclosed under other provisions of the Internal Revenue Code. Accordingly, the proposed regulations provide that, without prior safeguard approval, the IRS will not give automatic notification of any determination or other information that may be disclosed under the expanded §6104(c). If the IRS determines that an ASO has failed to comply with the safeguard requirements, the IRS may take all necessary actions to ensure compliance, including the refusal to disclose any further information.

Under the proposed regulations, the IRS may require an ASO to enter into a disclosure agreement that stipulates the procedures for disclosure and the restrictions on use and redisclosure. The changes to §6104 and the proposed regulations allow an ASO to disclose such information received from the IRS in a state administrative or judicial proceeding, but requires the ASO to notify the IRS before doing so. This stipulation, as well as the potential criminal penalties for willful, unauthorized disclosure of such information under §7213, have made some states hesitant to use this information in a complaint or legal proceeding.

Without a written request, the IRS has the authority under §6104(c) to disclose returns and return information of charitable organizations and applicants to an ASO, subject to the safeguard requirements of §6103, if it determines that such information may constitute noncompliance with the laws under the ASO's jurisdiction.

For more information on the implications of these proposed regulations, contact your local CBIZ office.

Copyright © 2012, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. To ensure compliance with requirements imposed by the IRS, we inform you that-unless specifically indicated otherwise-any tax advice in this communication is not written with the intent that it be used, and in fact it cannot be used, to avoid penalties under the Internal Revenue Code, or to promote, market, or recommend to another person any tax related matter. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

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