The Advisory Committee on Tax Exempt and Government Entities (ACT) presented to the Internal Revenue Service (IRS) on June 15 its tenth annual report, including recommendations for significant changes to IRS group tax-exemption procedures. If adopted, these changes would be applicable to tax-exempt healthcare organizations that obtain their tax-exempt status as a result of a group exemption and that file with other group members an aggregate Form 990 annual return.
For more than 70 years, the IRS has permitted certain affiliated organizations to obtain recognition of tax-exempt status on a group basis, rather than by filing separate applications for tax-exemption. Group exemption holders also have the option of filing an aggregated IRS Form 990 annual return for two or more subordinate organizations, thus relieving those subordinate organizations from having to file separate Forms 990. Forms 990 filed on a group basis have the effect of aggregating information for multiple organizations in one return, and they generally do not permit the reader to access certain information relating to individual organizations included in the aggregate return.
In its report, the ACT recommended, among other things, elimination of group exemption holders’ ability to file Form 990 returns on an aggregate basis for subordinate organizations, on the grounds that allowing group exemption holders to file one Form 990 return for the subordinate organizations does not provide adequate transparency about the activities of subordinate organizations covered by group exemptions. Forms 990, which must be made available to the public, require the filing organization to disclose, among other things, its governance practices, executive compensation, activities and finances. If the IRS and the Department of Treasury adopt this recommendation, each organization covered by a group exemption would be required to file its own annual Form 990.
The ACT also recommended that there be a “significant transition period” for existing groups to come into compliance with any changes to the group ruling procedures. It also recommended that special consideration be given to existing church group exemptions (some of which include hospitals and other healthcare providers as subordinate organizations), as some church group exemptions have tens of thousands of subordinate organizations and have been in existence for 60 years or more.
Although the ACT’s report recommended changes to Form 990 reporting for organizations that obtain tax-exempt status under a group exemption letter, it also stated the ACT’s belief that the group exemption process continues to provide an appropriate mechanism for central organizations to seek recognition of exemption on a group basis for organizations under a central organizations general supervision or control. Accordingly, the ACT did not recommend changes to current group exemption application procedures.
For a copy of the ACT’s full report, click here. The part of the report addressing group exemption procedures begins on page 291 of the full report.