Introduction

First of all, if your organization has no affiliates, you can skip this article entirely.

For the rest of you, especially those whose affiliates operate under a Group Exemption: You may have already received from the IRS a "Group Ruling Questionnaire" (GRQ). The IRS began sending them out at the end of 2012 to several thousand tax-exempt organizations that had obtained a Group Exemption for their subsidiary organizations.  The purpose of the GRQ is to help the IRS develop new regulations applicable to parent organizations to assure tax compliance and timely filing of IRS Form 990s by subsidiaries.

Background

As you probably know, in the past several years, thousands of subordinate entities have lost their tax-exempt status because they failed to file their Form 990 for three consecutive years. In 2011, the Advisory Committee on Tax Exempt and Government Entities (ACT) issued a report raising numerous concerns about Form 990 compliance. The GRQ initiative grew out of some of the concerns raised, and delves into the details of subordinate activities and the supervisory role actually being exercised by the parent organization.

Although the IRS is still in its “fact finding” phase, if the ACT report's recommendations were to be enacted in full, then additional general supervision by parent organizations will likely be required to assure tax compliance by subordinates covered by the group exemptions.  While some parent organizations now file group returns for some or all of the subordinates, new regulations will likely require more active supervision by the parent organization to assure full compliance by all subordinates covered by the group exemption.  In fact, ACT has recommended that group returns be abolished to assure greater transparency for subordinate activities.  However, abolishing the group returns will not mean less supervision by parent organizations – instead, it will push the responsibility for compliance directly onto the parent organization.

Recommendations

Rather than waiting passively for any IRS action, proactive organizations are reviewing or formalizing their processes and procedures for assuring subordinate filing of Form 990 to include a verifiable audit trail of tax compliance by their subordinates.  Documentation should include formal protocols of communications with subordinates, sign-off by the officers and directors of subordinates, and documented training of and meetings with subordinate representatives to assure tax compliance.  Additionally, parent organizations should implement appropriate protocols and safeguards to assure that all subsidiaries are organized and operated consistent with their tax-exempt purposes.