Now that the Nov. 15 deadline for many exempt organizations is over, it is time to reflect on the challenges tax practitioners serving exempt organizations (EO) have encountered. Members of AICPA’s Exempt Organizations Taxation Technical Resource Panel (TRP) shared their experiences, and the many issues connected with the IRS’ Exempt Organizations Business Master File (EO BMF). Errors in the information contained in the EO BMF, and the inability to update the system promptly, have caused considerable disruptions for many tax-exempt organizations. Although these issues previously existed, mandatory e-filing, coupled with IRS processing issues related to the pandemic, made it more challenging to file returns for entities that were having issues with the EO BMF this year.
The EO BMF is the IRS’ basic record source for information about tax-exempt organizations. That includes the IRC subsection under which the organization is exempt, the foundation classification for section 501(c)(3) entities, the primary return the organization is required to file and a code that indicates whether contributions to the organization are deductible. Inaccurate information in the EO BMF includes:
Erroneous auto-revocation of exempt status — With the IRS lag time in processing paper-filed Forms 990 and extensions due to the pandemic, some organizations have received notification that their tax-exempt status has been revoked for not filing returns that were at the IRS site but not processed.
Incorrect tax year-end information — A mismatched accounting period between the return and the EO BMF will reject an electronic filing, affecting organizations that had a change in the accounting period reported during the pandemic, as well as entities with legacy issues they didn’t know existed. These organizations had past paper filings or electronic filings accepted before recently rejected e-filings.
Incorrect entity names or name changes not reflected in EO BMF — Similar to the incorrect year-end issue, organizations that have changed their names experienced e-filing rejections of current year Forms 990.
Organizations not listed in EO BMF or listed under the wrong subsection of section 501(c) — Some organizations that have completed the IRS’ exemption recognition process and received their exempt status letter have had their e-filed Form 990 rejected. The explanation is that the EO BMF does not match the information reported on Form 990.
Group rulings and subordinate organizations — There are a lot of mismatches in the BMF system for the separate accounts. To fix the e-filing group, each account has to be updated separately.
The auto-revocation of tax-exempt status is troubling because the IRS posts the notice on its website and updates its Tax Exempt Organization Search (TEOS) tool. The TEOS allows users to search publication 78 data, the auto-revocation list, determination letters, copies of returns and Forms 990-N. An error indicating an entity is no longer exempt has a substantial impact on the organization’s ability to receive donations, which tend to be the lifeblood of most charitable organizations. Without this vital donation revenue, many organizations must scale back their operations, which typically serve the marginalized, the economically fragile, the environment and other works of communal good. The good news is that they can use a dedicated IRS fax line (855.247.6123) to correct the error.
Fixing these errors in the EO BMF can be challenging for the organization and its tax advisers. Calls to the IRS’ Customer Account Services often involve wait times of over an hour. If there are too many callers waiting for assistance, the automated phone system instructs the caller to call back and disconnects the call. While the IRS has a separate e-filing Services number and staff, Customer Account Services must handle any e-filing rejections associated with errors in the EO BMF. This results in a ping-pong effect of multiple calls to resolve the issue. Timing is another issue. Since the updates to the EO BMF do not get published to Publication 78 and the Tax-Exempt Organizations Search tool until the second Monday of every month, with no updates in January, taxpayers often have to wait a few months before the change appears in the system.
Practitioners attempting to resolve these matters on behalf of their clients expend a considerable amount of professional time and face the dilemma of the appropriate amount of fees to charge. These factors are in addition to all of the other challenges practitioners have faced during the pandemic with helping their clients meet their compliance requirements. The exempt organization sector is often already under-resourced, so it has limitations on the ability to pay extra practitioner billings and/or to fund erroneous penalties to prevent the IRS from levying the organization’s bank account.
The AICPA® is closely monitoring these issues as they progress. At the end of this tax year, exempt organizations, and their tax advisers, are wondering if they will ever catch up from pandemic slowdowns. These have included the repeated cycle of receiving and responding to erroneous notices, the IRS not processing responses promptly and having additional notices issued for the supposed failure of responding to the first notice. Considering the challenges related to the IRS’ budgetary and personnel constraints, quickly fixing these issues will be hard. The status quo is not sustainable and there should be alternatives to accommodate the requests of tax practitioners. The AICPA is continuing discussions with the IRS regarding the appropriate solutions.