February 26, 1997
Overview of Internal Revenue Service Programs
for Tax Exempt Organizations
Within the Internal Revenue Service, the Office of Employee
Plans and Exempt Organizations (EP/EO) has responsibility for providing uniform
interpretation and application of the tax laws relating to tax exempt organizations,
including related sections such as the private foundation and unrelated business income
tax provisions. EP/EO also is responsible for provisions relating to the taxation of
political organizations and for tax-exempt bond examinations. EP/EO is comprised of the
Headquarters office and five key district offices (KDOs).
- There are approximately 1.2 million exempt organizations,
not including about 300,000 churches. Of these exempt organizations, around 630,000 are
section 501(c)(3) organizations (e.g., charities), and 140,000 are section 501(c)(4)
organizations (social welfare organizations).
- There are two programs through which the IRS seeks to
ensure compliance with the various requirements for tax exemption contained in the
Internal Revenue Code: the determination letter program and the examination program.
- The determination letter program is one in which the
taxpayer applies for a ruling from the IRS as to its tax exemption. Approximately 200
individuals in the key district offices work on determination letters, and the IRS is
centralizing this process in the Cincinnati KDO. The determination letter program is vital
in that it allows an up-front compliance check of an organization while providing the
opportunity to educate the taxpayer as to its rights and responsibilities. In 1996,
approximately 70,000 applications for tax exempt status were received by the IRS.
- The authority to initiate an examination rests with career employees in the four
KDOs whose geographical responsibilities correspond to the IRS regional system: Northeast
(Brooklyn); Southeast (Baltimore); Midstates (Dallas); and Western (Los Angeles). At
present, there are around 400 individuals devoted to exempt organizations examinations and
approximately 5600 entities under examination. The Cincinnati KDO does not oversee
- The Headquarters office in Washington has program
management responsibility, but cannot initiate or oversee the day-to- day conduct of
examinations. Revenue agents work for the District Director of their respective KDO, and
it is these offices that make decisions regarding examinations. Headquarters issues an
annual work plan containing, among other items, areas of emphasis for that year�s
examination program and the amount of time that the KDOs should spend on areas of
- As part of the exam program, the IRS conducts examinations
aimed at ensuring that exempt organizations continue to meet all the legal requirements
for tax-exempt status, including such rules as the prohibition on inurement and the
restrictions on engaging in political campaign or legislative activity.
- The prohibition on political campaign activity by charities
has been a part of the law since 1954, and was recently strengthened in 1987 when Congress
enacted an excise tax on payments for political purposes. Restrictions on legislative
activity by tax exempt organizations date from 1934.
- In light of the restrictions on political campaign and
legislative activities, the IRS has made enforcement of these restrictions a part of its
exempt organizations examination program through the Internal Revenue Manual, IRS training
materials, and the EP/EO annual work plan. These restrictions have been EP/EO high
interest areas for over ten years.
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