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[Senate Report 114-28]
[From the U.S. Government Publishing Office]

                                                        Calendar No. 51
114th Congress     }                                      {      Report
                                 SENATE
 1st Session       }                                      {      114-28

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 NOTICE FOR ORGANIZATIONS THAT INCLUDE CHARITIES IS ESSENTIAL (NOTICE) 
                                  ACT

                                _______
                                

                 April 14, 2015.--Ordered to be printed

                                _______
                                

               Mr. Hatch, from the Committee on Finance, 
                        submitted the following

                              R E P O R T

                         [To accompany S. 918]

    The Committee on Finance, having considered an original 
bill, S. 918, to amend the Internal Revenue Code of 1986 to 
provide notice to charities and other nonprofit organizations 
before their tax-exempt status is automatically revoked, having 
considered the same, reports favorably thereon without 
amendment and recommends that the bill do pass.

                                CONTENTS

                                                                   Page
 I. LEGISLATIVE BACKGROUND............................................1
II. EXPLANATION OF THE BILL...........................................2
        A. Require Internal Revenue Service to Notify Exempt 
            Organizations Before Revoking Exempt Status for 
            Failing to File Information Returns (sec. 2 of the 
            bill and sec. 6033(j) of the Code)...................     2
III.BUDGET EFFECTS OF THE BILL........................................6

IV. VOTES OF THE COMMITTEE............................................6
 V. REGULATORY IMPACT AND OTHER MATTERS...............................7
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED.............7

                       I. LEGISLATIVE BACKGROUND

    The Committee on Finance, having considered S. 918, the 
``Notice for Organizations That Include Charities is Essential 
(NOTICE) Act,'' to amend the Internal Revenue Code of 1986 to 
provide notice to charities and other nonprofit organizations 
before their tax-exempt status is automatically revoked, 
reports favorably thereon without amendment and recommends that 
the bill do pass.

Background and need for legislative action

    Background.--Based on a proposal recommended by Senators 
Coats and Cardin, and on S. 400 (114th Cong. 1st Sess.), co-
sponsored by Senators Coats and Cardin, the Committee on 
Finance marked up original legislation (the ``Notice for 
Organizations That Include Charities is Essential (NOTICE) 
Act'') on February 11, 2015, and, with a majority present, 
ordered the bill favorably reported.
    Need for legislative action.--Under present law, the IRS 
does not have the discretion to reinstate an organization's 
exempt status without requiring a formal reapplication for 
exempt status (Form 1023 or Form 1024) if the organization has 
had its exempt status automatically revoked for failing to file 
information returns. This reapplication requirement has added 
tens of thousands of applications to the IRS's backlog of 
unprocessed applications. Furthermore, present law does not 
require the IRS to notify an organization that has already 
failed to file a return for two consecutive years that it is at 
risk of revocation if it fails to file for a third consecutive 
year. Many of the affected organizations are small and poorly 
funded, yet face increased demand for their services from the 
communities they serve. As a result, requiring reapplication 
can pose a significant financial burden on these organizations 
and their communities. The Committee therefore believes it is 
appropriate to require the IRS to notify organizations that are 
at risk of losing exempt status for failure to file and to 
permit the IRS to reinstate an organization's exempt status 
without requiring reapplication in certain situations.

                      II. EXPLANATION OF THE BILL

  A. Require Internal Revenue Service to Notify Exempt Organizations 
 Before Revoking Exempt Status for Failing to File Information Returns 
           (sec. 2 of the bill and sec. 6033(j) of the Code)

                              PRESENT LAW

Applications for tax exemption

            Section 501(c)(3) organizations
    Section 501(c)(3)\1\ organizations (with certain 
exceptions) are required to seek formal recognition of tax-
exempt status by filing an application with the IRS (Form 1023 
(Application for Recognition of Exemption under section 
501(c)(3) of the Internal Revenue Code) or Form 1023-EZ 
(Streamlined Application for Recognition of Exemption under 
section 501(c)(3) of the Internal Revenue Code)).\2\ In 
response to the application, the IRS issues a determination 
letter or ruling either recognizing the applicant as tax-exempt 
or not. Certain organizations are not required to apply for 
recognition of tax-exempt status in order to qualify as tax-
exempt under section 501(c)(3) but may do so. These 
organizations include churches, certain church-related 
organizations, organizations (other than private foundations) 
the gross receipts of which in each taxable year are normally 
not more than $5,000, and organizations (other than private 
foundations) subordinate to another tax-exempt organization 
that are covered by a group exemption letter.
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    \1\All section references are to the Internal Revenue Code of 1986, 
as amended (the ``Code''), unless otherwise noted.
    \2\See sec. 508(a).
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    A favorable determination by the IRS on an application for 
recognition of tax-exempt status generally will be retroactive 
to the date that the section 501(c)(3) organization was created 
if it files a completed Form 1023 within 15 months of the end 
of the month in which it was formed.\3\ If the organization 
does not file Form 1023 or files a late application, it will 
not be treated as tax-exempt under section 501(c)(3) for any 
period prior to the filing of an application for recognition of 
tax exemption.\4\ Contributions to section 501(c)(3) 
organizations that are subject to the requirement that the 
organization apply for recognition of tax-exempt status 
generally are not deductible from income, gift, or estate tax 
until the organization receives a determination letter from the 
IRS.\5\
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    \3\Pursuant to Treas. Reg. sec. 301.9100-2(a)(2)(iv), organizations 
are allowed an automatic 12-month extension as long as the application 
for recognition of tax exemption is filed within the extended, i.e., 
27-month, period. The IRS also may grant an extension beyond the 27-
month period if the organization is able to establish that it acted 
reasonably and in good faith and that granting relief will not 
prejudice the interests of the government. Treas. Reg. secs. 301.9100-1 
and 301.9100-3.
    \4\Treas. Reg. sec. 1.508-1(a)(1).
    \5\Sec. 508(d)(2)(B). Contributions made prior to receipt of a 
favorable determination letter may be deductible prior to the 
organization's receipt of such favorable determination letter if the 
organization has timely filed its application to be recognized as tax-
exempt. Treas. Reg. secs. 1.508-1(a) and 1.508-2(b)(1)(i)(b).
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            Other section 501(c) organizations
    Most other types of section 501(c) organizations--including 
organizations described within sections 501(c)(4) (social 
welfare organizations, etc.), 501(c)(5) (labor organizations, 
etc.), or 501(c)(6) (business leagues, etc.)--are not required 
to provide notice to the Secretary that they are requesting 
recognition of exempt status. Rather, organizations are exempt 
under these provisions if they satisfy the requirements 
applicable to such organizations. However, in order to obtain 
certain benefits such as public recognition of tax-exempt 
status, exemption from certain State taxes, and nonprofit 
mailing privileges, such organizations voluntarily may request 
a formal recognition of exempt status by filing a Form 1024 
(Application for Recognition of Exemption under section 
501(a)).
    If such an organization voluntarily requests a 
determination letter by filing Form 1024 within 27 months of 
the end of the month in which it was formed, its determination 
of exempt status, once provided, generally will be effective as 
of the organization's date of formation.\6\ If, however, the 
organization files Form 1024 after the 27-month deadline has 
passed, its exempt status will be formally recognized only as 
of the date the organization filed Form 1024.
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    \6\Rev. Proc. 2015-9.
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Annual information returns

    Exempt organizations are required to file an annual 
information return, Form 990 (Return of Organization Exempt 
From Income Tax), stating specifically the items of gross 
income, receipts, disbursements, and such other information as 
the Secretary may prescribe.\7\ Exempt from the requirement are 
churches, their integrated auxiliaries, and conventions or 
associations of churches; the exclusively religious activities 
of any religious order; certain State institutions whose income 
is excluded from gross income under section 115; an interchurch 
organization of local units of a church; certain mission 
societies; certain church-affiliated elementary and high 
schools; and certain other organizations, including some that 
the IRS has relieved from the filing requirement pursuant to 
its statutory discretionary authority.\8\
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    \7\Sec. 6033(a). An organization that has not received a 
determination of its tax-exempt status, but that claims tax-exempt 
status under section 501(a), is subject to the same annual reporting 
requirements and exceptions as organizations that have received a tax-
exemption determination.
    \8\Sec. 6033(a)(3); Treas. Reg. secs. 1.6033-2(a)(2)(i) and (g)(1).
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    An organization that is required to file an information 
return, but that has gross receipts of less than $200,000 
during its taxable year, and total assets of less than $500,000 
at the end of its taxable year, may file Form 990-EZ. If an 
organization normally has gross receipts of $50,000 or less, it 
must file Form 990-N (``e-postcard''), if it chooses not to 
file Form 990 or Form 990-EZ. Private foundations are required 
to file Form 990-PF rather than Form 990.

Revocation of exempt status

            In general
    An organization that has received a favorable tax-exemption 
determination from the IRS generally may continue to rely on 
the determination as long as ``there are no substantial changes 
in the organization's character, purposes, or methods of 
operation.''\9\ A ruling or determination letter concluding 
that an organization is exempt from tax may, however, be 
revoked or modified: (1) by notice from the IRS to the 
organization to which the ruling or determination letter was 
originally issued; (2) by enactment of legislation or 
ratification of a tax treaty; (3) by a decision of the United 
States Supreme Court; (4) by issuance of temporary or final 
Regulations by the Treasury Department; (5) by issuance of a 
revenue ruling, a revenue procedure, or other statement in the 
Internal Revenue Bulletin; or (6) automatically, in the event 
the organization fails to file a required annual return or 
notice for three consecutive years (discussed in greater detail 
below).\10\ A revocation or modification of a determination 
letter or ruling may be retroactive if, for example, there has 
been a change in the applicable law, the organization omitted 
or misstated a material fact, or the organization has operated 
in a manner materially different from that originally 
represented.\11\
---------------------------------------------------------------------------
    \9\Treas. Reg. sec. 1.501(a)-1(a)(2).
    \10\Rev. Proc. 2015-9, sec. 12.
    \11\Ibid.
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    Upon revocation of tax-exemption or change in the 
classification of an organization (e.g., from public charity to 
private foundation status), the IRS publishes an announcement 
of such revocation or change in the Internal Revenue Bulletin. 
Contributions made to organizations by donors who are unaware 
of the revocation or change in status ordinarily will be 
deductible if made on or before the date of publication of the 
announcement.
            Automatic revocation for failure to file information 
                    returns
    If an organization fails to file a required Form 990-series 
return or notice for three consecutive years, the 
organization's tax-exempt status is automatically revoked.\12\ 
A revocation for failure to file is effective from the date 
that the Secretary determines was the last day the organization 
could have timely filed the third required information return 
or notice. To again be recognized as tax-exempt, the 
organization must apply to the Secretary for recognition of 
tax-exemption, irrespective of whether the organization was 
required to make an application for recognition of tax-
exemption in order to gain tax-exemption originally.
---------------------------------------------------------------------------
    \12\Sec. 6033(j).
---------------------------------------------------------------------------
    If, upon application for tax-exempt status after an 
automatic revocation for failure to file information returns, 
the organization shows to the satisfaction of the Secretary 
reasonable cause for failing to file the required annual 
notices or returns, the organization's tax-exempt status may, 
in the discretion of the Secretary, be reinstated retroactive 
to the date of revocation. An organization may not challenge 
under the Code's declaratory judgment procedures (section 7428) 
a revocation of tax-exemption made for failure to file annual 
information returns.
    The Secretary is authorized to publish a list of 
organizations whose exempt status is automatically revoked.

                           REASONS FOR CHANGE

    Under present law, the IRS does not have the discretion to 
reinstate an organization's exempt status without requiring a 
formal reapplication for exempt status (Form 1023 or Form 1024) 
if the organization has had its exempt status automatically 
revoked for failing to file information returns. This 
reapplication requirement has added tens of thousands of 
applications to the IRS's backlog of unprocessed applications. 
Furthermore, present law does not require the IRS to notify an 
organization that has already failed to file a return for two 
consecutive years that it is at risk of revocation if it fails 
to file for a third consecutive year. Many of the affected 
organizations are small and poorly funded, yet face increased 
demand for their services from the communities they serve. As a 
result, requiring reapplication can pose a significant 
financial burden on these organizations and their communities. 
The Committee therefore believes it is appropriate to require 
the IRS to notify organizations that are at risk of losing 
exempt status for failure to file and to permit the IRS to 
reinstate an organization's exempt status without requiring 
reapplication in certain situations.

                        EXPLANATION OF PROVISION

    The provision requires that the IRS provide notice to an 
organization that fails to file a Form 990-series return or 
notice for two consecutive years not later than 300 days after 
the date of the second failure. The notice must state that the 
IRS has no record of having received such a return or notice 
from the organization for two consecutive years and inform the 
organization about the consequences of failing to file such a 
return or notice by the date of the next filing deadline. The 
notice must also contain information about how to comply with 
the annual information return and notice requirements under 
sections 6033(a)(1) and 6033(i).
    The provision also provides that the Secretary may 
reinstate the exempt status of an organization that had its 
exempt status automatically revoked for failing to file an 
information return or notice for three consecutive years if (1) 
the organization demonstrates to the satisfaction of the 
Secretary that it did not receive the above-described notice 
from the IRS, and (2) files an annual return or notice for the 
current year. Under such circumstances, the exempt status is 
reinstated as of the date of revocation.

                             EFFECTIVE DATE

    The provision is effective for notices and returns required 
to be filed after December 31, 2014.

                    III. BUDGET EFFECTS OF THE BILL

                         A. Committee Estimates

    In compliance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate and section 308(a)(1) of the 
Congressional Budget and Impoundment Control Act of 1974, as 
amended (the ``Budget Act''), the following statement is made 
concerning the estimated budget effects of the revenue 
provision of the ``Notice for Organizations That Include 
Charities is Essential (NOTICE) Act'' as reported.
    The provision is estimated to have a negligible effect on 
Federal fiscal year budget receipts for the period 2015-2025.

                B. Budget Authority and Tax Expenditures

Budget authority

    In compliance with section 308(a)(1) of the Budget Act, the 
Committee states that no provisions of the bill as reported 
involve new or increased budget authority.

Tax expenditures

    In compliance with section 308(a)(1) of the Budget Act, the 
Committee states that no provisions of the bill as reported 
affect the levels of tax expenditures.

            C. Consultation with Congressional Budget Office

    In accordance with section 402 of the Budget Act, the 
Committee advises that the Congressional Budget Office has not 
submitted a statement on the bill. The letter from the 
Congressional Budget Office will be provided separately.

                       IV. VOTES OF THE COMMITTEE

    In compliance with paragraph 7(b) of rule XXVI of the 
Standing Rules of the Senate, the Committee states that, with a 
majority present, the ``Notice for Organizations That Include 
Charities is Essential (NOTICE) Act,'' was ordered favorably 
reported by voice vote on February 11, 2015.

                 V. REGULATORY IMPACT AND OTHER MATTERS

                          A. Regulatory Impact

    Pursuant to paragraph 11(b) of rule XXVI of the Standing 
Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact that might be 
incurred in carrying out the provisions of the bill.

Impact on individuals and businesses, personal privacy and paperwork

    The bill requires the Internal Revenue Service to notify 
organizations before exempt status is revoked for failing to 
file information returns. The provisions of the bill are not 
expected to impose additional administrative requirements or 
regulatory burdens on individuals or businesses.
    The provisions of the bill do not impact personal privacy.

                     B. Unfunded Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
    The Committee has determined that the tax provision of the 
reported bill does not contain Federal private sector mandates 
or Federal intergovernmental mandates on State, local, or 
tribal governments within the meaning of Public Law 104-4, the 
Unfunded Mandates Reform Act of 1995.

                       C. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service Reform and 
Restructuring Act of 1998 (``IRS Reform Act'') requires the 
staff of the Joint Committee on Taxation (in consultation with 
the Internal Revenue Service and the Treasury Department) to 
provide a tax complexity analysis. The complexity analysis is 
required for all legislation reported by the Senate Committee 
on Finance, the House Committee on Ways and Means, or any 
committee of conference if the legislation includes a provision 
that directly or indirectly amends the Internal Revenue Code 
and has widespread applicability to individuals or small 
businesses. The staff of the Joint Committee on Taxation has 
determined that there are no provisions that are of widespread 
applicability to individuals or small businesses.

             VI. CHANGES IN EXISTING LAW MADE BY THE BILL, 
                              AS REPORTED

    In the opinion of the Committee, it is necessary in order 
to expedite the business of the Senate, to dispense with the 
requirements of paragraph 12 of rule XXVI of the Standing Rules 
of the Senate (relating to the showing of changes in existing 
law made by the bill as reported by the Committee).

                                  [all]
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