GUIDANCE PROVIDED ON INSPECTION REQUIREMENTS FOR EXEMPT ORGANIZATIONS.

Notice 96-48

[1] This notice summarizes certain aspects of Taxpayer Bill of Rights 2 related to (1) inspection requirements for exempt organizations and (2) increases in certain penalties on exempt organizations. Taxpayer Bill of Rights 2, Pub. L. No. 104-168, 110 Stat. 1452, (TBOR2) was enacted July 30, 1996.

[2] This notice also describes a provision of the Small Business Job Protection Act of 1996, Pub. L. No. 104-188, 110 Stat. 1755, enacted August 20, 1996, that increases certain penalties on exempt organizations for failing to satisfy inspection requirements.

[3] This notice also solicits comments to be considered in drafting future guidance. See Notice 96-46, page 212, this Bulletin, for aspects of TBOR2 related to excise taxes on excess benefit transactions engaged in by certain tax-exempt organizations, and Notice 96-47, page 213, this Bulletin, for aspects of TBOR2 related to the express prohibition of private inurement for section 501(c)(4) organizations.

I. INSPECTION REQUIREMENTS RELATED TO ANNUAL INFORMATION RETURNS

[4] Section 1313(a) of TBOR2 amends section 6104(e) with regard to the manner in which an exempt organization, other than a private foundation, must allow inspection by the public of its annual information returns and its application for exemption. Section 6104(e), as amended, provides that if a request is made, in person or in writing, for a copy of certain documents, an organization must provide the copies to the requester without charge, other than a reasonable fee for any reproduction and mailing costs. The documents that may be requested under section 6104(e) are (1) one or more of an exempt organization's three most recent information returns, and (2) the organization's application for recognition of exemption under section 501(a) (together with a copy of any supporting papers and any document issued by the Internal Revenue Service in response). If the request is made in person, the copies must be provided immediately. If the request is made in writing, the copies must be provided within 30 days.

[5] Pursuant to section 6104(e)(3), this new requirement to provide copies without charge (other than a reasonable fee for any reproduction and mailing costs) does not apply if, in accordance with regulations promulgated by the Secretary, the organization has made the requested documents widely available. Additionally, the new section 6104(e) requirement does not apply if the Secretary determines, upon application by the organization, that the request is part of a harassment campaign and that compliance with the request is not in the public interest.

[6] The requirement to provide copies without charge (other than a reasonable fee for any reproduction and mailing costs) does not take effect until 60 days after the Secretary of the Treasury first issues regulations under new section 6104(e)(3). Until that time, the prior law governs the manner in which an exempt organization, other than a private foundation, must allow inspection of its annual information returns by the public.

[7] Until regulations are issued, prior law requires tax- exempt organizations to show a requester copies of the organization's three most recent annual information returns, and the organization's application for exemption (together with a copy of any supporting papers and any document issued by the Internal Revenue Service in response), at the organization's principal place of business (and at other offices in certain instances). Although prior law requires the organization to allow inspection of the returns and requires the organization to allow the requester to take notes while inspecting the returns, it does not require the organization to provide a copy that the requester can take from the organization's office.

II. INCREASES IN CERTAIN PENALTIES

FAILURE TO FILE COMPLETE AND TIMELY ANNUAL INFORMATION RETURNS

[8] Section 1314(a) of TBOR2 amends section 6652(c)(1)(A) to increase the penalties on exempt organizations for failure to file complete and timely annual information returns. Section 6652(c)(1)(A) provides that a failure to timely file an annual information return, failure to include any of the information required to be shown on the return, or failure to show the correct information, results in a penalty to be paid by the organization of $20 per day (increased from $10 per day) for each day during which the failure occurs. The maximum penalty under section 6652(c)(1)(A) with respect to any one return shall not exceed the lesser of $10,000 (increased from $5,000) or 5 percent of the gross receipts of the organization for the year.

FAILURE TO ALLOW INSPECTION OF ANNUAL RETURNS AND EXEMPTION APPLICATIONS

[9] Section 1704(s) of the Small Business Job Protection Act, Pub. L. No. 104-188, 110 Stat. 1755 (SBJPA), enacted August 20, 1996, amends sections 6652(c)(1)(C) and (D) to increase the penalties for failure to allow inspection of any return or application under section 6104(d) or section 6104(e). Under the amended section 6652(c)(1)(C), any person failing to allow inspection of annual returns must pay $20 per day (increased from $10 per day) for each day during which such failure continues, not to exceed $10,000 (increased from $5,000). Under the amended section 6652(c)(1)(D), any person failing to allow inspection of an organization's application for exemption must pay $20 per day (increased from $10 per day) for each day such failure continues.

WILLFUL FAILURE TO ALLOW INSPECTION

[10] Section 1313(b) of TBOR2 amends section 6685 to increase the penalty for a willful failure to allow inspection of any return or application for exemption under sections 6104(d) or (e) from $1,000 to $5,000. The amendment to section 6685 does not take effect until 60 days after the Secretary of the Treasury first issues regulations under new section 6104(e)(3).

SPECIAL PENALTY FOR LARGE TAX-EXEMPT ORGANIZATIONS

[11] Section 1314(b) of TBOR2 creates a new special penalty for large organizations under section 6652(c)(1)(A). Under this provision, a failure to timely file an annual information return, failure to include any of the information required to be shown on the return, or failure to show the correct information by an exempt organization with gross receipts exceeding $1,000,000 for any year results in a penalty to be paid by the organization of $100 per day for each day during which the failure occurs. The maximum penalty under section 6652(c)(1) for an organization with gross receipts exceeding $1,000,000 shall not exceed $50,000.

[12] The amended penalties in section 6652(c)(1) apply to returns for taxable years ending on or after July 30, 1996.

III. COMMENTS ON FUTURE GUIDANCE INVITED

[13] The Service invites comments on the amendments to the Internal Revenue Code made by sections 1313 and 1314 of TBOR2 and section 1704(s) of SBJPA (inspection requirements and penalty increases). The Service will consider these comments in drafting future guidance. In particular, comments are requested concerning ways in which an organization can make the relevant documents widely available, and, therefore, qualify for exemption from the general requirements of section 6104(e)(3). The Service is interested in providing suitable or helpful alternatives for qualifying for the exemption. These could include, but are not limited to, electronic dissemination through the internet or other electronic databases, depositing copies at public libraries, or providing copies to third- party organizations that will make the documents available to the public for a reasonable fee. The Service is also interested in comments with respect to how these methods could satisfy requests made in person or in writing. The Service intends to expeditiously issue guidance on the section 6104(e)(3) exception, and therefore requests that written comments be submitted by November 12, 1996. Send submissions to: CC:DOM:CORP:R (Notice 96-48), Room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand- delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (Notice 96-48), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically via the internet by submitting comments directly to the IRS Internet site at htpi//www.irs.ustreas.gov/prod/tax_regs/comments.html.

[14] The principal author of this notice is Phyllis Haney of the Office of Associate Chief Counsel (Employee Benefits and Exempt Organizations). For further information regarding this notice contact Ms. Haney on (202) 622-4290 (not a toll-free call).