IRS Takes a Closer Look at Tax-Exempt “Parent” Organizations Who Have “Subordinate” Organizations

Sasha Herzig on January 16, 2013

As tax season approaches, the Internal Revenue Service (IRS) is taking a more stringent look at “parent” tax-exempt organizations that have “subordinate” organizations.

A “parent” organization, also referred to sometimes as a “central” organization, is a tax-exempt organization that has one or more subordinate organizations. The subordinate organization gains tax-exempt status through a “group ruling” and therefore does not have to file separately with the IRS to obtain tax-exempt status. The group ruling requires the subordinate organization to adhere to the same rules and procedures as the parent organization.

To maintain a group exemption, the parent organization must file an annual report with the IRS, confirming that the subordinate organization(s) are still active. Form 990, a reporting form for organizations exempt from income tax, provides the IRS with information on the filing organization’s mission, programs and finances. The parent organization may file an annual group Form 990, which would apply to all subordinate organizations covered in the parent organization’s exemption letter or the parent organization may choose to have subordinate organizations file their own Form 990.

A tax-exempt organization that does not file Form 990 for three consecutive years will automatically have its federal tax-exempt status revoked. There are some organizations that are not required to file annually, such as churches, political organizations and other organizations engaged exclusively in religious activity. For further information and a list of organizations that do not have to file annual returns, please visit: http://www.irs.gov/Charities-&-Non-Profits/Annual-Exempt-Organization-Return:-Who-Must-File.

As of October 15, 2012 the IRS has asked more than 2,000 randomly selected tax-exempt organizations with group rulings (parent organizations) to complete a questionnaire (found here: http://www.irs.gov/Charities-&-Non-Profits/Group-Rulings-Questionnaire) regarding their oversight of subordinate organizations. This questionnaire is considered a voluntary compliance check, which does not directly relate to determining a tax liability and does not ask to examine any books or records. The organization has 60 days from the date of the letter to complete and submit the questionnaire. The purpose of the questionnaire is to help IRS better understand the relationship between parent and subordinate organizations and whether subordinate organizations are meeting their Form 990 filing requirements.

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