At IRS-No Accounting For Charities

November 1, 2006       Marla Nobles      

How many tax-exempt organizations are there in the United States? Don’t ask the Internal Revenue Service (IRS) right now.

A technical glitch at the IRS caused the agency to erroneously omit in excess of 10,000 tax-exempt organizations from its Business Master File (BMF). The omission, which applies to all organizations to which the IRS has given exempt status since January, could prevent affected 501(c)(3) organizations from receiving grants.

The IRS attributed the oversight, which was discovered mid-summer, to a miscommunication between departments. The agency maintained it is in the process of performing a “mass update” of its BMF, and expected the error to be resolved by Nov. 1. (The NonProfit Times went to press before that date.)

“What’s happening is a lot of these grant-making organizations that are going and downloading our data files every month are not seeing the exempt organizations show up,” explained Ron Williams, project manager, Office of Business Systems Planning, the department of the IRS that maintains online files of exempt organizations. “And the downside is that a lot of these organizations are not getting grants on account of this snafu.”

Beginning January 1, 2006, the IRS allowed certain employment tax filers to use the new Form 944 (Employer’s Annual Federal Tax Return), which added another filing to the string of requirements for organizations to be included in the BMF. But according to Williams, Business Systems was “left out of the loop” about the added filing requirement, and the impact this new filing requirement would have on closed exempt organization application cases attempting to post to the BMF.

Tax exempt organizations (EO) were generally not required to file the new form at the time they apply for tax exempt status, said Williams. As a result, when the EOs were entered into the BMF system, they did not match up and thus were rejected. “From what we’ve been able to surmise based on our analysis, we believe that was the root cause of the problem,” said Williams.

The organizations were given tax exempt status but were not listed in the online files, including IRS Publication 78, also known as the Cumulative List (CL). The CL provides the current list of recognized 501(c)(3)s and is what many grant-making organizations use to confirm that a recipient is in fact a 501(c)(3).

“Unfortunately, what we find is a lot of organizations that are grant-making organizations, they make a lot more out of this than they should,” Williams said of the importance placed on the CL. “The IRS determination letter that we issue to the organization is the basis of law for the organizations’ exemptions.”

But according to Lazer Lazaroff, executive director of Houston-based Aishel House, when tasked with confirming their exempt status, the IRS determination letter proved powerless. “The problem is that the determination letter was over a year old,” said Lazaroff, who said Aishel House was denied a contribution because the letter was deemed unacceptable.

Until a few months ago, Lazaroff was unaware his organization was among the affected EOs. “I found out about it only because there was someone who had given a contribution and was applying for his company for a matching gift,” he explained. Because Aishel House was not listed in the BMF, that company denied the employee’s request.

Lazaroff said he called the IRS and was told “that it was some sort of a snafu where (Aishel House) was supposed to automatically get transferred over because we had registered with them.” Aishel House was immediately added on the IRS Web site. “They solved it while I was on the phone. I would call it a very minor inconvenience that was solved in under 10 minutes.”

According to Tom Pollack, assistant director at the National Center for Charitable Statistics (NCCS), which uses the data, “It’s very hard to have massive administrative databases without occasional problems occurring. Mishaps do happen. It’s on our radar screen, but it certainly is not a huge deal.”

Pollack said the only thing he expects the omission to impact is the year’s statistics of newly exempt organizations. “All I’m aware of is this problem occurring in the raw data,” Pollack said, referring to the BMF. “Responsible analysts will pick up the differences and ask what’s going on before they publish any numbers using (the data).”

It’s always a big deal “when you’re adversely impacting a customer. Absolutely,” said Williams, who said the IRS will most likely post a notification on its Web site ( to alert exempt organizations of the problem and that the agency is working to fix it.

Williams said the IRS will immediately add to its Web site the name of any affected EO that calls the IRS’s toll-free number (888-829-4933). The amended list of 501(c)(3)s, which make up the largest portion of the affected EOs, can be found by clicking on “Additions to Cumulative List.” Until the problem is corrected, the amended list will serve as proof that the IRS recognizes an organization as exempt.   NPT