The Internal Revenue Service has announced that in late June or early July of this year it will begin a broad-ranging survey of the post-issuance record-keeping practices of 501(c)(3) institutions that receive the benefits of tax-exempt bonds. The survey will be sent to approximately 2,000 to 5,000 randomly selected charities that have disclosed that they have tax-exempt bonds outstanding on their Form 990s.

The survey will consist largely of “yes-no” questions relating to the institution’s general record-keeping and other compliance practices; in addition, there will likely be a few multiple-choice questions. The questions – expected to be general in nature (e.g., “Do you maintain a financial ledger?”) rather than specific (e.g., “Do you have any non-complying management contracts?”) – will cover issues such as oversight, private business use, management practices and policies, and record retention.

Concerns have been raised that by being limited to “yes-no” responses, many institutions will provide answers that might invite further scrutiny by the IRS and, therefore, respondents might want to add explanatory attachments. IRS personnel have explained, however, that institutions should in fact limit their answers to the yes-no format because the purpose of the survey is not to secure information about any particular institution but rather to discern the general record-keeping and compliance practices of 501(c)(3) borrowers. The IRS has also stated that to the extent an institution reveals a failure in its compliance procedures that turns out to be widespread, it is not likely to result in a particularized investigation of that institution.

If a charity receives the survey and chooses to ignore it, IRS personnel report that the IRS will look unfavorably upon such nonresponsiveness and may follow up with the institution.

Part of the impetus for the survey is that there are currently no specific record-keeping requirements for 501(c)(3) borrowers of tax-exempt bonds and the IRS is in the process of preparing guidelines. The IRS has explained that 501(c)(3) borrowers should not feel they are being singled out for attention: it plans to commence a similar survey concerning issuers of governmental bonds shortly after the release of the 501(c)(3) survey.

For more information, please contact:

Sean W. Glynn
202.857.6153
glynn.sean@arentfox.com

Richard J. Krainin
212.484.3918
krainin.richard@arentfox.com

Richard A. Newman
202.857.6170
newman.richard@arentfox.com

Edward J. Rojas
212.457.5440
rojas.edward@arentfox.com