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Final regulations governing IRS disclosure of EO information to states

TAX ALERT | August 17, 2022

Authored by RSM US LLP


The Treasury Department and IRS released final regulations under section 6104(c) describing the authority and scope of the IRS’s disclosure of certain exempt organization taxpayer information to state officials. The final regulations generally adopt and clarify the guidance provided in the proposed regulations issued in 2011, after the Pension Protection Act of 2006 (PPA) added new requirements.

Background

The PPA added sections 6104(c)(2) through (6), which expanded the IRS’s ability to disclose exempt organization information to state officials with respect to the type and timing of information available, contingent on the state adopting safeguard standards and procedures that comply with section 6103. With respect to charitable organizations and applicants, the IRS is now authorized to disclose information about certain proposed revocations and proposed denials before an administrative appeal has been made and a final revocation or denial has been issued. Prior to the PPA, only final determinations of these kinds (denials of recognition, revocations and notices of deficiency) could be disclosed under section 6104(c).

The proposed regulations, released in March 2011, proposed regulations were released addressing the expanded statutory provision and providing guidance to states regarding the process by which they may obtain or inspect certain returns and taxpayer information for the purpose of administering state laws governing exempt organizations. Specifically expanding the authority to disclose whether an organization has applied for recognition as a charitable organization and, if so, whether the IRS proposes to deny such recognition, or the organization has withdrawn its application; whether an organization’s charitable status has terminated; whether the IRS proposes to assess any chapter 42 excise taxes (for example, the tax on excess benefit transactions under section 4958); and whether the IRS has revoked an organization’s exemption, or proposes to revoke the recognition of its exemption.

Final regulations

The final regulations generally adopt the proposed guidance issued in 2011, offering minor clarifications and one substantive change in response to comments received in response to the proposed regulations.

The lone substantive change addresses the proposed prohibition against state officials’ redisclosure of tax return information to their agent or contractor. Under section 6104(c), the IRS may disclose information to a designated state officer or employee, but not to an agent or contractor. Moreover, state officials must notify the IRS of an intent to redisclose any information obtained under this provision, and such redisclosure may be prohibited if the IRS determines that it would seriously impair federal tax administration. 

One commenter argued that the proposed regulations could be interpreted to imply that the agent-contractor disclosure prohibition applies to redisclosures only. Noting that the legislative intent was to apply this prohibition to both initial disclosures by the IRS and subsequent redisclosures by state officials, the Treasury and IRS revised the final regulations to clarify the proper application of the prohibition. 

The final regulations are effective as of Aug. 16, 2022, the date published in the Federal Register.

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This article was written by Alexandra O. Mitchell and originally appeared on 2022-08-17.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/tax-alerts/2022/final-regulations-governing-IRS-disclosure-of-eo-information-to-states.html

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