Overview of Internal Revenue Service Programs
for Tax Exempt Organizations

Within the Internal Revenue Service, the Office of Employee Plans and Exempt Organizations (EP/EO) has responsibility for providing uniform interpretation and application of the tax laws relating to tax exempt organizations, including related sections such as the private foundation and unrelated business income tax provisions. EP/EO also is responsible for provisions relating to the taxation of political organizations and for tax-exempt bond examinations. EP/EO is comprised of the Headquarters office and five key district offices (KDOs).

• There are approximately 1.2 million exempt organizations, not including about 300,000 churches. Of these exempt organizations, around 630,000 are section 501(c)(3) organizations (e.g., charities), and 140,000 are section 501(c)(4) organizations (social welfare organizations).
• There are two programs through which the IRS seeks to ensure compliance with the various requirements for tax exemption contained in the Internal Revenue Code: the determination letter program and the examination program.
• The determination letter program is one in which the taxpayer applies for a ruling from the IRS as to its tax exemption. Approximately 200 individuals in the key district offices work on determination letters, and the IRS is centralizing this process in the Cincinnati KDO. The determination letter program is vital in that it allows an up-front compliance check of an organization while providing the opportunity to educate the taxpayer as to its rights and responsibilities. In 1996, approximately 70,000 applications for tax exempt status were received by the IRS.
• The authority to initiate an examination rests with career employees in the four KDOs whose geographical responsibilities correspond to the IRS regional system: Northeast (Brooklyn); Southeast (Baltimore); Midstates (Dallas); and Western (Los Angeles). At present, there are around 400 individuals devoted to exempt organizations examinations and approximately 5600 entities under examination. The Cincinnati KDO does not oversee examinations.
• The Headquarters office in Washington has program management responsibility, but cannot initiate or oversee the day-to- day conduct of examinations. Revenue agents work for the District Director of their respective KDO, and it is these offices that make decisions regarding examinations. Headquarters issues an annual work plan containing, among other items, areas of emphasis for that yearþs examination program and the amount of time that the KDOs should spend on areas of emphasis.
• As part of the exam program, the IRS conducts examinations aimed at ensuring that exempt organizations continue to meet all the legal requirements for tax-exempt status, including such rules as the prohibition on inurement and the restrictions on engaging in political campaign or legislative activity.
• The prohibition on political campaign activity by charities has been a part of the law since 1954, and was recently strengthened in 1987 when Congress enacted an excise tax on payments for political purposes. Restrictions on legislative activity by tax exempt organizations date from 1934.
• In light of the restrictions on political campaign and legislative activities, the IRS has made enforcement of these restrictions a part of its exempt organizations examination program through the Internal Revenue Manual, IRS training materials, and the EP/EO annual work plan. These restrictions have been EP/EO high interest areas for over ten years.

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