IRS Advance Ruling Update
Author: Jane Ward

The Internal Revenue Service took a step toward streamlining this fall, when on September 9, 2008, they issued regulations to eliminate the "advance ruling" process for new public charities.  The advance ruling period was the five-year window during which a new charity was designated as "publicly supported" (not a private foundation) and at the end of which was required to submit Form 8734 to show that they had met the public support test and would be worthy of "final determination" as a 501(c)(3) public charity.

Now, upon approving a group's Form 1023, the application for tax-exemption, the IRS will classify the group as publicly supported for five years and in the sixth taxable year will use the information submitted on Schedule A of the Form 990 to assess their public support.  Now the IRS will classify any organization whose advance ruling expires on or after June 9, 2008 as a publicly supported charity.  Organizations whose advance ruling expired before June 9 must still submit Form 8734, the five-year financial report filed by charities to secure their final determination. 

How does this affect grants managers?  It depends on how your foundation operates.  Some foundations do not track whether or not a grantee has a final determination letter.  Others request a copy of a grantee's Form 8734 as well as the final letter issued by the IRS – and will no longer have to track those dates and collect (review, file, store!) the paperwork.  My own foundation used to track the advance ruling period expiration date for informational purposes and we will no longer do that – one less piece of data to drown in!

Foundations that use IRS Publication 78 to verify tax status will not notice a difference since Publication 78 does not indicate final determination status.  Many foundations now use Guidestar's Charity Check to verify tax exempt status.  Charity Check will continue to show an organization's advance ruling expiration date, and will direct users to the recent IRS announcement (see link below).

For charities, the new regulation is a welcome simplification, not only easing the paperwork crunch but also relieving many nonprofit organizations from submitting duplicative information.

For more information, see www.irs.gov/charities.