12 January 2017 New procedures for exempt organizations included in annual IRS revenue procedures The IRS has issued its annual revenue procedures that govern the issuance of technical advice, letter rulings, exempt status determinations and related issues. For 2017, the IRS has consolidated much of the information applicable to the issuance of exempt organization determination letters into a single revenue procedure, while also making several notable changes to the applicable guidelines. The new revenue procedures are effective as of January 3, 2017. This Alert highlights the notable changes contained in two of the revenue procedures. Revenue Procedure 2017-5 describes the procedures relating to the issuance of determination letters on exempt status, private foundation status and other items relating to exempt organizations, including applicable user fees. It consolidates guidance previously contained in portions of four separate revenue procedures. (See, e.g., Revenue Procedure. 2016-4, Revenue Procedure 2016-5, Revenue Procedure 2016-8, Revenue Procedure 2016-10, and their predecessors). In a notable change from past procedure, Section 3.02(8) now provides that the IRS will not ordinarily issue a determination letter to an organization that is currently recognized as exempt under Section 501(c)(3), but is seeking recognition under a different subsection. Such an organization seeking a determination letter under a different subsection of Section 501(c) must first dissolve and re-form as a new entity. In addition, under Section 4.10(2)(b), the revised procedures now state that the IRS will not accept for processing a Form 1023-EZ from an organization that already has another application for recognition of tax-exempt status pending with the IRS. Notable changes contained in Revenue Procedure 2017-1: filing fees and letter ruling pre-submission conference requests Revenue Procedure 2017-1 increases certain user fees for filing of IRS forms. For instance, the fee to file a Form 3115 to request a non-automatic change in accounting method has increased from $8,600 to $9,500, while the fee to request an extension of time to file Form 3115 has increased from $9,100 to $10,000. The user fee to file a Form 1128 to request a non-automatic change in accounting period has increased from $4,200 to $5,800, while the fee to request an extension of time to file Form 1128 has increased from $3,700 to $5,400. The user fee for requesting most private letter rulings remains $28,300. In addition to increasing user fees for requesting changes to accounting methods and periods, Revenue Procedure 2017-1 also modifies the timing procedures for submitting statements explaining the proposed transaction when requesting letter ruling pre-submission conferences. A pre-submission conference can be a useful tool to utilize to gain an understanding of the IRS's position on a matter before a formal ruling request is submitted. The pre-submission conference is a good forum for discussion on substantive or procedural matters relating to a proposed transaction. As part of the pre-submission process, taxpayers generally should provide the IRS Associate Chief Counsel several documents, including a statement of whether the issue that is the subject of a possible letter ruling request is one for which a letter ruling is ordinarily issued and a draft of the letter ruling request or other detailed written statement explaining the proposed transaction, issue and legal analysis. Revenue Procedure 2017-1 changes the timing of when this material must be submitted, by eliminating the requirement contained in Revenue Procedure 2016-1 that taxpayers must submit this material "at least three days before" the scheduled pre-submission conference with IRS Chief Counsel. Revenue Procedure 2017-1 now provides that such statement generally must be submitted before scheduling the conference, although the IRS may allow taxpayers to submit the statement after the conference is scheduled, at its discretion. The addition of Section 3.02(8) in Revenue Procedure 2017-5 may operate to discourage a Section 501(c)(3) organization planning to change its exempt status from doing so. In particular, a Section 501(c)(3) organization that seeks to be recognized as exempt under another subsection of Section 501(c) must consider the legal, business and financial resources involved in dissolving and reforming as a new entity to change its tax-exempt classification. In that situation, it is important to carefully review any desired changes an organization wants to make to its tax-exempt classification to determine whether the change is necessary and whether the organization can best meet its objectives by forming a new entity and seeking exemption under a different subsection of Section 501(c). In most states and for federal tax purposes, it is imperative that a Section 501(c)(3) organization's assets remain irrevocably committed to a charitable purpose, so an organization contemplating a change in structure will need to take those legal requirements into consideration. The change contained in Section 4.10(2)(b) within Revenue Procedure 2017-5 makes it important for an organization to first determine whether it could otherwise qualify to file Form 1023-EZ prior to submitting the full Form 1023. The change in the procedures can be viewed as further fine-tuning of Form 1023-EZ filing procedures as the IRS gains more experience with the new form. Revenue Procedure 2017-1 reflects the new user fees that organizations must pay to process certain documents with the IRS. Although many of these fees have increased, the user fee for standard private letter ruling requests has not. Organizations will need to take these fees into consideration when submitting certain requests to the IRS. Revenue Procedure 2017-1 also reflects a change to the timing of the submission of supportive materials to the IRS as part of pre-submission conferences. The pre-submission conference is a useful and flexible tool, but one without many specific procedures. An organization normally must submit such supportive materials before scheduling the conference, although the IRS may permit the organization to submit the materials after the conference has been scheduled. This contrasts with the former rule, which allowed the materials to be submitted at least three days before the conference took place. This timing change will generally result in organizations needing to have the material ready sooner than was required in the past. Organizations should engage in a dialogue with the IRS on what it would be willing to rule on and what it would like to see in the pre-submission conference materials. Finally, also of note, Section 15.08 in Revenue Procedure 2017-1 was amended to reflect that the IRS is transitioning towards making www.pay.gov the exclusive means for making payments for certain guidance under Revenue Procedure 2017-1. This is consistent with the IRS's "future state" project and its continuing transition to more web-based interactions with taxpayers. — For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg.
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