(a) General Procedures

p. 917, note 25. Delete 2013‐9, 2013‐2 I.R.B. 255 § 4.01 and substitute:

• Rev. Proc. 2016‐5, 2016‐1 I.R.B. 188 § 4.01.

p. 917, note 28. Delete 2013‐9, 2013‐2 I.R.B. 255 § 3.04 and substitute:

• Rev. Proc. 2016‐5, 2016‐1 I.R.B. 188 § 3.07.

p. 918, note 29. Delete 2013‐9, 2013‐1 I.R.B. 255 § 4.03 and substitute:

• Rev. Proc. 2016‐5, 2016‐1 I.R.B. 188 § 4.03(3).

p. 918, note 35. Delete 2013‐9, 2013‐1 I.R.B. 255 and substitute:

• Rev. Proc. 2016‐5, 2016‐1 I.R.B. 188.

p. 919, note 39. Delete 2013‐9, 2013‐1 I.R.B. 255 § 4.04 and substitute:

• Rev. Proc. 2016‐5, 2016‐1 I.R.B. 188 § 4.04.

p. 920, note 43, second line. Delete 2013‐9, 2013‐2 I.R.B. 225 § 3.09 and substitute:

• Rev. Proc. 2016‐5, 2016‐1 I.R.B. 188 § 3.14.

(b) The Substantially Completed Application

p. 920, note 44. Delete 2013‐9, 2013‐2 I.R.B. 255 § 3.03 and substitute:

• Rev. Proc. 2016‐5, 2016‐1 I.R.B. 188 § 3.12.

p. 920, note 47, first line. Delete 2013‐9, 2013‐2 I.R.B. 255 § 10.03 and substitute:

• Rev. Proc. 2016‐5, 2016‐1 I.R.B. 188 § 10.03.

p. 922, note 53. Delete 2013‐9, 2013‐2 I.R.B. 255 § 3.08 and substitute:

• Rev. Proc. 2016‐5, 2016‐1 I.R.B. 188 § 3.02.

p. 922, note 55. Delete 2013‐9, 2013‐2 I.R.B. 255 § 4.06(1) and substitute:

• Rev. Proc. 2016‐5, 2016‐1 I.R.B. 188 § 4.07(1).

p. 922, note 57. Delete 2013‐9, 2013‐2 I.R.B. 255 § 10.03 and substitute:

• Rev. Proc. 2016‐5, 2016‐1 I.R.B. 188 § 10.03.

p. 922, note 59. Delete 2013‐9, 2013‐2 I.R.B. 255 § 4.06(1) and substitute:

• Rev. Proc. 2016‐5, 2016‐1 I.R.B. 188 § 4.07(1).

p. 922. Insert following fourth complete paragraph, before heading:

(b‐1) Application Processing Time Line

Applications that are properly and completely prepared may result in issuance of a favorable determination letter in a few months. Others will likely entail the gathering of additional information by the IRS, by means of one or more information requests. For many years, EO Determinations gave applicant organizations 21 days to respond to an information request, and an organization could obtain a 14‐day extension to respond. If a response did not arrive in a timely fashion, EO Determinations placed the case in suspense and notified the applicant that it had 90 days to supply the requested information. Absent a response within that time period, the case would be closed. Because the IRS has increased the timeliness of its processing of these applications, the IRS has revised the procedures, principally by eliminating the suspense period.

The essence of this new approach, which took effect in September 2015,^59.1 is that, if an applicant organization does not respond to an information request by the designated due date, EO Determinations will close the case without making a determination and will not refund any user fee paid. The concept is that an applicant that does not timely provide the requested information fails to establish that it meets the requirements for tax‐exempt status. An organization whose case is closed under this procedure will have to submit a new application package and pay another user fee.

IRS personnel are instructed to issue a letter to an applicant when it is necessary to seek information in addition to that provided in the application. The letter will incorporate “appropriate streamlined, pre‐written, or individually composed” questions. The applicant will be given 28 calendar days to respond. The applicant organization is to be called and notified about the letter on the day it is mailed. The agent is to emphasize the importance of responding by the due date, to avoid a case closing. Issues in the case may be discussed on this call.

If the organization requests an extension, the case manager must approve it, based on the facts and circumstances. The normal extension period is 14 days at the most. Managers can approve longer extensions as needed (such as for filing of an amendment to a corporate document). If the response is incomplete, the agent may issue an additional request for information. An agent must consult with his or her manager before a third request for information is issued.

If a response to an information request has not been received, the agent is to call the applicant organization three business days prior to the response due date. The organization is to be reminded of the due date and the imminent case closing.

If the organization does not respond by the due date, the agent is to close the case as a failure to establish eligibility for recognition of tax exemption.^59.2

(c) Issuance of Determination Letters and Rulings

p. 923, note 62. Delete 2013‐9, 2013‐2 I.R.B. 255 § 5.02 and substitute:

• Rev. Proc. 2016‐5, 2016‐1 I.R.B. 188 § 5.02.

p. 923, note 64. Delete 2013‐9, 2013‐2 I.R.B. 255 § 5.03 and substitute:

• Rev. Proc. 2016‐5, 2016‐1 I.R.B. 188 § 5.03

p. 923, second complete paragraph. Delete last sentence.

(e) User Fees

p. 927, note 93. Delete 2013‐8, 2013‐1 I.R.B. 237 § 6.07(1), (2) and substitute:

• 2016‐8, 2016‐1 I.R.B. 243 § 6.09, 6.10.

p. 927, last complete paragraph. Delete last sentence.

p. 928. Insert following carryover paragraph, before heading:

*(f) Applications Processing Controversy

On occasion, when there is a need for an IRS focus on a particular category of tax‐exempt organization or a particular exempt organizations law issue, the Determinations unit will assemble a team of specialists to advise as to the processing of applications on a centralized and uniform basis. This was done, for example, when the IRS embarked on its campaign to deny recognition of exemption to or revoke the exemption of nearly all nonprofit credit counseling organizations.^97.1 This type of centralized processing of applications is supposed to be accomplished using objective criteria based on the applicable law of tax‐exempt organizations.^97.2

Beginning in 2010, however, the Determinations unit was required to process many applications submitted by nonprofit organizations that potentially were involved or would become involved in political campaign financing or other forms of political campaign intervention. Rather than utilizing objective criteria to identify potential political activity cases for review among those entities applying for recognition of exempt status, the unit developed and began applying criteria that identified organizations on the basis of their names or policy positions.

This state of affairs became politicized, with stories about discriminatory tactics being employed at the IRS and charges by members of Congress that the IRS was unfairly targeting specific groups that were applying for recognition of exempt status. An audit by the Treasury Inspector General for Tax Administration (TIGTA) ensued. TIGTA concluded that the criteria used by the Determinations unit in these cases were “inappropriate,” the processing of the applications was delayed because these groups were “targeted,” and the IRS requested unnecessary information from these entities; these outcomes were said to be attributable to “ineffective management.”^97.3

This matter of supposed IRS targeting of applicant organizations on the basis of their names or policy positions quickly was, in many quarters, upgraded to a “scandal.” Nearly all of the senior executives in the TE/GE Division retired or were replaced, as was the Acting Commissioner of the IRS. Several investigations by congressional committees were initiated, as well as inquiries by the Federal Bureau of Investigation and the Department of Justice. Remedial legislation was introduced in Congress; various lawsuits were filed.

The IRS undertook to repair the damage. In a report made public in early 2015, TIGTA concluded that the IRS had taken “significant actions to eliminate the selection of potential political cases based on names and policy positions, expedite processing of social welfare organization applications, and eliminate unnecessary information requests.”^97.4 The EO function completed processing of nearly all of the applications that had been languishing, developed preapproved questions and instituted a quality review process, and provided extensive training for relevant EO Rulings and Agreements office employees.

The Senate Committee on Finance, on August 5, 2015, released a report on its bipartisan investigation of the IRS's handling of applications for recognition of tax exemption submitted by political advocacy organizations.^97.5 This investigation found that, from 2010 to 2013, IRS management was “delinquent” in its “responsibility to provide effective control, guidance, and direction over the processing of applications for [recognition of] tax‐exempt status filed by Tea Party and other political advocacy organizations.” IRS managers were said to fail in their responsibility to “keep informed about the very existence of the applications” or “recognize the sensitivity of these applications.” As to the former, IRS management “forfeited the opportunity to shape the IRS's response to the influx of political advocacy applications by simply failing to read reports informing them of the existence of those applications.” As to the latter, IRS managers “did not take appropriate steps to ensure that the applications were processed expeditiously and accurately.”

References to IRS management largely mean those heading the Exempt Organizations Division, the director of which during the period from 2006 to May 2013 was Lois Lerner. This report states that she first became aware of applications from Tea Party groups in April or May, 2010. The report states, “For the next two years, Lerner failed to adequately manage the EO employees who processed these applications” and “failed to inform upper‐level IRS management of the serious delays in processing applications [for recognition of] tax‐exempt status from Tea Party and other politically sensitive groups.” It is stated that, under the leadership of Ms. Lerner, the Division undertook a number of initiatives to process these applications, with “[e]ach of these initiatives…flawed in design and/or mismanaged.”

The report discusses the “dysfunctional culture” in the EO Division during this period, stating that it “operated without sufficient regard for the consequences of its actions for the applicant organizations.” The brouhaha over the loss and recovery of some e‐mails was related; this was said to delay issuance of this report for more than a year. The report concludes that “[o]verall, the IRS's less than complete response to these circumstances cast[s] doubt about the thoroughness of their efforts to recover all relevant records related to the investigation, as well as their candor to this and other Congressional committees.”

This Senate Finance Committee report offered a number of recommendations, including the following: (1) The IRS should publish in the applications' instructions objective criteria that may trigger additional review and the procedures IRS specialists use to process applications involving political campaign activity; (2) the IRS should be prohibited from requesting “individual donor identities” at the application stage, although “generalized donor questions should continue to be allowed”; (3) a position within the Taxpayer Advocate Service should be created, dedicated solely to assisting nonprofit organizations in applying for recognition of exemption; (4) the EO Division should track the age and cycle time of its cases, so that it can detect backlogs early in the process and conduct periodic reviews of over‐aged cases to identify the cause of the delays; (5) the standards in the Internal Revenue Manual for timely processing of cases should be enforced, and employees who fail to follow them should be disciplined; (6) IRS employees should be directed to conclude application cases within 270 days of filing; (7) the Sensitive Case Report process should be revised or a more effective way to elevate important issues within the IRS should be developed; (8) there should be “minimum training standards” for all EO Division managers to “ensure that they have adequate technical ability to perform their jobs”; and (9) the IRS should fully implement the recommendations of the Government Accountability Office in its July 2015 report.^97.6

The majority and minority staff were unable to reach agreement on these topics: (1) the extent to which, if any, political bias of IRS employees affected the IRS's processing of applications for recognition of tax‐exempt status; (2) whether the IRS used improper methods to screen and process applications for recognition of exempt status submitted by “progressive and left‐leaning organizations”; and (3) the involvement, if any, of Treasury Department and White House employees, including the President, in directing or approving the actions of the IRS.

In conclusion, the Committee stated that, between 2010 and 2013, the IRS failed to fulfill its obligation to administer the tax law with, in the words of its mission statement, “integrity and fairness to all.” The Committee's investigation uncovered “serious shortcomings” as to how the IRS exercises its power when processing the applications at issue—“shortcomings that raise public doubt about whether the IRS is a neutral administrator of the tax laws.” “Immediate and meaningful changes, including increased accountability to Congress and strengthened internal controls, are necessary if diminished public confidence in the IRS is to be restored.”

p. 928. Insert following preceding insert:

*Reforms at the IRS and the findings of congressional committees have not eliminated the likelihood of ongoing litigation in this area. For example, a federal district court certified a class action on behalf of a Tea Party entity and related organizations in connection with a lawsuit by the groups against the IRS for allegedly violating their First Amendment rights during the application‐for‐recognition‐of‐exemption process by discriminating against them because of their political views.^97.7

Debate continues as to whether this applications processing controversy is a true scandal at the IRS or merely a case of lower‐level mismanagement. Two appellate courts have adopted the first approach. The U.S. Court of Appeals for the Sixth Circuit issued an opinion that (1) appears to agree with those who assert that the IRS used “inappropriate” criteria in processing Tea Party and similar groups' applications for recognition of exemption and (2) excoriated the IRS for the agency's lack of compliance with the district court's orders in the class action case.^97.8

Thereafter, the U.S. Court of Appeals for the District of Columbia Circuit held that two cases against the IRS regarding the controversy cannot be dismissed as moot because the doctrine of voluntary cessation is inapplicable.^97.9 In its opinion, the appellate court referenced this “unequal treatment” of “victim” applicant organizations by the IRS, the agency's “unconstitutional acts,” and the IRS's “discriminatory processing and delay.”^97.10

(b) Recognition of Public Charity Status

p. 939, note 183. Delete 2013‐10, 2013‐2 I.R.B. 267 § 3.01 and substitute:

• 2016‐10, 2016‐1 I.R.B. 270 § 3.01.

p. 939, note 184. Delete 2.02 and substitute 3.05.

p. 939, note 184, lines 3 and 4. Delete 2013‐10, 2013‐2 I.R.B. 267 § 2.05 and substitute:

• 2016‐10, 2016‐1 I.R.B. 270 § 3.05.

p. 939, note 184, lines 6 and 7. Delete 2013‐10, 2013‐2 I.R.B. 267 § 2.05 and substitute:

• 2016‐10, 2016‐1 I.R.B. 270 § 3.05.

p. 939, note 184, last line. Delete 2013‐4, 2013‐1 I.R.B. 126 and substitute:

• 2016‐4 I.R.B. 142.