(iii) Application Processing Time Lines.

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. 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,^64.1 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 provide the requested information in a timely fashion 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 streamline, 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 the 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 by three business days prior to the response due date, the agent is to call the applicant organization. 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.^64.2

p. 801, last paragraph, first line. Insert before existing material:

(iv) Expedited Processing of Applications.

p. 802, second paragraph, first line. Delete (iii) and insert (v).

*(c) Issuance of Determinations and Rulings

*p. 804, heading. Delete and Rulings

*p. 804, note 80, first line. Delete 2015-9, 2015-2 I.R.B. 249 § 5.03 and substitute 2016-5, 2016-1 I.R.B. 188 § 5.01.

*p. 804, note 80, second line. Delete 2015-4, 2015-1 I.R.B. 144 and substitute 2016-4, 2016-1 I.R.B. 142.

*p. 804, third complete paragraph. Insert as second to fourth sentences:

In limited circumstances, applications for recognition of exempt status were transferred to the former EO Technical office for processing.^80.1 All of the procedures in these rules apply to pending applications that were transferred to the former Technical office, including the opportunity for the applicant to request consideration by Appeals of a proposed adverse determination.^80.2 An applicant receiving a proposed adverse determination with respect to an application that had been transferred to the former EO Technical office may request a conference with EO Rulings and Agreements in addition to requesting appeals office consideration.^80.3

*p. 804, note 81. Delete text and substitute:

Id. § 5.03.

*p. 804, third complete paragraph. Delete all text following what was second sentence.

*p. 804, note 86. Delete 2015-9, 2015-2 I.R.B. 249 and substitute 2016-5, 2016-1 I.R.B. 188.

*p. 805, first complete paragraph. Insert following existing text:

Inaccurate material information includes an incorrect representation or attestation as to the organization's organizational documents, the organization's exempt purpose, the organization's conduct of prohibited and restricted activities, or the organization's eligibility to file the streamlined application.^89.1

*p. 805. Insert as second and third complete paragraphs, before heading:

While the procedures for obtaining a determination letter by submitting a general application for recognition of exemption (Form 1023) may differ from those for obtaining a determination letter by submitting a streamlined application (Form 1023-EZ), grantors and contributors may rely on both types of determination letters to the same extent.^89.2

Determination letters may be reviewed by EO Quality Assurance and Processing to assure uniform application of the statutes or regulations, or rulings, court opinions, or decisions published in the Internal Revenue Bulletin.^89.3 If, on post-determination review, EO Quality Assurance and Processing concludes, based on the information contained in the application file, that a determination letter was erroneously issued, the matter will be processed in accordance with the revocation procedures.^89.4

*(d) User Fees

*p. 805, note 91, first line. Delete 2015-9, 2015-2 I.R.B. 249 and substitute 2016-5, 2016-1 I.R.B. 188.

*p. 805, note 92. Delete 2015-8, 2015-1 I.R.B. 235 § 6.08(1), (2) and substitute 2016-8, 2016-1 I.R.B. 243 § 6.09(2).

*p. 805, second complete paragraph. Insert as fourth sentence:

From its inception, the user fee accompanying the streamlined application for recognition of exemption^92.1 was $400^92.2; effective July 1, 2016, the fee is $275.^92.3

*p. 805, note 93. Delete 2015-8, 2015-1 I.R.B. 235 § 6.08(3) and substitute 2016-8, 2016-1 I.R.B. 243 § 6.09(3).

*p. 805, note 95. Delete 2015-8, 2015-1 I.R.B. 235 § 6.07(3) and substitute 2016-8, 2016-1 I.R.B. 243 § 6.09(4).

(h) Streamlined Application

*p. 805, note 95. Insert following existing text:

The list of IRS private letter rulings eligible for reduced user fees has a new addition: “substantially identical letter rulings requested by taxpayers who are parties engaged together in the same transaction affecting all requesting taxpayers” (Notice 2016-59, 2016-42 I.R.B. 457).

*p. 805. Insert as third complete paragraph:

In the case of an application that is returned to the applicant because it is not complete, the user fee will be returned or refunded.^95.1

*p. 811, note 123. Delete 2015-5, 2015-1 I.R.B. 186 and substitute 2016-5, 2016-1 I.R.B. 188 § 3.05.

*p. 811, second paragraph, fourth sentence. Delete and substitute:

A streamlined application filed by an eligible organization is complete if it includes responses for each required line item, an attestation as to completion of the eligibility worksheet, includes the correct employer identification number, is electronically signed by an authorized individual, and is accompanied by the correct user fee.^123.1

*p. 811, second paragraph, last line. Insert footnote at end of line:

^123.2 Id. § 4.08(2).

*p. 811, fourth paragraph, last line. Delete period and insert footnote following information:

^123.3 Id. § 4.07(3).

*p. 811, fourth paragraph, last line. Continue sentence with the following:

and may result in denial of recognition of exemption.^123.4

*p. 812, note 139. Insert following existing text:

Rev. Proc. 2016-5, 2016-1 I.R.B. 188 § 3.06.

p. 812. Insert as eleven complete paragraphs, before heading:

(j) Applications Processing Controversy

p. 814. Insert following existing text:

The Senate Committee on Finance, on August 5, 2015, released its report on the Committee's bipartisan investigation of the IRS's handling of applications for recognition of tax exemption submitted by political advocacy organizations.^153.1 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 of 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 of and recovery of some e-mails is 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 causes 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.^153.2

The majority and minority staff were unable to reach agreement as to 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.” The Committee stated, “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.”

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.^153.3

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.^153.4

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.^153.5 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.”^153.6

*(a) General Rules

*p. 815. Insert as third paragraph:

With respect to streamlined applications,^157.1 an eligible organization that does not submit the application within 27 months from the end of the month in which it was organized will generally be recognized as exempt as of the submission date of its application. For this purpose, the submission date of a streamlined application is determined without regard to the submission date of any previously submitted application for recognition of exemption that has been withdrawn by the organization or not accepted for processing by the IRS. Thus, if an eligible organization that has a general application pending with the IRS files a streamlined application outside the 27-month window, it will generally be recognized as exempt from the submission date of its streamlined application, not from the date it submitted its general application.^157.2

*p. 815, note 162. Delete 2014-9, 2014-2 I.R.B. 281 and substitute 2016-5, 2016-1 I.R.B. 188.

*(b) Exceptions

*p. 816, last paragraph, first sentence. Delete notice; insert of filing an application for recognition of exemption following requirement.

*p. 817, note 171. Delete 26.5 and insert 26.10.

p. 819. Insert following third paragraph, before heading: