Can the IRS Revoke a University’s Tax-Exempt Status Overnight?

As a result of President Trump’s recent social media posts regarding Harvard University’s tax-exempt status, some institutions of higher education (IHE) have expressed concerns over whether the Internal Revenue Service (IRS) could summarily revoke their tax-exempt status. Such fears are unwarranted.

In the first place, Section 7217 of the Internal Revenue Code, enacted in 1998, makes it unlawful for the President to request, directly or indirectly, any officer or employee of the Internal Revenue Service to conduct an audit or other investigation of any particular taxpayer, including an IHE.

In addition, the Internal Revenue Manual (IRM) provides instructions to IRS staff, ensuring that they have the information they need to carry out their responsibilities in administering the tax laws. The IRM states plainly, “The IRM explains what needs to be done, how to do it, and who is responsible to ensure consistent work performance.”

During an audit, a revenue agent may examine an IHE’s books and records to determine if it is organized and operated for tax-exempt purposes. An IHE that the IRS determines no longer qualifies for tax-exempt status has specific procedural rights. First, the IRS must provide a copy of the audit report, explaining that it proposes to revoke the IHE’s tax-exempt status. An IHE that disagrees with the proposed revocation may request a meeting or telephone conference with the revenue agent’s manager and furnish additional information it would like the IRS to consider. An IHE in receipt of a notice of proposed revocation also has the right to file a written protest with the IRS Appeals Office.

If, through these avenues, the IHE and IRS are unable to reach an agreement, the IRS will issue a final determination revoking the IHE’s tax-exempt status. An IHE that disagrees with the determination has 90 days to file an action for declaratory judgment in the United States Tax Court, the United States Court of Federal Claims, or the United States District Court for the District of Columbia. An IHE dissatisfied with the trial court decision may appeal to an appropriate federal appellate court.

Any organization that is not organized and operated for tax-exempt purposes absolutely can have its exempt status revoked, but to achieve that result, the IRS must undertake a lengthy process that is reviewable by the courts. As of May 21, Harvard University remains a tax-exempt organization.

IHEs should monitor their activities to ensure that they remain organized and operated in a manner consistent with their tax-exempt status. However, the rule of law, including constitutionally protected due process rights, will preclude any quick revocation of an IHE’s tax-exempt status.

If your institution has questions concerning its tax-exempt status under Section 501(c)(3), please contact the authors of this alert or any member of Steptoe & Johnson PLLC’s Higher Education Team.