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Wednesday, November 16, 2011

Automatic Revocation of Tax Exemptions - An Outline of Issues

This is outline of issues pertaining to the automatic revocation of tax exemptions by the IRS that occurred as a result of failing to file a tax return for three consecutive years.

BASICS OF AUTOMATIC REVOCATION

Exempt entities required to file returns (990, 990EZ, 990PF), with exceptions:

  • $25K - Years ending prior to January 1, 2010
  • $50K - thereafter  [See IRC section 6033(a)(3)]

2006 law, the Pension Protection Act of 2006, revised prior law to ADD ANNUAL NOTIFICATION REQUIREMENT

  • Applicable to all entities not required to file returns
    • Must file Form 990-N e-Postcard (or other 990 form)  [IRC 6033(i)]
    • Applicable for all tax years past 2006
    • 2007, 2008, 2009 were first years for which Annual Notification Requirement was in place
  • First automatic revocations took place in 2010
    • Effective dates of automatic revocation: date third consecutive 990N not filed by the 15th day of fifth month following the close of the fiscal year
  • IRS sends notices of automatic revocation to "last known address"

EFFECT OF AUTOMATIC REVOCATION

  • Entity is no longer exempt, and is subject to regular income tax
  • Contributions might not be tax deducible (especially if charitable)
  • Issues to consider:
    • Need we notify the board?  (Yes)
    • Need we notify the members?  (Unclear)
    • No change in corporate status  (Still a corporation, simply not tax exempt)
    • File different returns?  (Unclear.  Depends on whether exemption is reinstated.)
  •    Challenges to automatic revocation difficult
    • IRS taken hard line
    • Declaratory judgment court action prohibited [IRC 7428(b)(4)]
    • Long story short, you must apply for reinstatement of the exemption

REINSTATEMENT

Two options/"Transitional Relief":

  • Reinstatement - a new Form 1023 (501(c)(3)) or 1024 (501(c)(4-6) and others)
    • Effective the date of application for reinstatement; date of filing
  • Retroactive Reinstatement - a new Form 1023 or 1024
    • Effective the date of automatic revocation
    • Must establish "reasonable cause" for the failure to file  [IRC 6033(j)(3)]
    • Describe reasonable cause factors such as:
      • volunteer responsibility/lack of awareness of filing requirement
      • good faith reliance on information provided by IRS
      • circumstances beyond the control of the taxpayer
      • substantial, written procedures to prevent future failures
      • do above for every year for with a return or notification was not filed
    • Must file within 15 months of automatic revocation

Application required, even if not required in past (eg: group exemption)

  • User fee $850
  • Reduced user fee $100 under Revenue Procedure 2011-36
  • Eligibility
    • The entity was NOT required to file notices/returns prior to 2007
    • The entity was eligible to file Form 990N e-Postcard
    • The entity had annual gross receipts of not more than $25,000 in 2007, 2008 and 2009             based on averaged gross annual receipts for current filing year plus the two preceding years
  • File not later than 12/31/2012
  • Write "Notice 2011-43" on top of Form 1023/1024, AND on the envelope
  • Include properly completed 990/990EZ forms for 2007, 2008, 2009 and interim years
  • Attach letter with declaration:

"[Name of organization] was not required to file annual information returns for taxable years beginning  before 2007; was eligible in each of its taxable years beginning in 2007, 2008 and 2009 to file a Form 990-N e-Postcard; and had annual gross receipts of normally not more than $25,000 in each of its taxable years beginning in 2007, 2008 and 2009.

I, [insert name and title of an officer or director] declare, under penalties of perjury, that I am authorized to sign this request for retroactive reinstatement on behalf of [insert name of organization], and I further declare that I have examined this request for retroactive reinstatement, including the written explanation of all the facts and information pertaining to the claim for reasonable cause and the evidence to substantiate the claim for reasonable cause, and to the best of my knowledge and belief, this request is true, correct and complete."

CHAPTERS/SUBORDINATE UNITS

  • Same rules apply, even if group letter exemption
  • Parent responsibility to verify?
  • Parent responsibility to assist chapters with revoked exemptions?
  • Records and record keeping challenges
  • Management of chapter risks
    • Separate incorporations
    • Affiliation agreements
    • Supporting chapters

HELPFUL LINKS/RESOURCES

Automatic Revocation of Exemption

Automatic Exemption Revocation for Non-Filing: Reinstating Tax-Exempt Status

Annual Exempt Organization Return: Who Must File

Automatic Exemption Revocation for Non-Filing: Requesting Retroactive Reinstatement

Rules concerning reduced User Fee

Rules Concerning "Transitional Relief"

Automatic Revocation of Exemption List -

Annual Electronic Filing Requirement for Small Exempt Organizations — Form 990-N (e-Postcard)

Form 990 Series - Which Form to File (Filing Phase-In) 

Form 1023 Application

Form 1024 Application

1 comment:

  1. Thanks, this was super helpful!

    ReplyDelete