Author Archive | David McRee, CPA

Are Form 990 Extensions Valid for Three-Year Non-filers?

Question: When a tax-exempt organization has failed to file its Form 990 on time for two consecutive years, can it be granted a valid extension of time to file the third year?

Answer:

YES! But the IRS does not always handle this situation correctly.

A reading of the tax law would indicate that there is nothing in the law to disallow such an extension from being granted.

However, the IRS has in some cases been asserting that any such extension has no effect, and that revocation is automatic as of the original due date of the third consecutive non-filed return. The IRS seems to rely on the text of their Notice 2011-44, which was published in June of 2011.

To analyze this situation, first let’s turn to the law. The Pension Protection Act of 2006, Section 1223, revised Internal Revenue Code Section 6033, providing for the revocation of an organization’s tax-exempt status if it failed to file Form 990 or failed to submit Form 990-N for three consecutive years. Here is the actual text of  IRS Section 6033(j)(1):

(j) LOSS OF EXEMPT STATUS FOR FAILURE TO FILE RETURN OR NOTICE.– (1) IN GENERAL.–If an organization described in subsection (a)(1) or (i) fails to file an annual return or notice required under either subsection for 3 consecutive years, such organization’s status as an organization exempt from tax under section 501(a) shall be considered revoked on and after the date set by the Secretary for the filing of the third annual return or notice.

The law clearly gives the IRS the discretion to set the date at which automatic revocation takes effect. However, nothing in the law gives any indication that an extension of time to file would not be valid if granted.

The IRS issued various forms of guidance on its web site regarding revocation procedures and filing requirements.  Below is guidance that appeared on the IRS web site as early as December 2009 as viewed on the Wayback archive: (click on the image to enlarge)

The issue of the filing of extensions is not addressed in the above guidance, leaving open the reasonable interpretation that an extension could be requested to extend the filing due date of the third year.

In fact, it appears that many organizations did request and receive an extension of time to file the third year.

In June 2011, the IRS issued Notice 2011-44, which explicitly states for the first time that the exempt status of an organization that fails to file for three consecutive years “…is automatically revoked pursuant to section 6033(j)(1) on and after the date set by regulation for the filing of the third annual return or notice, without regard to any extension of time for filing.”

The “without regard to any extension of time for filing” statement appears to contradict what the IRS has published on its own web site currently (October 2012). However the real problem lies with the interpretation of the language in the notice. Here is a screen shot of published IRS guidance:

IRS web site screen capture: effect of extended due date on revocation of exempt status.

The language in Notice 2011-44 that says “…without regard to any extension of time for filing…” simply means that if extensions have been granted for the third-year return, the return must be filed by the extended due date. If the return is not filed by the extended due date, then the organization’s tax-exempt status will be revoked as of the original due date, not as of the extended due date.

If the IRS revokes your organization’s tax-exempt status even though you filed the third-year Form 990 within the extended due dates, provide proof that the extensions were filed and provide proof that the return was filed within the extended period.  Send this proof attached to a letter explaining that you believe the organization’s tax exempt status was revoked in error and that you want to be removed from the list of revoked organizations.

This can be a tedious process and may involve several hours on the phone with the IRS as well as follow-up written communication.

If you would like help, contact me.

IRS Stingy with Retroactive Reinstatement for Revoked Charities

How hard is it to get retroactive reinstatement after your 501(c)(3) status has been revoked for failure to file your Form 990 series return for three consecutive years?

Turns out that it is very hard. But the IRS did give some warning.

According to a TaxAnalysts summary of remarks made by the IRS at an American Bar Association Section of Taxation meeting in January 2011, “…retroactive reinstatement would seem to be the exception rather than the rule.”

The IRS’s former approach of being concerned about compliance “going forward,” rather than harsh punishment of prior non-filing may have come to an end. “There is a culture shift,” remarked Lois Lerner, EO director of TE and Gov’t. Entities Division.  Failing to file for three years in a row is viewed differently than filing one year’s return late, she said, according to the TaxAnalysts article.

Lerner appears to believe that it was Congressional intent to take a hard line on small tax-exempts and she intends to follow the law.

While I personally disagree that such harsh treatment was the intent of Congress, my opinion doesn’t matter.

Unless you have some written proof that the IRS told your organization that it was exempt from the filing requirement, you may find it very difficult to achieve reinstatement retroactively. This does not mean you should not try. Nor should you give up if your first request is denied by the IRS, though if your first letter was a do-it-yourself attempt, it may be time to seek professional assistance. Be persistent.

Also, be aware that escalating your argument to the next level within the IRS where it will be more carefully considered may add considerable delay to the process of officially getting your charitable status back.

Is it Worth the Effort?

What is the major down side to not getting retroactive reinstatement? Mainly there is the concern that the organization may owe tax on certain items of income and will have to file a regular corporate tax return ( Form 1120 ) for the years it is treated as a taxable entity. The IRS will treat the organization as a taxable entity from the date of revocation until the date of reapplication, assuming reinstatement is approved. No one yet knows how aggressive the IRS will be in this regard.

What income might be taxable? Presumably, any income that is not a genuine contribution would be subject to tax to the extent it exceeds allowable deductions. If all of the organization’s income is in the form of contributions then presumably it would have no taxable income, since gifts are not included in taxable income.

Donors who made donations after the IRS published notice of revocation and before reinstatement would be affected and might have to amend their tax returns.

 

CPA Gets Form 990 Late Filing Penalties Abated for Nonprofit Client

The difference between a successful penalty abatement request letter and an unsuccessful one can be subtle. Once you learn how to make and support an argument for reasonable cause, your chances are much better of getting the IRS to understand why the organization qualifies for abatement based on the existence of reasonable cause.

A CPA from West Virginia wrote to thank me for the advice and instruction my materials provided him:

“Dear David,  I was devastated when one of our nonprofit clients received a $30,000 late-filing penalty. I did not know how to handle such penalties and did not know that they can be abated. With the help of your Form 990 Penalty Abatement e-book, I was able to get the entire amount abated. This e-book is full of great and useful information for nonprofits. Due to the special circumstances of our case, our first abatement attempt was rejected by the IRS. We contacted you via email and with your help and guidance, the second letter completely abated this huge penalty. This book is for anybody who deals with IRS penalties as it has basic and detailed information that is necessary to be successful in removing penalties. –L. I., CPA

Not only did “L.I” write those kind words above, but he actually called me to thank me and tell me how valuable my materials were and how he didn’t know what he’d have done without them and without my advice.

Get your copy of my “How to Write a Reasonable Cause Letter to the IRS” materials.

 

Fraudulent Rejected Federal Tax Payment Email Phishing Scam

Rejected Federal Tax Payment email image

The email I received. Click image to enlarge.

I opened my email this morning to find an email from sender “Sue_Mcpherson@irs.gov, with the subject line “Rejected Federal Tax payment.” Right away I was pretty sure that this was a “phishing” scam email because I hadn’t recently sent any federal tax payments electronically. Plus, I’ve been getting a lot of phony electronic payment rejection notice scam emails lately.  But this one sure looked official.

There are two clues in the email itself that give it away as a scam. First, although it was sent to a domain that I own, it was not sent to a valid email address at that domain. This indicates that the scammer does not have my email and was just targeting anyone at that domain.

The second clue is the linked text: “tax_report_8800840897936.pdf”.  When I hover my mouse pointer over the link, it reveals the real URL that it will take me to, and it’s clearly not associated with the IRS>

What I find troubling about this email is that it uses words like “Tax Exempt/Non Profit Organizations” and refers to the EIN application process and legal structures, etc.

Clearly, this email appears to have been somewhat tailored to my area of practice.  No doubt as time wears on, such scam emails will become more targeted and sophisticated. Beware.

Be sure to click on the image of the email above to examine it and read my notes.

How to Write a Reasonable Cause Letter to the IRS for Nonprofit Late-Filing Penalty Abatement

how to write a reasonable cause letter to the IRSFOR IMMEDIATE RELEASE: I’ve just published a completely updated and expanded version of my popular e-book on how to write a reasonable cause letter to the IRS. This e-book is focused specifically on nonprofit, tax-exempt (501(c)) organizations that find themselves in the following situations:

  • They’ve filed their Form 990 or 990-EZ late and have been assessed a penalty by the IRS.
  • They’ve made errors on their Form 990 or 990-EZ that caused the IRS to assess penalties because the return was deemed incomplete.
  • They’ve had their tax-exempt status revoked for failing to file the required Form 990-N, 990-EZ, or Form 990 for three consecutive years and they want to have their tax-exempt status reinstated retroactively to the date it was revoked.

This e-book will help anyone in those situations who has reasonable cause for their non-compliance.

Who has reasonable cause? Generally, I maintain that anyone who did not knowingly and deliberately ignore the filing requirement usually has a very good chance for penalty abatement, especially if this is the first time penalties have been assessed. Showing a lack of “willful neglect”of the filing requirement in and of itself is NOT considered sufficient to demonstrate “reasonable cause,” but taken together with other factors (which I explain in great detail in the book) such an organization is usually a very good candidate for abatement.

Included with the purchase of this 75 page e-book (delivered instantly as a pdf file downloaded to your computer) is a 22 page Microsoft Word document that contains a letter template you can use to structure your letter. Additionally, I’ve added the full text of six penalty abatement request letters that were successful in having thousands of dollars of late-filing penalties abated.

Visit my web site to learn more about my materials that teach you how to write a reasonable cause penalty abatement request letter to the IRS for a nonprofit organization.

 

David B. McRee, CPA

Saint Petersburg, Florida

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