Address to File Form 990-PF with Florida Attorney General

Form 990-PF image

Federal Treasury Regulation 1.6033-3(c)(1) and the IRS instructions to Form 990-PF require that a private foundation furnish a copy of its Form 990-PF to the attorney general of the state where the foundation’s principal office is located and the state in which the foundation was incorporated or created. A copy of the annual return must be sent to the attorney general at the same time the annual return is filed with the IRS. “Contemporaneously,” as the IRS likes to say.

Are you having trouble figuring out who to send it to? I finally got in touch with the right person at the Florida AG’s office and learned that they do in fact accept Form 990-PF from private foundations.

Here is where you send it as of November 2012:

Attorney General Pam Bondi’s Office
The Capitol
Room PL01
Tallahassee, FL 32399-1050

Note that Pam Bondi is the current Florida AG.  You would naturally need to replace Bondi’s name with whomever is the current AG at the time of filing.

Several years ago I had called the AG’s office to inquire about where to send the 990-PF and was told that they didn’t want it and had no idea what I was talking about. So if you’ve just been checking “yes” on the 990-PF and then not filing with the AG, I wouldn’t worry.

I just called again and reached a more knowledgeable person  and was told that because of the IRS requirement (it’s not a state requirement), they have been accepting the 990-PF’s for about 16 years. The state apparently doesn’t do anything with them other than put them in a file.

Here’s an excerpt from the IRS instructions to the 2011 Form 990-PF:

IRS requires Form 990-PF to be furnished to state Attorney General

What About Schedule B?

Do you have to send Schedule B to the Attorney General as part of the 990-PF? Yes, for purposes of Form 990-PF, Schedule B is open to public inspection. On the 990-PF filing, the donors’ names and addresses are not protected as they are on Form 990 or 990-EZ. See IRS Schedule B instructions https://www.irs.gov/uac/about-schedule-b-form-990-990ez-or-990pf for documentation of this point. You’ll find a section called “Public Inspection” in the General Instructions that are appended to the end of the Schedule B.

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.

 

Nonprofits Must Keep Adequate Accounting Records or Risk Loss of Tax Exemption

On a regular basis I encounter tax-exempt organizations that do not have sufficient accounting records to prepare a proper Form 990. Often, records are lacking for multiple years. Even bank statements may be unavailable–perhaps left in the care of a treasurer who departed the organization years ago.

In a worst-case scenario, this situation can result in an organization having its tax-exemption revoked.

Generally, the IRS only seems to resort to revocation when an organization fails to respond to repeated demands for accounting and financial records. It is, for the IRS, a last resort.

When might the IRS make a demand for accounting records? Usually this would happen in the case of an investigation into the activities of the organization, either in a routine examination, or in response to a complaint lodged against the organization.

Tax-exempt organizations must be operated in furtherance of their tax-exempt purpose. To prove that they are doing so, they are required to file an information return (Form 990) each year to disclose their items of income and expense in addition to non-financial information. This requires the keeping of adequate accounting records.

Without adequate books and records, it is not possible to demonstrate to the IRS that an organization continues to qualify for its tax-exemption.

In 2011, the IRS revoked the tax-exempt status of a 501 (c)(3) daycare organization (LTR 201150031). As part of an examination into the organization’s Form 990, the IRS requested that the organization produce accounting records for several years. The organization failed to produce sufficient books, records and documentation, in part because the treasurer had stage 4 cancer. Further, though the president thought the records were at the daycare facility, the daycare was unable to produce them.

In trying to resolve the problem, the IRS even went so far as to contact the state office that partially funded the daycare to determine the amount of revenue given to the organization. You can imagine the high level of cooperation they got from the state agency (sarcasm intended). In short: “Nothing could be found that substantiated the financial activities of the organization, and no books and records could be found that summarized and demonstrated the activities of the organization.”

Thus, the IRS revoked the organization’s tax-exempt status.

Later in this article I regurgitate the laws that apply to keeping adequate books and records, but let’s talk about what you can do if you find yourself serving as management or as director of an organization that lacks proper accounting records for one or more periods and the IRS is asking for either a Form 990 or for the accounting records and documentation.

What if Your Organization Lacks Adequate Accounting Records?

First, understand for which years the IRS is requesting information. It may be that you can provide proper records for some years but not for others. If you can provide the IRS with records that substantiate that your organization met the operational test for some years, you may be able to convince them that the organization is legitimate and is being operated properly even though some years lack proper records.

For those years where records don’t exist, you will need to contact the bank and attempt to get bank statements and check copies so your accountant can reconstruct items of income and expense to the extent possible.

If the IRS can see that the organization is trying to comply and is being cooperative, it is more likely to be reasonable. This is especially true with small all-volunteer organizations like high school booster clubs and neighborhood associations. The IRS understands the nature of volunteer work.

As a preventative measure, you should never allow one person to have complete control over the accounting process. The organization should always know where the books and records are and should keep back-up copies of all records, documentation and tax returns. Further, the organization, even a small one, should have a document retention and destruction policy.

Internal Revenue Code and Regs.

Let’s have a look at the laws that apply and why the IRS can revoke exempt status for failing to keep adequate books and records:

Operational Test

Treasury Regulation 1.501(c)(3)-1(a) provides for the Organizational and operational tests:  In order to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt. The organizational test is met by the proper construction of the Articles of Incorporation. The operational test is met by the type of day-to-day activities the organization engages in and the associated items of income and expense. Failure to meet either test negates the exempt status of the organization. TC Memo 1993-116 WL 87864 (U.S. Tax Court).

Requirement to File an Annual Return

IRC 6033(a)(1) and Regulation § 1.6033-2(a)(1) state that except for a few listed exceptions, every organization exempt from taxation under IRC Section 501(a) shall file an annual return, stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the internal revenue laws…

Mandate to File Form 990

Treasury Regulation § 1.6033-2(a)(2)(i) states that organizations required to file an information return under section 6033 must do so by filing Form 990.

Requirement to Keep Accounting Records

Treasury Regulation 1.6001-1(a) provides that any person subject to income tax, or any person required to file a return of information with respect to income, shall keep such permanent books of account or records as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of tax or information.

Requirement to Retain Records

Section 1.6001-1(e) of the regulations provides that the books and records shall be retained so long as the contents thereof may become material in the administration of any internal revenue law.

Termination of Exempt Status

In Revenue Ruling 59-95, it was held that failure or inability to file the required information return or otherwise to comply with the provision of section 6033 of the Code and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds that the organization has not established that it is observing the conditions required for the continuation of an exempt status.

The exemption from paying Federal Income Tax is a matter of legislative grace–a privilege–rather than a right (Christian Echoes National Ministry 470 F2d 849, 857 (1972).

When the creators control the affairs of the organization there is an obvious opportunity for abuse which necessitates an open and candid disclosure of all facts bearing upon the organization, operations and finances. Where such disclosure is not made, the logical inference is that the facts, if disclosed, would show that the taxpayers fail to meet the requirements of IRC Section 501(c)(3) (Bubbling Well Church of Universal Love v. Commissioner, 74 TC 531, 535 (1980). Afd 670 F2d 104 (9th cir, 1981)).

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

Procrastination Undermines Penalty Abatement Efforts

One of the most frustrating situations I deal with when writing a penalty abatement request on behalf of a nonprofit organization is that they did not deal with their situation in a timely manner.

Missing the Deadline

A typical scenario goes like this: The Do-Gooder organization misses the May 15th filing deadline for its Form 990. Normally the treasurer handles all the tax filings, and no one else is really involved with or knowledgeable about the Form 990 due dates. Unfortunately, the treasurer resigned three months earlier and a replacement has not yet been found.

Discovering the Error

Because no was aware of the deadline, no extension of time to file was requested. One month later, during the preparation of a grant application, it is discovered that no Form 990 has been filed for the recently completed year. It is then that the organization realizes that it has missed a required filing deadline.

Procrastinating Compounds the Problem

It takes the organization until August to hire a new treasurer, who completes and files the delinquent Form 990 by sometime in October.

Do you see the problem here? The organization discovered in June that it was delinquent but did not correct the delinquency until October–a delay of four months. How do you explain that delay to the IRS? It appears to the IRS that the organization does not really take its filing responsibility serious.

Best Practices

What is the take-away from this scenario?

  • There should be more than one person in the organization who knows and tracks the due dates of Form 990 (and all other tax and legal filings as well). The due dates should be on the calendar of the board of directors. The board should see and review the Form 990 before it is signed and filed.
  • As soon as an organization realizes that it has missed a Form 990 filing deadline, it should prepare and file the Form 990 within 30 days if at all possible.
  • If there is no one in the organization with sufficient knowledge to prepare Form 990, hire a professional. In an attempt to avoid paying $800 to $1,500 to a professional tax return preparer, many organizations end up owing $10,000 or more in late filing penalties.
  • If you know the organization will not meet the initial filing deadline, file Form 8868 before the deadline passes to request a 3 month extension of time to file. Remember, the extension request is not valid if filed after the due date of the return.

Penalties for late filing of Form 990 are steep: $20 for each day the return is late for smaller organizations and $100 per day for larger organizations.  Even at $20 per day, you are looking at $600 per month. A return that is 6 months late can incur as much as $3,600 in late filing penalties at the lower rate.

While the IRS does tend to be more lenient with nonprofit organizations in certain situations, abatement of late filing penalties is far from certain. To make matters worse, the IRS is under a directive from Congress to be a lot tougher on non-compliant exempt organizations.

Late-Filing IRS Penalty Relief for Nonprofits

It happens to lots of nonprofit organizations for various reasons. But failing to file Form 990 on time doesn’t have to end with writing a large check to the IRS.

The filing requirements are clear; A nonprofit organization (with limited exceptions) MUST annually file either Form 990-N, Form 990-EZ, Form 990, or Form 990-PF. Which form it files depends largely on the level of gross receipts and total assets owned.

However, the IRS understands that nonprofits often rely on well-meaning but uninformed volunteers to manage the organization, keep the books and financial records, and perform tax-exempt functions. So it has historically offered a considerable amount of leniency and forbearance to nonprofit organizations that it does not offer to for-profits.

Officers, directors, managers, and professional advisers to non-profit organizations should not be shy about asking the IRS to abate penalties assessed for late filing of the Form 990 series when the organization generally has a good filing history, or if it is a newly formed organization, or has otherwise encountered circumstances beyond its control which resulted in the late filing of a return, even when multiple years may be involved.

While it does appear that the IRS may be taking a harder line on non-compliant nonprofits now than it has in the past, it is still likely that for two years or less of non-compliance, a nonprofit stands a very good chance of receiving abatement of late filing penalties if it can convince the IRS that it had reasonable cause for being late.

The IRS code and regulations as well as the IRS website and other published guidance has some helpful guidance on what it considers reasonable cause and what has to be shown to demonstrate that reasonable cause exists.

Writing a reasonable cause penalty abatement request letter to the IRS is not difficult. But in order to be successful you need to structure your argument properly, include all relevant facts and circumstances, and anticipate all the questions that the IRS might ask concerning why the organization was late.

Unless you are familiar with the code’s reasonable cause provisions, you should probably get some professional help.

Learn how to write a reasonable cause penalty abatement request for tax-exempt organizations that have been assessed late filing penalties for Form 990.

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