Tax-Exemption Been Revoked?
Why is this happening?
Internal Revenue Code Section 6033 was amended in 2006 to provide for the ultimate penalty for not filing returns: revocation of tax-exempt status.
How do we know if we have lost our tax-exempt status?
The IRS does not make a determination that an organization’s tax-exempt status should be revoked. It happens “automatically” by operation of law when an organization fails to file its required Form 990-N, Form 990-EZ, Form 990 or Form 990-PF for at least three consecutive years, beginning with tax years that start in 2007. If the IRS has your organization’s correct mailing address, it will send a notice informing you of the revocation, the date it was effective, and will probably tell you what your options are. The IRS is publishing on its website a list of organizations whose tax-exempt status has been revoked for non-filing (updated monthly). The IRS cannot “un-revoke” an organizations exempt status, but it can grant exempt status again upon submission of Form 1023 or Form 1024, whichever is appropriate.
Examples to illustrate:
Example #1: An organization did not file its 2006, 2007, or 2008 returns by the due dates. However, it filed the 2009 return on time. Because the new law does not affect 2006 returns, the organization will not lose its exempt status. It will however be subject to late filing penalties for ’06, ’07, and ’08 unless it can demonstrate reasonable cause (note: late filing penalties do not apply to Form 990-N).
Example #2: An organization did not file its 2007 or 2008 return on time, but filed its 2009 return on time. The organization is late filing its 2010 return. This organization is not subject to losing its exempt status. Although it was late filing for three years, the late returns were not consecutive since the 2009 return was on time. However, late filing penalties will apply to Form 990 / 990-EZ.
Example #3: An organization did not file its 2007, 2008 or 2009 returns on time. It has automatically lost its tax-exempt status by operation of law and will have to re-apply by filing Form 1023 or Form 1024.
Example #4: An organization did not file its 2008, 2009, or 2010 returns on time. It has automatically lost its tax-exempt status as of the due date of the 2010 return and will have to re-apply for tax-exempt status by filing Form 1023 or Form 1024.
Question: Will the third consecutive return be considered late even if we have properly extended the due date with Form 8868. Answer: No. The extensions are valid if filed on or before the due date of the return. However, not all of the employees at the IRS understand this. For more information on this, read my article on extending the third year return by clicking this link.
What do we do if we’ve received notice that our exempt status has been revoked?
Well, first thing is to make sure the IRS didn’t make a mistake. They tend to make a lot of mistakes. If you know that you did not file returns late for three consecutive years, you’ll need to gather proof of timely filing. This generally means that you will need a date-stamped certified mail receipt (a regular postmark won’t be sufficient) for a Form 990 or 990-EZ. If your CPA filed the return electronically, he or she will have proof of the date the return was filed. If your return was under an extended due date because the organization filed Form 8868, you will need to prove that extensions were filed on time. Note: there was and is no extension available for Form 990-N.
If you believe your Form 990-N was filed on time, the IRS has issued guidance on how you can prove it. However, the IRS seems to indicate by its instructions that your organization must prove that it filed on time before the October 15, 2010 deadline. In other words, if you did not know before October 15, 2010 that you were on the IRS list of organizations whose exempt status was in danger, and if you did not prove timely filing before that date, it is now too late to follow published IRS guidelines and your exempt status has quite possibly been revoked. No doubt the IRS will revoke many organizations’ exempt status in error and it has not issued guidance that will cover all circumstances. If in doubt, call the IRS Customer Account Services for exempt organizations (1-877-829-5500) and explain your situation to them. Additional guidance is likely to be issued in the near future. Remember, this situation is not only new to you, it is new to the folks at the IRS too, and they are still trying to work out the bugs.
If you are an organization that was not required to file (a church, for instance), you’ll need to make the IRS aware of that fact. If your organization has a determination letter from the IRS, the letter will indicate whether or not your organization is exempt from filing Form 990 (if the letter is correct). A phone call should be sufficient to clear up this type of situation.
How do we get our exempt status back?
Your organization will need to file Form 1023 if it is applying for recognition of tax-exempt status as a publicly supported charity under IRC section 501(c)(3). This type of organization is eligible to receive donations that are deductible as charitable contributions on the donor’s tax return.
Your organization will need to file Form 1024 if it is applying for recognition of tax-exempt status under other subsections of IRC section 501(c). For instance a 501(c)(4) social welfare organization; a 501(c)(6) business league; a 501(c)(7) social club, etc. would file Form 1024.
Normally, if the IRS approves your application, it will send you a “determination letter” recognizing your tax-exempt status effective as of the date of your application. This will leave a period of time between date-of-revocation and date-of-reinstatement during which your organization may be treated as a taxable corporation. To avoid this, you may be able to have your exempt status reinstated retroactively to date-of-revocation (see below).
Retroactive Reinstatement Procedures
On January 2, 2014 the IRS issued Revenue Procedure 2014-11 to clarify the reinstatement procedures. It also offers a streamlined procedure (which does not require a “reasonable cause” explanation) for small organizations that qualified to file Form 990-N or Form 990-EZ. And, it offers transitional provisions through May 2, 2014 for organizations that previously applied for retroactive reinstatement but were denied.
If you are trying to get retroactive reinstatement you should read Revenue Procedure 2014-11 in its entirety. If you need to establish that you had reasonable cause for filing late, my Penalty Abatement Manual will be a big help to you.
What if the IRS Refuses Our Request for Retroactive Reinstatement?
If your organization does not receive retroactive reinstatement of tax-exempt status, it MAY have to file a regular corporate tax return (Form 1120) for the time period that it was not tax-exempt. Some of the organization’s income may be taxable during that period. However, income received as a gift (contribution / donation) is not included in gross income and should not be taxable (IRC section 102):
§ 102. Gifts and inheritances: (a) General rule — Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.
It is not currently known how aggressively the IRS will pursue a demand for corporate tax returns for years when an organization’s exempt status was revoked.