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.

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