IRS Introduces Streamlined Approach to Reinstating Exemption for Automatically Revoked Organizations

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By Michele A.W.McKinnon, Esq.MiltonCerny, Esq.Kelly L.Hellmuth,
Esq.Justin F.Trent, Esq.Keonna D.Carter, Esq.

McGuireWoods LLP, Richmond, VA

The Pension Protection Act of 2006 (the Act) added an annual
filing requirement for tax-exempt organizations that previously did
not have to file an annual information return because their gross
receipts were below a certain level. The Act also added a provision
that any tax-exempt organization that fails to file its required
annual return for three consecutive years automatically loses its
exempt status. These changes were effective for taxable years
beginning after 2006.

In Notice 2011-44, the IRS provided guidance for organizations
that lost their tax-exempt status for failure to make the required
annual filings and wanted to apply for reinstatement.  An
organization that wanted to have its exemption be reinstated
retroactively to the date of revocation was required to include a
statement of facts and circumstances indicating reasonable cause
for failing to file the required returns for each of the three
consecutive years and safeguards were now in place to ensure that
the organization would not fail to file in the future. The
organization also had to submit properly completed returns for the
taxable years that the organization failed to file in and after the
three-year period. The request for retroactive reinstatement had to
be submitted to the IRS within 15 months of the date on which the
IRS posted the name of the organization on the automatic revocation
list.

In Notice 2011-43, the IRS also provided transitional relief for
small organizations that lost their exemption for failure to file
the Form 990-N for 2007, 2008, and 2009. Small organizations that
met those requirements for transitional relief would be deemed to
have reasonable cause for their failure to file and would have
their exemptions reinstated retroactive to the date of
revocation.  This transitional relief ended on Dec. 31,
2012.

On Jan. 2, 2014, the IRS issued Rev. Proc. 2014-11 to make the
reinstatement process more efficient for revoked organizations,
including those applying for retroactive reinstatement.

Under the new procedures, any organization that was eligible to
file either the Form 990-N or the Form 990-EZ for each of the three
consecutive years that it failed to file, and that has not had its
tax-exempt status previously revoked, may have its tax-exempt
status reinstated retroactively if it submits its application (with
the appropriate user fee) no more than 15 months after receiving a
revocation letter from the IRS or the posting of its name to the
IRS automatic revocation list, and files paper Form 990-EZ for any
of the three consecutive years that it was not eligible to file
Form 990-N. If its application is approved, the organization is
deemed to have reasonable cause for failure to file, and the
reinstatement will be retroactive to the date of revocation.

If an organization is not eligible for the relief given to small
organizations described above, the organization can have its
tax-exempt status retroactively reinstated if it:

  •  
    submits its application (with the appropriate user fee) no more
    than 15 months after receiving a revocation letter from the IRS or
    the posting of its name to the IRS automatic revocation list;
  •  
    files paper annual returns for all of the three consecutive years
    and any taxable years after such period but before the postmark
    date of the application for which returns were due and not filed;
    and
  •  
    can show reasonable cause for failure to file for at least one of
    the three consecutive years in which it failed to file.

An organization that applies for retroactive reinstatement more
than 15 months after receiving a revocation letter from the IRS or
the posting of its name to the IRS automatic revocation list must
be able to show reasonable cause for all three of the consecutive
years that it failed to file. If any organization cannot meet any
of the above tests for retroactive reinstatement, it can apply for
reinstatement of its tax-exempt status, but the reinstatement will
be effective only as of the postmark date of the application.

For any organization that has an application for retroactive
reinstatement that is currently pending before the IRS, the IRS
will apply the provisions of Rev. Proc. 2014-11 if it benefits the
organization. If any organization already applied for and received
reinstatement based on the postmark date on its application and the
organization would have met the streamlined criteria for small
organizations, the effective date of the reinstatement will be
changed to the revocation date. If any organization would have met
one of the other two tests for retroactive reinstatement, the
organization may re-apply by re-submitting its application (but is
not required to pay a second user fee) and complying with the other
requirements on or before May 2, 2014.

These new procedures create an easier process for organizations
to obtain reinstatement of their tax-exempt status (and also will
help the IRS reduce its backlog of reinstatement applications). Any
organization that has had its exemption revoked for failure to file
annual returns should be aware of these new procedures, including
organizations that have already started or completed the
reinstatement process.

For more information, in the Tax Management Portfolios, see
Webster, 452 T.M.
, Tax-Exempt Organizations: Reporting,
Disclosure and Other Procedural Aspects,  and in Tax
Practice Series, see ¶7010, Procedural Aspects of Obtaining and
Maintaining Exemption.

© 2014 McGuireWoods LLP