IRS Issues Guidance on Reinstating Tax Exempt Status for Organizations that Lost Exemption for Failure to File Returns for Three Years

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By Deborah M. Beers  

Buchanan Ingersoll & Rooney PC, Washington, DC

Background  

Section 6033(a)(1) requires an organization exempt from taxation
under §501(a) or a nonexempt charitable trust treated as a private
foundation to file an annual return (generally Form 990 or 990-PF).
Most small organizations (other than private foundations or
§509(a)(3) supporting organizations) whose annual gross receipts
are normally not more than $50,0001 are not required
to file an annual return, but are required to file an annual
notice, Form 990-N (e-postcard), instead.2 An organization
may file Form 990-EZ (short form return) if the organization has
gross receipts of less than $200,000 and total assets of less than
$500,000 at the end of the taxable year.

Section 6033(j), effective for taxable years beginning after
2006, was added to the Code by the Pension Protection Act of 2006,
("PPA").3 Section
6033(j)(1) and §6033(i) automatically revoke the tax-exempt status
of an organization exempt from tax under §501(a) that fails to file
a required annual return or notice for three consecutive years.
Revocation is effective on and after the date set by the Secretary
for the filing of the third annual return or notice. Organizations
generally receive notice of revocation either by publication on the
IRS's website of its list of automatic revocations,4 or by
a letter sent to the entity's last known address.

Organizations whose exempt status has been revoked must re-apply
for exemption in order to have their exempt status reinstated,
regardless of whether the organization was originally required to
make such an application.5 If the
application is approved, the effective date of the organization's
reinstated tax-exempt status generally will be the "Post-Mark Date"
(the date that the application for reinstatement was mailed).
However, if, upon application for reinstatement, an organization
"can show to the satisfaction of the Secretary evidence of
reasonable cause for the failure … [to file] the organization's
exempt status may, in the discretion of the Secretary, be
reinstated [retroactively] effective from the date of the
revocation."6

Applications for reinstatement have been reported to have
greatly increased the workload of the EO Determinations Unit in
recent years, resulting in unprecedented backlogs in processing all
types of exemption applications.

Discussion  

Rev. Proc. 2014-11 provides procedures for reinstating the
tax-exempt status of organizations that have had their tax-exempt
status automatically revoked for failure to file required annual
returns or notices for three consecutive years under four alternate
scenarios, as follows:

Streamlined Retroactive Reinstatement
Process.
 An organization (described above) that
was eligible to file either Form 990-EZ or Form 990-N for each of
the three consecutive years that it failed to file, and that has
not previously had its tax-exempt status automatically revoked may
use the process described in Section 4of the revenue procedure to
apply for streamlined retroactive reinstatement of its tax-exempt
status if it applies not later than 15 months after the later of
the date of the Revocation Letter or the date on which the IRS
posted the organization's name on the Revocation List. Under
Section 4 of the revenue procedure, submitting the exemption
application and the user fee will establish reasonable cause for
the filing failure and negate any penalties for such failure.
However, for any organization that was required, but failed, to
file Form 990-EZ for three consecutive taxable years, such
organization that is retroactively reinstated under Section 4 must
file properly completed and executed paper Forms 990-EZ for all
such taxable years. For any year for which an organization was
eligible to file a Form 990-N, the organization is not required to
file a prior year Form 990-N or Form 990-EZ for such year.

Retroactive Reinstatement Process (Within 15 Months
of Revocation)
. An organization that is not eligible
to use the streamlined process may use the process described in
Section 5 of the revenue procedure to apply for retroactive
reinstatement of its tax-exempt status if it applies not later than
15 months after the later of the date of the Revocation Letter or
the date on which the IRS posted the organization's name on the
Revocation List. In addition to submitting the exemption
application and user fee, an organization applying for retroactive
reinstatement under Section 5 must include with the application a
"reasonable cause" statement applicable to at least
one
 of the years during the three-year period that it
failed to file annual returns, and a statement confirming that it
has filed properly completed and executed paper annual returns for
all taxable years in the consecutive three-year period for which it
failed to file such returns.

Retroactive Reinstatement Process(After 15 Months of
Revocation).
 If it has been more than 15 months
from the later of the date of the Revocation Letter or the date on
which the IRS posted the organization's name on the Revocation
List, an organization may apply for retroactive reinstatement of
its tax-exempt status only under the process described in Section 6
of the revenue procedure. The process described in Section 6 is
identical to that described in Section 5, except that reasonable
cause must be demonstrated for all three years in the
filing period.

Post-Mark Date Process . An
organization may apply for reinstatement of its tax-exempt status
effective from the Post-Mark Date at any time, regardless of
whether it is eligible to use the procedures outlined in Sections
4, 5 or 6 by submitting the appropriate application and user fee.
Reinstatement in this case will not be retroactive, but will be
effective from the Post Mark Date of the application.

Reasonable Cause  

To establish reasonable cause, an organization must establish
that it "exercised ordinary business care and prudence in
determining and attempting to comply with its reporting
requirements under section 6033." In determining whether the
organization establishes reasonable cause, the IRS will take into
account all pertinent facts and circumstances.

Facts and circumstances that would weigh in favor of finding
reasonable cause (with no single factor being either necessary or
determinative) include:

 

(1) The organization's failure was due to its reasonable, good
faith reliance on erroneous written information from the IRS,
stating that the organization was not required to file a return or
notice under section 6033, provided the IRS was made aware of all
relevant facts;

(2) The failure to file the return or notice arose from events
beyond the organization's control ("impediment") that made it
impossible for the organization to file a return or notice for the
year;

(3) The organization acted in a responsible manner by
undertaking significant steps to avoid or mitigate the failure to
file the required return or notice and to prevent similar failures
in the future; and

(4) The organization has an established history of complying
with its reporting requirements (if any) under section 6033 and/or
any other applicable reporting or other requirements under the
Code.

 

The Reasonable Cause Statement must also include an original
declaration, dated and signed under penalties of perjury by an
officer, director, trustee, or other official who is authorized to
sign for the organization in the form prescribed in the ruling.

Previous Reinstatements  

1. An organization that applied for and received reinstatement
of its tax-exempt status effective from the Post-Mark Date prior to
the effective date (generally January 2, 2014, subject to
transitional relief for pending applications) of the revenue
procedure, and that would have satisfied the streamlined
retroactive reinstatement requirements of Section 4, will be
reinstated effective from the Revocation Date.

2. An organization that applied for and received reinstatement
of its exempt status effective from the Post-Mark Date prior to the
effective date of this revenue procedure, and that would have
satisfied the retroactive reinstatement requirements of Section 5
or 6 of the revenue procedure, may reapply by submitting a copy of
the Application it previously filed to receive reinstatement and
complying with the other requirements of the applicable section of
the revenue procedure on or before May 2, 2014, except that the
user fee is waived. In addition, the organization should include
with its copy of its previous Application a copy of its
determination letter reinstating its tax-exempt status.

Both of these options will require additional action on the part
of a previously reinstated entity that wishes its reinstatement to
be retroactive.

Conclusion  

Rev. Proc. 2014-11 supersedes Notice 2011-44,7 which
provided a somewhat more cumbersome procedure for reinstating
automatic revocations of exemption. Since the enactment of the PPA
automatic revocation statute, thousands of organizations, many of
them small, have been caught up in 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, Washlick, 873
T.M.
, Nonprofit Healthcare Organizations: Federal Income Tax
Issues,  and in Tax Practice Series, see ¶7010, Procedural
Aspects of Obtaining and Maintaining Exemption.

 

  1 $25,000 for taxable years beginning before Jan.
1, 2010. 

  2 See §6033(a)(3) and §6033(i); Rev.
Proc. 2011-15, 2011-3 I.R.B. 322. 

  3 P.L. 109-280, 120 Stat. 780, §1223
(2006). 

  4 The "Revocation List" is updated monthly.
See
http://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check

  5 §6033(j)(2). 

  6 §6033(j)(3). 

  7 2011-25 I.R.B. 883.