United States: New Jersey State Bar Association Taxation Law Section - Tax-Exempt Organizations Subcommittee - Committee Meeting – January 28, 2016
Automatic Revocation And Reinstatement Of Tax-Exempt Status

I. Background

Most tax-exempt organizations other than churches and certain church-related organizations are required to file an annual information return or notice (Form 990, 990-EZ, 990-PF, or 990-N (e-Postcard)) with the Internal Revenue Service (the "IRS"). Organizations that do not file for three consecutive years automatically lose their tax-exempt status.

Pursuant to section 6033(j)(1) of the Internal Revenue Code of 1986, as amended (the "Code"), an exempt organization's failure to file the information return required by Code section 6033(a) (i.e., Form 990) for three consecutive years will result in the revocation of its tax-exempt status on and after the date that the IRS has set for filing the third annual return or submitting the third annual notice. Also pursuant to Code section 6033(j)(1), the same rule applies to a tax-exempt organization that fails to submit the notice required under Code section 6033(i) (i.e., Form 990-N) for three consecutive years.

A 2011 study by the Urban Institute's Center on Nonprofits and Philanthropy identified that following the enactment of the Pension Protection Act of 2006, which mandated that nonprofits with less than $25,000 in annual gross receipts file a new e-Postcard, and which also imposed certain mandatory revocation rules, over 275,000 nonprofits lost their tax-exempt status. Of these, 31 percent were human services organizations, 28 percent were public and societal benefit organizations, and 10 percent were arts organizations. Over 60 percent of organizations that were created before 1950 had their status revoked. However, organizations that had registered in the past 20 years accounted for over half of the total revocations. On average, 15 percent of organizations in each state were revoked, with the District of Columbia having 23 percent of its non-profits lose their tax-exempt status, the highest percentage in the country. Next was Utah with 20 percent. Iowa had the lowest percentage of revocations, at 9 percent.

II. List of Organizations

The IRS no longer publishes a discrete list of organizations whose tax-exempt status was automatically revoked because of failure to file a required annual information return or notice for three consecutive years

This list, formerly contained in IRS Publication 78, gave the name, employer identification number (EIN), organization type, last known address the organization provided to the IRS, effective date of revocation, and the date the organization was added to the list. For organizations that applied for and received reinstatement, the list gave the date of reinstatement. Presently, a list of exempt organizations, together with the automatic revocation list containing the aforementioned information, as well as the e-Postcard filing list, is contained in the Exempt Organizations Select Check combined database ("Select Check"). Select Check is updated monthly.

III. Consequences of Revocation

If an organization's tax-exempt status is automatically revoked, it is no longer exempt from federal income tax. Consequently, it may be required to file one of the following federal income tax returns and pay applicable income taxes: (1) Form 1120 - U.S. Corporation Income Tax Return, due by the 15th day of the 3rd month after the end of the organization's taxable year; or (2) Form 1041 - U.S. Income Tax Return for Estates and Trusts, due by the 15th day of the 4th month after the end of the organization's taxable year.

Failing to file the Forms 990 required under Code section 6033(a)(1) for three consecutive years may result in imposition of the monetary penalty under Code section 6652(c)(1) for failure to timely file. Small exempt organizations that are not required to file returns under Code section 6033(a)(1) but instead are required to submit the annual notice required under Code section 6033(i) are not subject to a monetary penalty for failure to submit the notice. Code section 6652(c)(1)(E).

In addition, if an organization fails to meet its obligations to the IRS for three consecutive years in cases where the organization is subject to the requirement to submit a notice under Code section 6033(i) in one or more years during a three-year period and is also subject to the information return requirement for one or more years during the same three-year period, the organization's tax-exempt status will be revoked. Joint Comm. Staff, Tech Expln of the Pension Protection Act of 2006 (JCX-38-06), 8/3/2006, p. 326.

The IRS is required to timely publicize any revocation penalties for failure to file the information return required by Code section 6033(a)(1) and to submit the Code section 6033(i) notice for three consecutive years. Section 1223(e)(2), P.L. 109-280, 8/17/2006. Incidentally, no such revocation penalty has to date been publicized by the IRS, and this provision is likely a consequence of Congress reacting to constituent citizen groups complaining that their organization lost its tax-exempt status, something that they never considered was a possibility.

The IRS is also required to timely inform organizations of the revocation of their tax-exempt status and their concomitant removal from Select Check.

Donors can deduct contributions made on dates before an organization's tax-exempt status appears as revoked on Select Check. State and local laws may also affect an organization that loses its tax-exempt status. For example, these organizations may not be entitled to exemptions from real property, sales, or other taxes, or they may be required to provide state authorities or the public with information concerning their changed federal tax status.

Finally, upon revocation of its tax-exempt status, an organization will become liable for all income, excise, or other taxes and penalties that may have been owed at the time it was automatically revoked. It will also be responsible for any future tax liabilities that accrue as a result of the organization's loss of tax-exempt status.

IV. Reinstating Tax-Exempt Status

The IRS does not provide an appeal process for those organizations whose tax-exempt status is automatically revoked because they did not file the required 990 series returns or notices for three consecutive years. Instead, these organizations must apply for reinstatement of their tax-exempt status, even if the organization was not originally required to file an application for exemption. Code section 6033(j)(2).

If the IRS determines that the organization meets the requirements for tax-exempt status, it will issue a new determination letter and reinstate the organization's tax-exempt status, generally effective from the date of revocation. Code section 6033(j)(3). The IRS will also include the reinstated organization in its next update of Select Check. Donors and others may rely upon the new IRS determination letter as of its stated effective date, and on the updated Select Check listing. See https://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check:-Timing-of-Database-Updates-for-Organizations-Whose-Exempt-Status-Is-Reinstated (last updated April 20, 2016).

V. Revenue Procedure 2014-11

On January 2, 2014, the IRS issued an advance copy of Revenue Procedure 2014-11, 2014-3 I.R.B. 411. In it, the IRS explains the processes that various types of tax-exempt organizations whose status has been automatically revoked for failure to file required annual returns or notices for 3 consecutive years may use to apply for reinstatement. Completing the applicable process, which includes filing a new Form 1023 or Form 1024, results in reinstatement of tax-exempt status, retroactive to the revocation date. Note that pursuant to the subsequently issued Revenue Procedure 2014-40, 2014-30 I.R.B. 229, the IRS made clear that applications for retroactive reinstatement may be submitted on Form 1023 or, by eligible organizations, on Form 1023-EZ. References below to Form 1023 also encompass Form 1023-EZ, as may be applicable to the described organization.

(a) Small First Offenders

Revenue Procedure 2014-11 allows certain organizations to regain their tax-exempt status as of the date of revocation under a simplified process called the Streamlined Retroactive Reinstatement Process. Organizations eligible to use this simplified process are those (1) that were eligible to file either Form 990-EZ or Form 990-N for each of the three consecutive years they failed to file; (2) that apply for retroactive reinstatement on Form 1023 or Form 1024 within 15 months of the date of revocation (the later of the day the organization received a letter notifying them of the revocation from the IRS, or the date that the organization appeared on Select Check); and (3) that have had their tax-exempt status revoked for the first time.

An organization eligible for this Streamlined Retroactive Reinstatement Process is not required to file a prior year Form 990-EZ or Form 990-N for any year in which the organization was eligible to file such forms. It must simply re-submit a Form 1023 or submit a Form 1024, if applicable, with the phrase "Revenue Procedure 2014-11, Streamlined Retroactive Reinstatement" written at the top, and mail the application and the $850 user fee (subject to certain exceptions) to:

Internal Revenue Service
P.O. Box 12192
Covington, KY 41012-0192

If the organization's application is approved, the organization will be deemed to have reasonable cause for its failures to file Forms 990-EZ or 990-N, as applicable, for three consecutive years and it will be reinstated retroactively to the revocation date (i.e., the date set for the filing of the third annual return or notice). This rule applies to applications submitted before the date that the IRS revises the Form 1023 and Form 1024 to permit organizations that otherwise qualify for retroactive reinstatement in this category to demonstrate reasonable cause by attesting that the organization's failure to file was not intentional and that it has put in place procedures to file in the future. After such date, reasonable cause may be demonstrated through that attestation.

The IRS will not impose the Code section 6652(c) penalty for failure to file annual returns for the three consecutive taxable years that caused the organization to be revoked if the organization is retroactively reinstated and files proper paper Forms 990-EZ for all such taxable years under this section 4 of Revenue Procedure 2014-11. For any year for which the 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 to avoid penalties. The organization should write "Retroactive Reinstatement" on the Forms 990-EZ and mail them to:

Department of the Treasury
Internal Revenue Service
Ogden, UT 84201-0027

(b) Large, Timely Offenders

Organizations that cannot use the Streamlined Retroactive Reinstatement Process (such as those that were required to file Form 990 or Form 990-PF for any of the three years that caused revocation or those that were previously auto-revoked) may have their tax-exempt status retroactively reinstated to the date of revocation if they (1) apply on Form 1023 or Form 1024 for retroactive reinstatement with the appropriate user fee no later than 15 months after the later of the date on the organization's revocation letter (CP-120A) or the date the organization appeared on Select Check; (2) include with the application a statement establishing that the organization had reasonable cause for its failure to file a required annual return for at least one of the three consecutive years in which it failed to file; (3) include with the application a statement confirming that it has filed required returns for those three years and for any other taxable years after such period and before the post-mark date of the application for which required returns were due and not filed; and (4) file properly completed and executed paper annual returns for the three consecutive years that caused the revocation and any following years. The organization should write "Retroactive Reinstatement" on these returns and mail them to:

Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201-0027

These organizations should write on the top of the Form 1023 or Form 1024, "Revenue Procedure 2014-11, Retroactive Reinstatement," and mail the application and $850 user fee (subject to certain exceptions) to:

Internal Revenue Service
P.O. Box 12192
Covington, KY 41012-0192

In addition, the Service will not impose the Code section 6652(c) penalty for failure to file annual returns for the three consecutive taxable years that caused the organization to be revoked if the organization is retroactively reinstated under this section 5 of Revenue Procedure 2014-11.

(c) All Other Offenders

Organizations that apply for reinstatement more than 15 months after the later of the date on the organization's revocation letter (CP-120A) or the date the organization appeared on the Revocation List on the IRS website may have their tax-exempt status retroactively reinstated to the date of revocation if they satisfy all of the requirements described under the Large, Timely Offenders section, above, except that the reasonable cause statement the organization includes with its application must establish reasonable cause for its failure to file a required annual return for all three consecutive years in which it failed to file.

In addition, the IRS will not impose the Code section 6652(c) penalty for failure to file annual returns for the three consecutive taxable years that caused the organization to be revoked if the organization is retroactively reinstated under this section 6 of Revenue Procedure 2014-11.

(d) Post-Mark Date Reinstatement

An organization may apply for reinstatement of its tax-exempt status effective from the "Post-Mark Date" (i.e., a reinstatement as of the date the organization filed for reinstatement of its tax-exempt status) by completing the requisite application form (e.g., Form 1023) and including the appropriate user fee with that application form. To facilitate processing, the organization should write "Revenue Procedure 2014-11, Reinstatement Post-Mark Date" on the top of the application form and mail it to the address specified in the instructions to that application form. Importantly, the IRS does not state that it will waive the Code section 6652(c) penalty for failure to file annual returns for the three consecutive taxable years that caused the organization to be revoked for those organizations requesting a Post-Mark Date Reinstatement under this section 7 of Revenue Procedure 2014-11.

(e) Transition Relief

Revenue Procedure 2014-11 is effective for applications submitted after January 2, 2014. To the extent that the rules in Revenue Procedure 2014-11 benefit an organization's ability to have its tax-exempt status reinstated, the IRS will apply Revenue Procedure 2014-11 to pending applications.

An organization that applied for and received a reinstatement effective from the Post-Mark Date prior to the effective date of Revenue Procedure 2014-11, and that would have satisfied the Streamlined Retroactive Reinstatement Process requirements (described in Part V (a), supra), will be reinstated effective from the revocation date. Such an organization needs to keep its reinstatement determination letter together with a copy of Revenue Procedure 2014-11 in its books and records.

(f) Establishing Reasonable Cause

A reasonable cause statement establishes that an organization exercised ordinary business care and prudence in determining and attempting to comply with its annual reporting requirement. The statement should have a detailed description of all the facts and circumstances about why the organization failed to file, how it discovered the failure, and the steps it has taken or will take to avoid or mitigate future failures.

Revenue Procedure 2014-11 identifies four factors that weigh in favor of finding reasonable cause (with no single factor being either necessary or determinative): (1) the failure was due to reasonable, good faith reliance on erroneous written information from the IRS; (2) the failure arose from events beyond the organization's control that made filing impossible; (3) the organization undertook significant steps to avoid or mitigate the failure to file; and (4) the organization has an established history of complying with Code section 6033 and other applicable requirements.

The reasonable cause statement must include an original declaration, dated and signed under penalties of perjury by an officer, director, trustee, or other authorized official, in the following form:

(g) Subsequent Revocation

An organization can be automatically revoked again if it fails to file required returns for three consecutive years beginning with the year in which the IRS approves the application for reinstatement. Organizations seeking reinstatement of tax-exempt status after a subsequent revocation are not eligible to use the Streamlined Retroactive Reinstatement Process.

Len Sprishen, Tax Manager – Counsel at MSPC in Cranford, New Jersey, where he advises on a wide range of federal, international, and state and local tax issues. www.mspc-cpa.com

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