Volume 26 Issue 2 --March/April 2014
Since 2006, when Congress amended IRC § 6033 to provide that tax
exempt entities that fail to file required annual returns for 3
consecutive years have their tax exempt status automatically revoked,
thousands of tax exempts (TEs) have received notices from the IRS on
Form CP120A indicating that their tax exempt status was automatically
revoked effective on the due date for the third unfiled annual return.
Each month the IRS publishes a list of all TEs
that have had their status revoked. A recent copy of this database
indicates that more than 54,000 TEs have had their exemption status
revoked! Clearly this is not an isolated problem.
These revocations started in 2010, 3 years
after the due dates for the first returns due after the 2006 law went
into effect and
have continued through 2013.
The 2006 law provided that it was necessary to
file an application for reinstatement regardless of whether an
application for tax exempt status originally was necessary. In
addition, it provided that reinstatement of TE status would be
retroactive to the date of revocation only if reasonable cause for not
filing was shown.
In 2011, the IRS published transitional relief
for certain small TEs that were previously not required to file annual
returns and separately published a Notice setting out the requirements
for reinstatement. Generally
this required completing a new application for tax exempt status (Form
1023 or 1024, as applicable) and paying a user fee.
By default, reinstatement was not retroactive. Separate
“reasonable cause” statements were necessary for the IRS to consider
retroactive reinstatement. The Notice also indicated that the IRS
intended to issue regulations on this subject, but to date no
regulations have appeared.
Early this year, however, the IRS issued a
Revenue Procedure that affords some measure of relief to TEs that have
been automatically revoked. Depending upon the annual return that a TE
is required to file, there are slightly different sets of streamlined
reinstatement procedures.
Both procedures require filing of a new
application for tax exemption, either Form 1023 for 501(c)(3)
organizations or Form 1024 for other TEs.
For TEs eligible to file either Form 990-EZ or
990-N (which are generally smaller TEs) the TE must submit its
application and pay a user fee. If this is submitted within 15 months after the later of the
date of the revocation notice or the date on which the IRS posted the
TE's name on its revocation list, then reasonable cause will be
presumed and the reinstatement, if accepted, will automatically be
retroactive.
For TEs that are required to file other forms,
such as Form 990 or Form 990-PF (private foundations), there are
additional requirements to obtain retroactive reinstatement. Such TEs must also submit
a reasonable cause statement (which is outlined in the Revenue
Procedure) and a statement affirming that all omitted
returns have been filed before the date of the application for
reinstatement. Again, if the application is accepted, failure-to-file
penalties will be waived.
Particularly for larger TEs or TEs required to
file Form 990 or
990-PF, filing the application for reinstatement within the 15-month
window described above is advantageous. If the application is filed within 15 months, then reasonable
cause for non-filing must be established for only one of the three
years in which returns were not filed.
If the application is not submitted within 15
months, then reasonable cause for non-filing must be established for all three of the years in which
returns were not filed. This is a significant difference!
The Revenue Procedure makes clear that to
establish “reasonable cause” for not filing, the TE must submit a detailed
statement showing “that it exercised ordinary business care and
prudence in determining and attempting to comply with its reporting
requirements under” IRC § 6033. The Procedure identifies
a number of factors that might weigh in favor of a finding of
reasonable cause, including a failure that “arose from events beyond
the organization's control.”
For many of the thousands of TEs affected by
automatic revocation of their tax exempt status, the Revenue Procedure
provides a useful and fairly
straightforward set of rules for seeking reinstatement, particularly
within 15 months of revocation.
If you have questions about this subject please call the Tax & Business Professionals.
While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.
Redistribution or other commercial use of the material contained in Tax & Business Insights is expressly prohibited without the written permission of Tax and Business Professionals, Inc.
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