Tax & Business Insights

Help For Former Tax-Exempts

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.

In addition, if the application is accepted, the IRS will not impose a non-filing penalty with respect to 990-EZs. There is no financial penalty for not filing Form 990-N.

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.

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