Taxation Law

Taxation Law

Section Blog

Automatic Revocation of Tax-Exempt Status for Thousands of Organizations Nationwide

by Caitlin M Cianflone , posted Thu, Jun 9, 2011 12:19 PM

            Yesterday, the IRS announced that approximately 275,000 organizations nationwide have lost their tax-exempt status due to failure to file annual reports for the past consecutive three years. A list of all the automatic revocations was released on the IRS website, and it will be updated regularly. Currently, 6,878 formally tax-exempt organizations in Massachusetts appear on that list. While many of these organizations are no longer in existence, the IRS is sending a very clear message to those that still are that tax-exempt status will be monitored more closely from now on.

            In 2006, Congress passed the Pension Protection Act (PPA), which requires most tax-exempt organizations to file an annual informational report or notice with the IRS. The law provides for automatic revocation of tax-exempt status for failure to file such reports for three consecutive years. Section 6033(j) of the Internal Revenue Code makes the automatic revocation effective as of the due date of the third required annual filing or notice without regard to any extension of time for filing. As soon as the organization’s tax-exempt status is revoked, it is no longer eligible to receive tax-deductible contributions under Code section 170. The list released by the IRS yesterday is intended to provide notice to these organizations and their interested donors.

            Once an organization’s tax-exempt status has been automatically revoked under Section 6033(j), it must file an application for reinstatement of exemption and pay an appropriate user fee, even if that organization was not originally required to apply for exempt status. The application for reinstatement is the same as the application for initial tax exemption, Form 1023 for organizations seeking tax-exempt status under Code section 501(c)(3), and Form 1024 for most other organizations. Because these applications take many months to be processed, organizations seeking reinstatement should write “automatically revoked” on the top of their applications.

Upon approval of the reinstatement application, the IRS will issue a new determination letter with its effective date being the date the reinstatement application was submitted to the IRS. However, in limited circumstances, the reinstatement of tax-exempt status may be retroactive to the date it was revoked. Such limited circumstances will be revealed in forthcoming regulations from the Department of Treasury. Notice 2011-44 provides some guidance for requesting retroactive reinstatement until final regulations are promulgated. Requests must include a written statement setting forth all the facts that support reasonable cause for failure to file the annual reports or notices for the three consecutive years individually and continuously, including a detailed description of the facts and circumstances that led to the failures, the determination of the failures, and the steps taken to prevent such failures in the future. Properly completed Forms 990, 990-EZ, or 990-PF must also be filed. In order to establish reasonable cause, an organization applying for retroactive reinstatement must provide evidence that it “exercised ordinary business care and prudence in determining and attempting to comply with its reporting requirements under section 6033…” A number of factors for finding reasonable cause are outlined in Notice 2011-44 as well. Comments regarding Notice 2011-44 and the forthcoming regulations should be submitted to the IRS by August 19, 2011.

The release of the list of automatic revocations yesterday marks the beginning of a new era in the exempt organizations world. Such organizations must comply with IRS laws and regulations or lose valuable contributions from donors seeking deductibility. The challenge for the IRS will be keeping up with all the forthcoming paperwork over the next several months.

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