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Friday, October 12, 2012

Our Exempt Status Has Been Revoked – Now, What Do We Do?

Posted by Armanino Nonprofit Team

Under the Pension Protection Act of 2006, if a tax-exempt organization fails to file a return (990. 990-EZ or 990N) for three consecutive years, the organization’s tax exemption is automatically revoked as of the due date for the third return.  The automatic revocation rule is prospective only and does not affect an organization’s tax-exempt status for prior years.
Following the date of automatic revocation, the organization will no longer be exempt from federal income tax and will no longer be eligible to receive tax-deductible charitable contributions. However, donors  who are unaware of a change in an organization’s status,  may continue to take a deduction for their contributions until the IRS publishes an announcement that contributions to the organization are no longer deductible.

Revocation of exemption is a harsh penalty, particularly when many of the revocations are erroneous.  Due to an apparent lack of the ability to distinguish between those Organizations that haven’t filed because they are not required to file and those organizations that haven’t filed but should have, the IRS is revoking the status of all non-filers.  Because of this, it would be a good idea for all organizations that are not required to file, to verify that with the IRS BEFORE the organization’s status is revoked.  Of course, those organizations that are required to file should do so immediately.
Reinstatement of Exemption
Once an organization’s exemption is revoked, an organization must apply for reinstatement of its tax-exempt status “regardless of whether such organization was originally required to make such an application.” If the organization wishes to make the reinstatement retroactive to the date its tax exemption was revoked, it must show reasonable cause for failing to file an annual return or notice for three consecutive years.

Notice 2011-44
In Notice 2011-44, an organization may apply for reinstatement by filing the same form as an organization applying for initial recognition of exemption.  A public charity should file Form 1023 and most other organizations should file Form 1024 to seek reinstatement, even if the organization was not required initially to file Form 1023 or Form 1024 to become tax exempt. An organization applying for reinstatement must also pay the applicable user fee for filing such forms. If the organization does not wish to request that its reinstatement be made retroactive to the date of revocation, it does not need to file Forms 990 for the three years for which it failed to file.
An organization must provide additional information demonstrating that it had reasonable cause for failing to file. Notice 2011-44 provides that to show reasonable cause, an organization must provide the IRS with all of the following:
(1.) A written statement showing reasonable cause for failing to file, including “all the facts and circumstances that led to each failure [to file] and the continuous failure, the discovery of the failures, and the steps taken to avoid or mitigate the failures.”
(2.) A written explanation of the safeguards the organization has put into place to prevent such failures from happening again.
(3.) Supporting evidence showing that the organization “exercised ordinary business care and prudence in determining and attempting to comply with its reporting requirements under section 6033.” 32
(4.) Properly completed Forms 990, 990-EZ, or 990-PF, as applicable, for the years during and after the three-year period for which the organization failed to file.
(5.) A declaration under penalties of perjury that the application for retroactive reinstatement is accurate.
Notice 2011-44 provides that any one or more of the following factors will support a finding that the organization had reasonable cause for failing to file:
(1.) The organization in good faith relied on an incorrect written communication from the IRS stating that the organization did not need to file annual returns.
(2.) The failures to file arose from circumstances “beyond the organization’s control.” 33
(3.) The organization acted responsibly to prevent or correct a failure to file.
(4.) Other than the three consecutive years for which the organization failed to file, the organization has a history of making all of the filings required of it under the Code.
The IRS will consider a request for a retroactive reinstatement only if the application is filed no later than 15 months of the later of (1) the date of its revocation letter from the IRS or (2) the date that the organization’s name is posted on the IRS Web site on the list of revoked organizations.

Notice 2011-43, Opportunity for Small Organizations Expiring December 31, 2012
In addition to Notice 2011-44, the IRS issued Notice 2011-43 to provide transitional relief for certain small organizations. Under Notice 2011-43, 2011-25 IRB 882, an organization is presumed to have reasonable cause for failing to file if it meets all of the following tests:
(1.) It was not required to file annual returns prior to 2007.
(2.) It would have been eligible to file a Form 990-N for 2007, 2008, and 2009 because its gross receipts were normally not more than $25,000. 35
(3.) The organization files an application for reinstatement before the end of 2012.
Notice 2011-43 also provides that the user fee for such small organizations to file for reinstatement is $100.   Unfortunately, this transitional relief is only available through December 31, 2012.

In Notice 2011-44, 2011-25 IRB 883, the IRS set forth temporary rules that will apply to reinstatement until the IRS issues regulations under Section 6033(j). Under Notice 2011-44, an organization may apply for reinstatement by filing the same form as an organization applying for initial recognition of exemption. Thus, a charity should file Form 1023 and most other organizations should file Form 1024 to seek reinstatement, even if the organization was not required initially to file Form 1023 or Form 1024 to become tax exempt. An organization applying for reinstatement must also pay the applicable user fee for filing such forms. If the organization does not wish to request that its reinstatement be made retroactive to the date of revocation, it does not need to file Forms 990 for the three years for which it failed to file.

To obtain a retroactive reinstatement, the organization must provide additional information demonstrating that it had reasonable cause for failing to file. Notice 2011-44 provides that [pg. 39] to show reasonable cause, an organization must provide the IRS with all of the following:

(1.) A written statement showing reasonable cause for failing to file, including “all the facts and circumstances that led to each failure [to file] and the continuous failure, the discovery of the failures, and the steps taken to avoid or mitigate the failures.” 31
(2.) A written explanation of the safeguards the organization has put into place to prevent such failures from happening again.
(3.) Supporting evidence showing that the organization “exercised ordinary business care and prudence in determining and attempting to comply with its reporting requirements under section 6033.” 32
(4.) Properly completed Forms 990, 990-EZ, or 990-PF, as applicable, for the years during and after the three-year period for which the organization failed to file. If the organization was eligible but failed to file a Form 990-N e-Postcard for a tax year during or after the three-year period, the organization should file a Form 990-EZ for that year.
(5.) A declaration under penalties of perjury that the application for retroactive reinstatement is accurate.
Notice 2011-44 provides that the presence of any one or more of the following factors will weigh in favor of finding that an organization had reasonable cause for failing to file:

(1.) The organization in good faith relied on an incorrect written communication from the IRS stating that the organization did not need to file annual returns.
(2.) The failures to file arose from circumstances “beyond the organization’s control.” 33
(3.) The organization acted responsibly to prevent or correct a failure to file.
(4.) Other than the three consecutive years for which the organization failed to file, the organization has a history of making all of the filings required of it under the Code.
The IRS will consider a request for a retroactive reinstatement only if the application is filed no later than 15 months of the later of (1) the date of its revocation letter from the IRS or (2) the date that the organization’s name is posted on the IRS Web site on the list of revoked organizations. 34

Notice 2011-43
In addition to Notice 2011-44, the IRS issued Notice 2011-43 to provide transitional relief for certain small organizations. Under Notice 2011-43, 2011-25 IRB 882, an organization is presumed to have reasonable cause for failing to file if it meets all of the following tests:

(1.) It was not required to file annual returns prior to 2007.
(2.) It would have been eligible to file a Form 990-N for 2007, 2008, and 2009 because its gross receipts were normally not more than $25,000. 35
(3.) The organization files an application for reinstatement before the end of 2012.
Notice 2011-43 also provides that the user fee for such small organizations to file for reinstatement is $100.

One of the key points to note about the transitional relief under Notice 2011-43 is the deadline for filing—12/31/12. Thus, small organizations have only until the end of this year to take advantage of these special, more lenient rules for establishing reasonable cause for failing to file.

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