Red card

Yesterday, the IRS identified 275,000 nonprofits that had their federal tax-exempt status revoked as a result of failing to satisfy their filing requirement for three consecutive years.  This is a result of section 6033(j) of which was added to the Internal Revenue Code (“IRC”) as part of the Pension Protection Act of 2006:

6033(j)  Loss of exempt status for failure to file return or notice

(1)  In general

If an organization described in subsection (a)(1) or (i) fails to file an annual return or notice required under either subsection for 3 consecutive years, such organization’s status as an organization exempt from tax under section 501 (a) shall be considered revoked on and after the date set by the Secretary for the filing of the third annual return or notice. The Secretary shall publish and maintain a list of any organization the status of which is so revoked.

(2)  Application necessary for reinstatement

Any organization the tax-exempt status of which is revoked under paragraph (1) must apply in order to obtain reinstatement of such status regardless of whether such organization was originally required to make such an application.

(3)  Retroactive reinstatement if reasonable cause shown for failure

If, upon application for reinstatement of status as an organization exempt from tax under section 501 (a), an organization described in paragraph (1) can show to the satisfaction of the Secretary evidence of reasonable cause for the failure described in such paragraph, the organization’s exempt status may, in the discretion of the Secretary, be reinstated effective from the date of the revocation under such paragraph.

Note that revocation by the IRS may mean that any state tax exemption your nonprofit received that is dependent on federal tax-exempt status is also now revoked. If your organization is a fiscally sponsored project of an organization that had its tax-exempt status revoked, it may need to find a new eligible sponsor quickly.

Donors and grantmakers must pay attention.  

Organizations on the Automatic Revocation of Exemption List previously recognized as exempt under IRC section 501(c)(3) are no longer eligible to receive tax-deductible contributions under IRC section 170.  Publication of an organization’s name on the Auto-Revocation List serves as notice to donors and others that the organization is no longer eligible to receive tax-deductible contributions under section 170 and that donors and others may not rely on an IRS determination letter dated before the effective date of revocation or on a prior listing in either Publication 78 or the BMF extract for purposes of claiming tax-deductible contributions.  Accordingly, private foundations must exercise expenditure responsibility for grants to organizations appearing on the Auto-Revocation List.

Online Publication 78, Cumulative List of Organizations described in IRC Section 170(c), and the IRS Business Master File (BMF) extract will be updated on Friday, June 10, 2011, to remove organizations appearing on the Auto-Revocation List.

Reinstatement of Tax-Exempt Status

If an organization has had its tax-exempt status automatically revoked and wishes to have that status reinstated, it must file an application for exemption and pay the appropriate user fee even if it was not required to apply for exempt status initially. For 501(c)(3) exempt status, the organization should file Form 1023.  For most other types of exempt status, the organization should file Form 1024.  If the IRS determines that the organization meets the requirements for tax-exempt status, it will issue a new determination letter.

Transitional Relief for Small Organizations

IRS Notice 2011-43 provides transitional relief for certain small organizations that have lost their tax-exempt status because they failed to file a required annual electronic notice (Form 990-N e-Postcard) for taxable years beginning in 2007, 2008 and 2009.  A small organization – that is, one that normally has annual gross receipts of not more than $50,000 in its most recently completed taxable year – that qualifies for the transitional relief under this notice and applies for reinstatement of tax-exempt status by December 31, 2012, will be treated by the Internal Revenue Service (“IRS”) as having established reasonable cause for its filing failures and its tax-exempt status will be reinstated retroactive to the date it was automatically revoked.

Here’s why.  The IRS recognizes that many small organizations that have lost their tax- exempt status because they failed to file a Form 990-N e-Postcard for their 2007, 2008, and 2009 taxable years were never required to file an annual return or notice prior to their 2007 taxable year.  The IRS also recognizes that many small organizations are operated by volunteers and may face unique challenges in meeting federal tax obligations.  Accordingly, the IRS will treat a small organization as having established reasonable cause for failing to file an annual return for its taxable years beginning in 2007, 2008, and 2009 if it meets the listed criteria.

Here are a few tips:

  • A small organization seeking the transitional relief described in this notice must write “Notice 2011-43” on the top of the form it uses to apply for reinstatement of tax-exempt status and on the envelope.
  • A small organization seeking the transitional relief described in this notice must also attach to its application for reinstatement of tax-exempt status the following statement:  “[Name of Organization] was not required to file annual information returns for taxable years beginning before 2007; was eligible in each of its taxable years beginning in 2007, 2008 and 2009 to file a Form 990-N e-Postcard; and had annual gross receipts of normally not more than $25,000 in each of its taxable years beginning in 2007, 2008 and 2009.”
  • Small organizations that are eligible for the transitional relief described in this notice are also eligible for a reduced user fee of $100 for the application of reinstatement of tax-exempt status.

Organizations not described in Notice 2011-43 should consult Notice 2011-44 for guidance on how to apply for reinstatement of tax-exempt status and request retroactive reinstatement.

References & Resources

Read NY Times: I.R.S. Ends Exemptions For 275,000 Nonprofits.

Search the Database: Groups That Have Lost Their Tax-Exempt Status.

Read the National Council of Nonprofit’s tip sheet on automatic revocation and what to do if your organization’s tax-exempt status was revoked.