When the Internal Revenue Service announced in June 2011 that approximately 275,000 exempt organizations had lost their exempt status under a provision of the Pension Protection Act of 2006 for a failure to file three consecutive annual information returns, it also provided guidance for organizations seeking to obtain reinstatement and retroactive reinstatement of its tax-exempt status. As explained below, certain small organizations have until December 31, 2012 to apply for retroactive reinstatement under a much easier procedure than the standard retroactive request process they will be subject to starting January 1, 2013.
To obtain retroactive reinstatement (i.e., reinstatement from the date exempt status was revoked for failure to file), an organization generally must:
- File an application for reinstatement via an exemption application (i.e., Form 1023, 1024) regardless of whether the organization was originally required to submit such application (e.g., organizations that normally have annual gross receipts of not more than $5,000); and
- Show reasonable cause for its failure to file the required annual information returns.
In order to show reasonable cause, the applicant organization must provide information such as:
- A written statement setting forth all of the facts that support its claim for reasonable cause for failing to file, including steps taken to avoid or mitigate such failures;
- A written statement describing the safeguards the organization has put into place to a prevent a failure to file in the future;
- Evidence substantiating the material aspects of such statements; and
- An original declaration, dated and signed under penalty of perjury by an officer, director, trustee, or other authorized official that such statements are true, correct, and complete.
The IRS will determine whether reasonable cause has been shown based on all relevant facts and circumstances. Generally, forgetting to file or failing to keep up with organizational requirements would not alone constitute reasonable cause. The IRS is looking for something more substantial. Favorable factors may include:
- A reasonable, good faith reliance on erroneous written information from the IRS, stating the organization is not required to file an annual information return;
- An event beyond the organization’s control that made it impossible for the organization to file the annual information returns;
- Steps taken by the organization to avoid or mitigate the failure to file such as acting promptly and implementing safeguards for future compliance when a failure to file was discovered; and/or
- A history of organizational compliance with its reporting requirements.
If reasonable cause is not shown but the application for reinstatement is approved, reinstatement will only be granted from the date the application was filed. Such a lapse in exempt status can have consequences such as creating corporate income tax liability and adversely affecting the deductibility of contributions for donors.
For small organizations, the IRS articulated a transitional relief procedure that allows them to obtain retroactive reinstatement without showing reasonable cause and to apply with a reduced user fee of $100. This transitional relief is offered to small organizations that (i) failed to file an annual information return for taxable years beginning in 2007, 2008, and 2009 and (ii) apply for reinstatement of tax-exempt status by December 31, 2012. Small organizations are defined as organizations that normally have annual gross receipts of not more than $50,000 in its most recently completed taxable year.
This transitional relief is greatly advantageous for a small organization that may otherwise have difficulty showing reasonable cause. For example, prior to 2006, organizations that normally had not more than $25,000 in gross receipts were not required to file an annual information return. Therefore, when the Pension Protection Act included a new requirement that such organizations must file an annual information return (e.g., Form 990-EZ) for taxable years starting after 2006 (and made them subject to automatic revocation penalties for failure to file), it was not surprising that many small organizations were simply unaware that the law had changed. Even if a small organization believes it has a good chance to show reasonable cause, it can still benefit from the less demanding application and reduced user fee available under the transitional relief procedure. Accordingly, small organizations that have yet to take advantage of the transitional relief procedure would be wise to do so before the end of the year.
The IRS Revocation List is available online and updated monthly.
Please view the IRS annual information return forms and requirements here.
More information about retroactive reinstatement is available in IRS Notice 2011-44.
More information about the transitional relief for small organization is available in the IRS Notice 2011-43.
More background information on IRS Reinstatements is made available by Sandy Deja in her article, The Comback Kids: A Look at IRS Reinstatements.