By Lisa B. Petkun
and
Michelle Moersfelder
On June 8, 2011 the IRS revoked the tax-exempt status of more than
275,000 organizations. The revocations were a result of the Pension
Protection Act of 2006 (PPA), which requires the IRS to automatically
revoke the tax-exempt status of any nonprofit that is required to file
an annual return (Form 990, 990-N, 990-EZ, or 990-PF) but has failed to
do so for three consecutive years. The list of organizations whose
status was revoked can be found on the IRS's Web site, www.irs.gov.
In addition to requiring automatic revocations of exempt status, the
PPA requires that small organizations file a very simple annual return
in the form of an e-Postcard, Form 990-N. Small organizations are
defined as those organizations with normally not more than $50,000 in
annual gross receipts. Prior to 2010, small organizations were
organizations with normally $25,000 or less in annual gross receipts. As
a result of the new rules enacted in the PPA, the IRS has revoked the
tax-exempt status of those organizations subject to the new filing
requirement, and other organizations with existing filing obligations,
that have not filed an annual return for three consecutive years.
Since enactment of the PPA, the IRS has undertaken numerous measures
to communicate the new filing obligations imposed on small organizations
and the consequences of the failure to file to organizations impacted.
The IRS has mailed more than one million notices to organizations that
had not filed annual returns, published a list of at-risk groups and
gave smaller organizations an additional five months to file required
returns and come into compliance. According to the IRS, about 50,000
organizations filed during this five-month extension period.
Organizations Whose Status Was Revoked
If an organization appears on the list of organizations whose
tax-exempt status has been revoked, it is because IRS records indicate
that the organization had a filing requirement and did not file the
required returns for each of 2007, 2008 and 2009. The IRS has explained
that the vast majority of tax-exempt organizations file their required
returns and are unaffected by the revocation list. In addition, the IRS
believes the vast majority of the revoked organizations are no longer in
existence and need to be removed from the tax-exempt listing.
Reinstatement Procedures
Contemporaneous with issuance of the revocations, the IRS issued
guidance setting forth procedures for reinstatement, including
retroactive reinstatement, of the tax-exempt status of organizations
whose exempt status was automatically revoked. The procedures provided
by the IRS in Notice 2011-43, Notice 2011-44, and Revenue Procedure
2011-36 are briefly described below.
Notice 2011-44 sets forth detailed instructions for organizations
seeking retroactive reinstatement other than certain small organizations
covered by Notice 2011-43, described below. Notice 2011-44 provides
that existing organizations that seek to have their tax-exempt status
reinstated must complete an application for exemption (Form 1023 or Form
1024) and pay a user fee regardless of whether they were originally
required to file an application. To receive retroactive reinstatement an
organization must demonstrate reasonable cause for failure to file its
annual returns. The Notice defines reasonable cause for this purpose and
describes the type of information required to support a claim for
reasonable cause. The IRS has set a relatively high bar for establishing
reasonable cause.
Notice 2011-43 provides relief for certain small tax-exempt
organizations. In recognition of the "unique challenges" faced by small
organizations, the relief provided in Notice 2011-43 is much more
generous than that provided for larger organizations in Notice 2011-44.
The most significant difference is that the IRS will treat a small
organization as having reasonable cause for failing to file a Form 990-N
e-Postcard or an annual return for its taxable years beginning in 2007,
2008, and 2009 if it (1) was not required to file annual returns before
2007, (2) was eligible in 2007, 2008, and 2009 to file a Form 990-N
e-Postcard, and (3) the organization submits to the IRS a properly
completed and executed application for reinstatement of tax-exempt
status on or before December 31, 2012. Notice 2011-43 also reduces the
application fee for eligible small organizations, filing pursuant to the
terms set forth in the Notice, to $100 rather than the typical $400 or
$850 fee.
Donors to Revoked Organizations
Donations made prior to the publication of an organization's name on
the revocation list should remain tax-deductible. However, organizations
that are on the list that do not receive reinstatement are no longer
eligible to receive tax-deductible contributions.
Publication on the revocation list of organizations serves as notice
to donors and others that they may no longer rely on a prior listing in
IRS Publication 78, Cumulative List of Organizations, as an indication
of an organization's tax-exempt status or its eligibility to receive
tax-deductible contributions. An updated version of Publication 78 with
current listings is available on the IRS's Web site.
Tax Treatment of Revoked Organizations
Income, including donations, received by organizations whose
tax-exempt status has been revoked and is not reinstated may be taxable.
These organizations also must file a federal tax return and pay federal
income taxes.
Pepper Perspective
The IRS has provided procedures for the retroactive reinstatement of
the tax-exempt status of organizations whose status has been revoked.
Most small organizations will find it relatively simple to comply with
the procedures applicable to them. Other organizations may have a more
difficult time obtaining retroactive reinstatement because of the high
threshold set by the IRS for establishing and proving reasonable cause.
These organizations should likely seek the assistance of counsel to
determine the best path forward.
The
material in this publication was created as of the date set forth above
and is based on laws, court decisions, administrative rulings and
congressional materials that existed at that time, and should not be
construed as legal advice or legal opinions on specific facts. The
information in this publication is not intended to create, and the
transmission and receipt of it does not constitute, a lawyer-client
relationship.
This
article is republished with permission of Pepper Hamilton LLP. Further
duplication without the permission of Pepper Hamilton LLP is prohibited.
All rights reserved.
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