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Failure to File Form 990
Automatic Revocation of Tax-Exempt Status

Please note that this page is slightly out of date and will be updated when time permits. Please consult Revenue Procedure 2014-11 for further information.

Background

Section 6033(a)(1) of the Internal Revenue Code has always required a wide variety of tax-exempt organizations to file an annual return. The filing requirement has applied to all organizations identified in Section 501(a) and thus includes —

  • traditional charities
  • educational, religious, and social welfare organizations
  • labor unions
  • professional societies
  • social and recreational clubs
  • fraternal groups
  • war veterans organizations
  • trusts created as part of qualified retirement plans

Section 501(a) does not apply to political organizations and homeowners associations that are partially tax-exempt under Sections 527 and 528, respectively, nor does it apply to state and local governments that are exempt under Section 115.

Section 6033(a)(3)(A) has historically provided exceptions from the filing requirement to a limited number of organizations —

  • churches and certain other religious organizations that are closely related to churches (so-called “integrated auxiliaries”)
  • most other Section 501(c)(3) organizations that normally do not receive more than $50,000 per year in gross revenues
  • (Section 6033(a)(3)(A)(ii) actually contains a filing threshold of $5,000 of gross revenues per year, but Section 6033(a)(3)(B) gives the IRS discretionary authority to relieve other organizations from the annual return filing requirement. In Revenue Procedure 2011-15, the Service raised the filing threshold to $50,000 for taxable years beginning on or after January 1, 2010.)

Private foundations and Section 509(a)(3) supporting organizations are excluded from the filing relief granted to organizations with less than $50,000 of annual revenues and thus must file an annual return regardless of their size and financial support.

Recent Changes in the Law

A problem that has confounded the Internal Revenue Service for years is that it has had no way of knowing whether tax-exempt organizations that did not file annual returns failed to do so because (a) they had discontinued their activities or dissolved, (b) they had gross revenues below the filing threshhold and therefore weren’t required to file returns, or (c) they had gross revenues greater than the filing threshhold per year and were simply failing to comply with the law. In Section 1223 of the Pension Protection Act of 2006, Congress chose to fix the problem. It did so by enacting two new rules.

The first, set forth in Section 6033(i), states that all organizations with gross revenues of less than the filing threshhold (now $50,000 of gross revenues annually) must now furnish certain minimal information in electronic form to the IRS. The IRS has implemented this requirement with Form 990-N, the so-called “e-postcard” return, which is filed simply by filling in eight items of information online via the IRS’s web site.

The second rule, set forth in Section 6033(j), now states that any organization described in Section 6033(a)(1) that is required to file an annual return, but that fails to do so for three consecutive years, will have its tax-exempt status revoked on the date of the filing deadline for the third such return. In other words, all tax-exempt organizations – not just those with less than $50,000 in gross revenues, that have not filed a tax return for three consecutive years will automatically lose their tax-exempt status. For tax-exempt organizations whose fiscal year is the calendar year, the filing deadline for their third return after the 2006 Act was May 17, 2010, and, for those organizations that failed to take advantage of the special relief described below, that was the date that their tax-exempt status was revoked.

Revocation of tax-exempt status under these provisions is automatic; it occurs by operation of law and is not the result of any administrative action by the Internal Revenue Service. Thus, organizations whose tax-exempt status is revoked under these rules will have no appeal rights within the IRS and will have no recourse to the courts to reestablish their tax exemption. They can only reapply for tax exemption (on Form 1023 or Form 1024), and they must do so even if they weren’t required to apply for tax-exempt status in the first place.

The IRS Gives Noncomplying Organizations A Second Chance

Throughout the Summer and Fall of 2010, the IRS took some rather extraordinary measures to publicize the 2006 Act’s new filing requirements and the consequences of failing to comply with them. It mailed reminders to the last known addresses of non-filing organizations, issued press releases, assembled an extensive FAQ, distributed media kits, developed podcasts for download to MP3 players, even published a YouTube video.

In September of 2010, it announced a special amnesty program, one that had two components. First, it extended the filing deadline for small organizations eligible to file Form 990-N. For these organizations whose filing deadline was on or after May 17, 2010, Form 990-N could have been filed by October 15, 2010, and it would have been considered timely filed. If the form were not filed by that date, then revocation of the organization’s exempt status would have been effective May 17, 2010, the original due date for its third delinquent return.

Second, for organizations that were not eligible to file Form 990-N for all of the past three years, but that should have filed Form 990-EZ for any one or more of those years, the Service implemented a “voluntary compliance program.” Under that program, an organization could have filed, by October 15, 2010, its three years’ delinquent Form 990-N’s and Form 990-EZ’s, accompanied by a “checklist,” and paid a modest fee “in lieu ... of taxes, penalties and interest that otherwise would be incurred by reason of ... non-filing” of Form 990-EZ. There are normally substantial penalties for filing delinquent 990-EZ’s, and so one of the significant benefits of this voluntary compliance program was that the IRS seemed to nave been prepared to waive those penalties as a matter of course. Organizations required to file Form 990 or Form 990-PF for any one or more of the past three years were not eligible for relief under this voluntary compliance program.

In connection with its announcement of this special, one-time, amnesty program, the IRS released a list of all of the “at risk” tax-exempt organizations in its database that had not filed returns for at least the past three years. Approximately 5,500 of those organizations were located in Colorado. There were over 320,000 nationwide.

The IRS has since published its final list of organizations that failed to take advantage of the extended filing deadline for Form 990-N filers and the voluntary compliance program for Form 990-EZ filers and whose tax-exempt status has therefore been automatically revoked. Organizations of this nature that had previously been qualified under Section 501(c)(3) have also been deleted from Publication 78, the list of organizations eligible to receive deductible charitable contributions. This means that contributions to organizations on the automatic revocation list will no longer be deductible. Similarly, private foundations will no longer be able to make grants to those organizations without exercising expenditure responsibility

Procedures for Organizations That Want to Reinstate Their Tax-Exempt Status

Ordinarily, organizations that apply for tax-exempt status under Section 501(c)(3) more than 27 months after the date of their incorporation can only be granted exemption beginning with the date their exemption application is mailed to the IRS. This means that, if an organization on the automatic revocation list applies to have its tax-exempt status reinstated, the effective date of its reinstated exemption will generally be the date it mails its new application.

Small Organizations – December 31, 2012 Deadline for Transitional, Retroactive Relief.

However, in Notice 2011-43, the IRS announced that certain “small organizations” that apply for reinstatement by December 31, 2012 “will be treated by the Internal Revenue Service 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.” For these purposes, a “small organization” is one that had annual gross receipts of not more than $50,000 in its most recently completed taxable year. To qualify for this temporary, transitional relief, a small organization must meet the following requirements:

  • The organization was not required to file annual information returns (such as Form 990 or Form 990–EZ) for taxable years beginning before 2007.
  • The organization was eligible in each of its taxable years beginning in 2007, 2008, and 2009 to file a Form 990–N e-Postcard (rather than an annual information return). In other words, it cannot have been a private foundation or a Section 509(a)(3) supporting organizations and must have had annual gross receipts that were less than $25,000 in those years.
  • It must submit to the IRS a properly completed and executed application for reinstatement of tax-exempt status on or before December 31, 2012.
  • It must write “Notice 2011-43” at the top of its exemption application form and on the envelope in which it is mailed.
  • It must attach a statement to its exemption application that reads as follows:
  • [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.

As announced in Revenue Procedure 2011-36, the filing fee for organizations that qualify for this relief and that file a new exemption application by December 31, 2012 is only $100.

According to Notice 2011-43:

An organization whose tax-exempt status has been automatically revoked and reinstated may have its tax-exempt status automatically revoked a second time under section 6033(j)(1) only if it fails to file returns or notices for another three consecutive taxable years, beginning with the taxable year the IRS approves its application for reinstatement of tax-exempt status. For example, if an organization reporting on a calendar year basis has its tax-exempt status automatically revoked for failing to file required returns or notices for 2007, 2008, and 2009 and receives a determination letter recognizing the reinstatement of its tax-exempt status dated September 1, 2011, the organization’s tax-exempt status will not be automatically revoked a second time for failing to timely file a return or notice for 2008, 2009, and 2010. However, the organization’s tax-exempt status will be automatically revoked a second time if the organization fails to timely file a return or notice for 2011, 2012, and 2013.

Reinstatement Procedures for All Other Organizations.

There is no temporary relief available for all other organizations that wish to reinstate their tax-exempt status. Those organizations must submit a new exemption application (Form 1023 or 1024), even if they were not required to file an exemption application to obtain tax-exempt status in the first place. (For example, a subordinate organization that has originally been included in a group exemption ruling, but that lost its exemption for failure to file returns, will now need to submit an application for reinstatement on its own behalf.) All such applications for reinstatement must be accompanied by the usual user fee, and to facilitate the processing of the application, the words “automatically revoked” should be written on the top of the application form and on the envelope in which it is mailed.

Notice 2011-44 states that, if an organization wishes to request retroactive reinstatement of its exemption, then its application for reinstatement must be accompanied by the following:

  • A written statement setting forth all of the facts that support its claim for reasonable cause for failing to file a required return or notice in each of the three consecutive years and over the entire consecutive three-year period, including a detailed description of all the facts and circumstances that led to each failure and the continuous failure, the discovery of the failures, and the steps taken to avoid or mitigate the failures.
  • A written statement describing the safeguards the organization has put into place to ensure that the organization will not fail to file returns or notices in the future.
  • Evidence to substantiate all material aspects of the written statements described in the preceding requirements.
  • Properly completed and executed paper annual information returns (Forms 990, Forms 990–EZ, or Forms 990–PF, whichever is applicable) for all taxable years during and after the consecutive three-year period that the organization was required, but failed, to file an annual information return.
  • Properly completed and executed Forms 990–EZ for all taxable years during and after the consecutive three-year period that the organization was eligible to file a Form 990–N e-Postcard but failed to file either a Form 990–N e-Postcard or an annual information return.
  • An original declaration, dated and signed under penalties of perjury by an officer, director, trustee, or other official who is authorized to sign for the organization in the following form:
  • I, (Name), (Title) declare, under penalties of perjury, that I am authorized to sign this request for retroactive reinstatement on behalf of [Name of Organization], and I further declare that I have examined this request for retroactive reinstatement, including the written explanation of all the facts and information pertaining to the claim for reasonable cause and the evidence to substantiate the claim for reasonable cause, and to the best of my knowledge and belief, this request is true, correct, and complete.

The IRS will consider a request for retroactive reinstatement of exemption only if it is submitted within 15 months of the later of the date of the IRS revocation letter or the date on which the IRS posts the name of the organization on the revocation list available on the IRS website (or otherwise provides notice of the revocation to the public).

Reasonable Cause for Retroactive Reinstatement of Exemption.

Notice 2011-44 states that because automatic revocation of tex-exempt status for failure to file returns “involves a repeated and continuous failure ... for a consecutive three-year period,” any organization that wishes to have its exemption reinstated retroactively “must demonstrate that it had reasonable cause for failing to file a return or notice not only for each of the three years but also over the entire three-year period.” It would not be sufficient to show that the organization had reasonable cause for not filing a return in the first of the three-year period; it would need to establish reasonable cause, both for not filing that first-year return in any subsequent year, but also for not filing the subsequent years' returns either. That is not likely to be an easy task.

Notice 2011-44 will require the organization to “provide evidence that it exercised ordinary business care and prudence in determining and attempting to comply with its reporting requirements ... for each of the three years and over the entire three-year period, but was nevertheless unable to file the required returns or notices for three consecutive years.” Among the factors the IRS may consider in this reagrd are the following:

  • Whether the organization’s failure was due to its reasonable, good faith reliance on erroneous written information from the IRS, stating that the organization was not required to file a return or notice under, provided the IRS was made aware of all relevant facts.
  • Whether the failure to file the returns or notices arose from events beyond the organization’s control that made it impossible for the organization to file returns or notices for each of the three years at issue and over the entire three-year period.
  • Whether the organization acted in a responsible manner by undertaking significant steps to avoid or mitigate the failure to file the required returns or notices and to prevent similar failures in the future, including, but not limited to—
  • Attempting to prevent an event beyond its control, if it was foreseeable;
  • Acting as promptly as possible to remove an event beyond its control or the cause of the reporting failure, once the failure was discovered; and
  • After the failure was discovered, implementing sufficient safeguards to ensure future compliance with the reporting requirements.
  • Whether, aside from the three consecutive years in which the organization failed to file returns or notices, the organization has an established history of complying with its reporting requirements (if any) under section 6033 and/or any other applicable reporting or other requirements under the Code.

In any event, the IRS will consider any of the preceding factors only if there is satisfactory evidence to substantiate it.

Organizations Erroneously on the Automatic Revocation List.

It is also quite possible that the “Auto-Revocation List” includes various organizations in error. An IRS FAQ explains that an organization has in fact filed its required returns (and can verify that fact) or that is legitimately not required to file than may contact IRS Customer Services to resolve the matter.

Important Links to Additional Resources

The IRS has developed an extensive web site devoted to automatic revocation of exemption, including its Automatic Revocation of Exemption List

IRS web site for filing Form 990-N