Tax Law Insights

On January 2, 2014, the Internal Revenue Service (the "IRS") issued an advance copy of Revenue Procedure 2014-11 which updates the procedures for an organization to request retroactive or non-retroactive reinstatement after having its tax-exempt status automatically revoked under Section 6033(j) of the Internal Revenue Code (the "Code") for failure to file required annual returns or notices for three consecutive years. Revenue Procedure 2014-11 will be published in the Internal Revenue Bulletin 2014-3, dated January 13, 2014.

Generally, Section 6033(a) of the Code requires all organizations exempt from taxation under Section 501 to file an annual information return such as IRS Form 990, Return of Organization Exempt from Income Tax, IRS Form 990-EZ, Short Form Return of Organization Exempt from Income Tax, or IRS Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation. Furthermore, an organization, other than a private foundation or supporting organization may file Form 990-N, e-Postcard, if the organization has annual gross receipts of $50,000 or less.

In 2006, Congress passed the Pension Protection Act which now requires the IRS to revoke the tax-exempt status of any organization that fails to file an annual information return or notice for three consecutive years pursuant to Section 6033(j) of the Code. The automatic revocation date is the original due date for the third annual return or notice which was not filed.

Revenue Procedure 2014-11 provides four processes for organizations to request restatement:

1. Streamlined Retroactive Reinstatement Process;
2. Retroactive Reinstatement Process for Organizations Requesting within 15 Months of Revocation;
3. Retroactive Reinstatement Process for Organizations Requesting more than 15 Months from Revocation; and
4. Post-Mark Date Process.

Streamlined Retroactive Reinstatement Process

An organization may apply for retroactive reinstatement using the streamlined process if it has not previously had its tax-exempt status automatically revoked pursuant to Section 6033(j) of the Code and was eligible to file either IRS Form 990-EZ or IRS Form 990-N for each of the three consecutive years that it failed to file. An organization may have its tax-exempt status retroactively reinstated effective from its Revocation Date if it completes and submits either IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) or IRS Form 1024, Application for Recognition of Exemption under Section 501(a) (the "Application") and encloses the appropriate user fee with the Application.

The streamlined process may only be used if the organization applies for reinstatement no later than 15 months after the later of the date the organization received its revocation letter or the date on which the organization's name is posted on the IRS Revocation List. If an organization's Application is approved, it will be deemed to have reasonable cause for failing to file its Forms 990-EZ or 990-N, as applicable, and it will be reinstated retroactively to its Revocation Date.

Retroactive Reinstatement Process for Organizations Requesting within 15 Months of Revocation

An organization ineligible to apply for streamlined retroactive reinstatement may apply to have its tax-exempt status retroactively reinstated effective from its revocation date if it does all of the following:

1. Completes and submits the appropriate Application to the Service no later than 15 months after the later of the date of the revocation letter or the date on which the organization's name was posted on the IRS Revocation List;
2. Encloses the appropriate user fee with the Application;
3. Includes a reasonable cause statement;
4. Files completed and executed Form 990s for all taxable years in the consecutive three-year period and for any other taxable years after such period the organization was required but failed to file; and
5. Includes a statement with the Application confirming that it has filed all required annual returns.

The organization will need to provide a statement establishing reasonable cause as to the reasons it failed to file its Form 990 for at least one of the three consecutive years. In particular, for one of the three consecutive years, the organization must show it exercised ordinary business care and prudence in determining and attempting to comply with the annual filing requirements. This reasonable cause statement must provide a detailed description of the facts which led to the failure to file, the discovery of the failure, and the steps taken or will be taken to avoid or mitigate future failures to file. An officer, director, or trustee of the organization must sign and date a declaration attesting the facts in the reasonable cause statement and the request for retroactive reinstatement are true, correct, and complete.

Retroactive Reinstatement Process for Organizations Requesting more than 15 Months from Revocation

An organization applying for retroactive reinstatement more than 15 months after revocation may apply using the same procedure stated above for organizations requesting retroactive reinstatement within 15 months of revocation. However, the organization must provide a statement establishing reasonable cause as to the reasons it failed to file its Form 990 for all three consecutive years it failed to file Form 990. This is an elevated standard to establish reasonable cause for failing to file its annual information returns more than 15 months after revocation.

Post-Mark Date Process

Notwithstanding any of the three processes discussed above, an organization may apply for non-retroactive reinstatement of its tax-exempt status effective from the date on which it files an Application for reinstatement (i.e., Post-Mark Date) by completing and submitting the appropriate Application and including the appropriate user fee. An organization may use the Post-Mark Date process even it is eligible to apply for reinstatement using any of the other three retroactive reinstatement processes.

Section 6652 Penalty Relief

Section 6652 of the Code provides for penalties for failure to file certain information returns. Specifically, Section 6652(c) imposes a penalty for failure to file a return required under Section 6033 on the date and manner prescribed by the Code. However, the Code does not prescribe a penalty for failing to file Form 990-N. In each of the retroactive reinstatements processes described above, the IRS will not impose a failure-to-file penalty for the three consecutive years for which the organization was required, but failed, to file the annual returns if: (1) the organization's application for retroactive reinstatement is approved; (2) the organization satisfies all requirements for reinstatement; and (3) the organization is retroactively reinstated.

Taxpayer Impact

If an organization which has had its tax-exempt status revoked for failing to file three consecutive returns does not apply for reinstatement under the procedures in Revenue Procedure 2014-11, the organization will not be tax exempt and will be required to file regular federal and state income tax returns, and pay all applicable income taxes. An organization that relies on its exemption as a basis for a state property tax exemption may also lose the property tax exemption and be required to pay property taxes. 501(c)(3) organizations whose exempt status is revoked also lose the ability to accept tax-deductible donations.

Revenue Procedure 2014-11 provides specific procedures for tax-exempt organization to request reinstatement of their tax-exempt status following revocation for failure to file three consecutive annual returns or notices. The procedures are particularly beneficial for organizations that can establish reasonable cause for failing to file one of the three unfiled returns or notices. Under the former procedures for requesting retroactive reinstatement, an organization was required to show reasonable cause for each return it failed to file, regardless of whether the organization sought reinstatement within 15 months of having its tax-exempt status revoked. Under Revenue Procedure 2014-11, however, an organization filing for reinstatement within 15 months of having its tax-exempt status revoked now must only show reasonable cause for failing to file one of the three unfiled returns which led to revocation of its tax-exempt status.

Reasonable cause statements should be drafted with care. The IRS's evaluation of the reasonable cause statement will either result in retroactive reinstatement of tax-exempt status, or denial of retroactive reinstatement. When retroactive reinstatement is denied, a tax-exempt organization faces the unpleasant and complex prospect of filing regular federal income tax returns for the period between the revocation date and the filing of the application.