The Internal Revenue Service ("IRS") has excess inventory of applications for tax-exemption, resulting in delays in the approval of applications. As of June 25, 2014, the IRS is now reviewing applications submitted in October 2013. Due to this excess inventory, the IRS has applications from organizations that may have failed to file annual information returns while their applications have been pending. IRS's Tax Exempt and Government Entities Division ("TEGE") has issued a memorandum in which it instructs its specialists on providing relief to organizations that have failed to file required annual information returns for three consecutive years while their applications for exempt organization status were pending.
Most tax-exempt organizations are required to file an informational return on an annual basis with the IRS on Form 990, Form 990-EZ, Form 990-N, or Form 990-PF (each an “information return”). Information returns must be filed even while the organization’s application for exemption is pending. An organization’s exempt status will automatically be revoked if it fails, for three consecutive years, to comply with the annual filing requirements. If an organization’s exempt status is revoked, it must apply for reinstatement to continue operating as an exempt entity. Because of the length of time some exemption applications have been pending, the exempt status of these organizations may be revoked for failure to file information returns before they have received a ruling from the TEGE.
The TEGE recognizes that many organizations are operated by volunteers and may face challenges in understanding or satisfying the filing requirements prior to receiving a ruling from the TEGE. The memorandum provides guidance for the treatment of applications in these circumstances and direction as to the effective date should exemption be granted.
The memorandum applies when (a) an application of an organization was filed before the due date of filing its information return for the third tax year after its formation date, and (b) the TEGE specialist has determined that the organization should receive a favorable determination with regard to the exempt status of the organization. The TEGE specialist is directed to review the IRS records to determine if any information return has been filed for the organization in the prior three years.
If the TEGE specialist finds that the organization has filed an information return at least once in the three year period, the exemption will be granted effective under normal procedures (e.g. as of the formation date or application post-mark date, depending on the application), as if there was no automatic revocation.
If the TEGE specialist finds that no information return has been filed, the TEGE specialist is directed to (i) list the organization on the automatic revocation list, which will take approximately three weeks to register, (ii) grant exemption effective as of the date under normal procedures as if there was no automatic revocation, and (iii) add language to the exemption approval letter that informs the applicant that the exemption was automatically revoked on the due date of its third year return, the exemption application was treated as an application for reinstatement, the exemption is recognized as being reinstated on the same day it was automatically revoked, and there will be no gap in recognition of exemption. As a result, the organization will be recognized as tax-exempt continuously from the effective date of exemption under normal procedures.
The TEGE acknowledges the challenges that would arise should a delay in review of an application result in an organization’s failure to file information returns for three consecutive years, creating an automatic revocation. The TEGE will, therefore, treat applications pending after the time period for which automatic revocation would be effective as requests for reinstatement. Relief is granted to these organizations through procedures taken by the TEGE and the organization’s exemption, once granted, will be effective retroactive to the date as granted under normal procedures (e.g. as of the formation date or application post-mark date, depending on the application).