Donors should confirm the charitable status of recipients to ensure that a charitable deduction will be available. Starting in June 2011, the IRS began publishing a monthly "revocation list" of organizations which had their federal tax-exempt status automatically revoked for failure to file an annual federal tax return (Form 990, 990-EZ or 990-PF) or notice (Form 990-N "e-Postcard") for three consecutive years after 2006. This revocation list is online at http://www.irs.gov/charities. While the IRS will mail a notice of the revocation of tax-exempt status to the last known address of each affected organization, donors and grant-makers may not receive notice that such organizations are on a revocation list making any subsequent contributions to these organizations no longer tax-deductible.
Due Diligence for Donors and Grant-makers
When making an initial grant or contribution, or renewing a grant or contribution, it is now critical to confirm the recipient's tax-exempt status in one of the IRS-maintained electronic lists at http://www.irs.gov/charities which are updated quarterly as Publication 78 and monthly as the IRS Business Master File. If a "charity status" report generated by Guidestar.org or another organization is used, the donor or grant-maker must keep a copy of the report that shows the recipient's tax-exempt status, the date and time the report was generated, and the date and version of the IRS Master Business File used to generate the report. The IRS will allow taxpayers to rely on these lists under Revenue Procedure 2011-36 as long as the grant or contribution is made on or before the next update of the IRS list showing the recipient's tax-exempt status has changed, and the taxpayer was unaware of the change in the recipient's tax-exempt status. In order to protect their charitable tax deductions, donors and grant-makers must check the IRS lists or obtain third-party reports when making each donation or grant.
Reinstatement of Tax-Exempt Status for Small Organizations
Small organizations which receive notice of the revocation of their tax-exempt status may be able to restore their tax exemption without any substantial monetary penalties. Small organizations which have lost their exempt status for failure to file the required Form 990-N e-Postcard for their 2007, 2008 and 2009 tax years (or any 3 subsequent years) may qualify for retroactive reinstatement of their tax-exempt status with a reduced $100 filing fee. To qualify, an organization must not have been required to file annual information returns before 2007 and must have annual gross receipts that annually averaged $25,000 or less for its 2007, 2008 and 2009 tax years. In order to qualify for retroactive reinstatement, an organization must submit a new and properly completed application for recognition of tax exempt status (using Form 1023 for Section 501(c)(3) organizations or Form 1024 for other organizations) with a statement that it qualifies for retroactive reinstatement under IRS Notice 2011-43. The reinstatement application must be filed with the IRS within 15 months of the notice of revocation (September 8, 2012 for organizations on the initial list), but not later than December 31, 2012.
Reinstatement of Tax-Exempt Status for Other Organizations
Larger public charities, private foundations and other organizations which lost their tax exempt status for failure to file federal tax returns for their 2007, 2008 and 2009 tax years may also qualify for retroactive reinstatement of their tax-exempt status based on "reasonable" cause. To qualify for retroactive instatement of tax-exempt status, IRS Notice 2011-44 requires that organizations:
- submit a new and properly completed application for recognition of tax exempt status (using Form 1023 for Section 501(c)(3) organizations or Form 1024 for other organizations) regardless of whether the organization was originally required to submit an application;
- file the appropriate annual federal tax returns (Forms 990, 990-EZ or 990-PF) for the three missing consecutive tax years and all subsequent years (i.e., 2007 to 2010), except that Form 990-EZ must be filed for any year where a Form 990-N e-Postcard would have been required;
- provide a written statement explaining the reasonable cause for failure to file, including a discussion of the relevant facts and circumstances along with any substantiation; and
- identify the safeguards to ensure that the organization will timely file its tax returns in the future; and
- file the reinstatement application with the IRS within 15 months of the notice of revocation, with a filing fee of $850 (reduced to $400 if gross receipts did not exceed $10,000 annually over a 4-year period).
The IRS will grant retroactive reinstatement for organizations which can provide evidence that they exercised ordinary business care and prudence in attempting to comply with the reporting requirements but were nonetheless unable to file the required returns or notices. The IRS generally defines "reasonable cause" for failure to file as (a) a good faith reliance on erroneous written information from the IRS (for example, a statement that after 2006 the organization was not required to file), if the IRS was aware of all relevant facts, or (b) events beyond an organization's control made it impossible to file over the three-year period. For example, the organization may provide evidence that substantially all of its activities are performed by volunteers. The IRS will also consider the organization's history of reporting compliance, any steps taken by the organization to address and rectify the filing error, and the organization's plans to prevent similar failures in the future. If the organization fails to establish reasonable cause but establishes it qualifies for tax-exempt status, the organization's tax-exempt status will not be restored retroactively but will be restored from the date of filing the tax-exemption reinstatement application.
If your organization has lost or is at risk of losing its tax-exempt status due to failure to file the required returns or notices, please contact your tax advisor immediately.
Reminder to File Annual Tax and Information Returns
In order to avoid losing tax-exempt status, it is important that tax-exempt organizations (except for certain religious, governmental and political organizations) file a federal tax return (Form 990, 990-EZ or 990-PF) or notice annually. Beginning with the 2010 tax year (filed in 2011), tax-exempt organizations with average annual gross receipts of $50,000 or less must file the Form 990-N e-Postcard electronic notice with the IRS. In general, public charities and other tax-exempt organizations, as well as Section 527 political organizations and non-exempt charitable trusts, are required to file Form 990 annually. However, after 2010, these organizations will be permitted to file Form 990-EZ if gross receipts are less than $200,000 and total assets are less than $500,000. Private foundations and certain non-exempt charitable trusts are required to file a Form 990-PF annually, regardless of their size.