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 The list of organizations whose status was revoked can be found on the IRS’s Web site, www.irs.gov.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Organizations Whose Status Was Revoked
If an organization appears on the list of organizations whose tax-exempt status has been revoked, it is because IRS records indicate that the organization had a filing requirement and did not file the required returns for each of 2007, 2008 and 2009.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.
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.
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.