The IRS announced June 8, 2011 that approximately 275,000 organizations lost their tax-exempt status because they did not file annual returns for three consecutive years. The IRS has published on its website separate lists of affected organizations for each state; OpenData also provides on its website a searchable combined list.
While Section 6033(a) of the Tax Code requires most tax-exempt organizations to file annual information returns, the Pension Protection Act of 2006 imposed a filing requirement on small organizations for the first time in 2007. Despite the IRS’s information campaign over the last several years, it appears many organizations nevertheless remained unaware of their filing obligations and that, under Code Section 6033(j), organizations will lose their exempt status if they do not file for three consecutive years.
What does automatic revocation mean for organizations and their donors? An organization that loses it tax-exempt status must pay corporate income tax on its annual revenues and file the appropriate income tax return. The organization may also lose its state tax exemption if such exemption is dependent on federal tax-exempt status. In addition, the organization will no longer be eligible to receive tax-deductible charitable contributions.
Organizations subject to automatic revocation that wish to have their tax-exempt status reinstated must file an application for exemption and pay the appropriate user fee. In a show of heart, the IRS is allowing small organizations (i.e., those with annual gross receipts of $50,000 or less for 2010) applying for reinstatement to pay a lesser application fee of $100 instead of the usual fee of $400 or $850. And in an even grander gesture, the IRS will treat eligible small organizations applying for reinstatement before December 31, 2012 as having established “reasonable cause” for their filing failures, meaning their tax-exempt status will be reinstated retroactive to the date it was automatically revoked.
Eligible small organizations should consult IRS Notice 2011-43 to take advantage of retroactive reinstatement. Other organizations seeking retroactive reinstatement should review IRS Notice 2011-44. More information on automatic revocation can be found on the IRS website and our previous posts on April 5, 2010 and July 27, 2010.