IRS Issues Procedures For Reinstatement of Tax-Exempt Status
The Internal Revenue Service (“IRS”), with the issuance of Revenue Procedure 2014-11, provides procedures for organizations to follow to reinstate tax-exempt status that was automatically revoked as a result of the Pension Protection Act of 2006. This Revenue procedure modifies and supersedes earlier guidance outlined in IRS Notices 2011-43 and 2011-44. Unlike this prior guidance, this Revenue Procedure provides more focus on the reinstatement process itself.
BACKGROUND
The Pension Protection Act of 2006 introduced Internal Revenue Code (“IRC”) §6033(j) which is effective for taxable years beginning after 2006. Under IRC §6033(j)(1), any organization that is tax-exempt under IRC §501(a) that fails to file a required return or notice for three consecutive years will have its tax-exempt status automatically revoked. The list of organizations that have had their tax-exempt status automatically revoked is updated by the IRS on a monthly basis. IRC §6033(j)(2) provides that any organization that has had its tax-exempt status automatically revoked may apply to the IRS to request retroactive reinstatement.
STREAMLINED REINSTATEMENT PROCESS FOR SMALL ORGANIZATIONS
Tax-exempt organizations that satisfy the requirements for filing a Form 990-EZ, Short Form Return of Organization Exempt from Income Tax, or Form 990-N, e-Postcard, for each consecutive three year period for which it failed to file and has not previously had its tax-exempt status revoked are eligible for the streamlined retroactive reinstatement process outlined in the Revenue Procedure with said reinstatement effective back to original date of revocation.
In order to obtain retroactive reinstatement, these organizations must complete and submit an application for tax-exemption; either a Form 1023, Application for Recognition of Exemption Under IRC §501(c)(3), or Form 1024, Application for Recognition of Exemption Under IRC §501(a) (“Application”) and remit the appropriate user fee within 15 months of the date of the IRS revocation letter, or when the IRS posted the organization’s name to the revocation list, whichever is later.
Organizations utilizing this process should write “Revenue Procedure 2014-11, Streamlined Retroactive Reinstatement” at the top of their Application.
If the Application is approved, the organization will be deemed by the IRS to have reasonable cause and will have its tax-exempt status reinstated retroactively to the revocation date. In addition, the organization, if required to file a Form 990-EZ, must file the required forms for the years in which it was responsible for filing and failed to do so. Organizations will need to write “Retroactive Reinstatement” on the forms. For any year in which the organization was eligible to file Form 990-N there will not be a filing requirement. Organizations that are granted retroactive reinstatement under Revenue Procedure 2014-11 and are required to file Form 990-EZ will not be subject to failure to file penalties for the three year period in which they had not met the filing requirements.
RETROACTIVE REINSTATEMENT PROCESS
A copy of the IRS Revenue Procedure 2014-11 can be accessed at the healthcare services section of our firm’s website.
If an organization is not eligible to use the streamlined reinstatement process outlined above, they may use the retroactive reinstatement process as long as an Application is filed not later than 15 months after the later of the date of the IRS revocation letter, or when the IRS posted the organization’s name on the revocation list. As with the streamlined reinstatement process outlined above, these organizations will need to file an Application and remit the appropriate user fee. In addition, these organizations must (1) include a reasonable cause statement with the Application, (2) include a statement with the Application that confirms that the required annual returns have been filed (this would include a Form 990, Return of Organization Exempt from Income Tax, or a Form 990-PF, Return of Private Foundation), and (3) file the annual returns for each of the three consecutive years. The organization should also write “Retroactive Reinstatement” on the annual returns filed. If reinstatement is granted under this process, the IRS will not assess a penalty for the preceding consecutive three years that the organization was required to file.
A reasonable cause statement in this instance is one that establishes reasonable cause with respect to a failure to file for at least one of the three consecutive years for which it failed to file a required return. The reasonable cause statement must establish that the organization exercised ordinary business care and prudence in attempting to comply with reporting requirements as well as including applicable factors. In addition, the reasonable cause statement must provide specific facts and circumstances to support the organization’s position and must also include a declaration that is signed under penalties of perjury by an authorized officer of the organization. The Revenue Procedure includes certain factors that would assist an organization establish reasonable cause.
In situations where more than 15 months have passed since an organization had its tax-exempt status automatically revoked, an organization may receive approval for retroactive reinstatement of its tax-exempt status.
In this particular situation, the only difference is that a reasonable cause statement must be provided for all three consecutive years; not for just one of the three years as was applicable if the Application is filed within the 15 month period following automatic revocation.
POST-MARK DATE PROCESS
Regardless of whether or not an organization is eligible to receive retroactive reinstatement under the methods described thus far, they may apply for reinstatement to be effective upon the post-mark date of the Application. The organization should write “Revenue Procedure 2014-11, Reinstatement Post-Mark Date” at the top of the Application.
CONCLUSION
Revenue Procedure 2014-11 became effective January 2, 2014, however, the IRS indicated that it will also apply these new rules to pending applications for reinstatement if there exists a benefit to the filing organization. If an organization had its tax-exempt status reinstated effective from the application date, but would have been eligible for retroactive reinstatement under the streamlined reinstatement process, tax-exempt status will indeed be reinstated retroactively. Alternately, if an organization had its tax-exempt status reinstated effective from the application date, but would have been eligible for retroactive reinstatement under one of the retroactive reinstatement processes; they may reapply for retroactive reinstatement.
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To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
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