Revenue Procedure Released Regarding Reinstatement of Automatically-Revoked Tax-Exempt Status

January 14, 2014Articles

On January 2, the Internal Revenue Service issued Revenue Procedure 2014-11, 2014-3 IRB 1, revising the procedures for retroactively reinstating the tax-exempt status of organizations that had that status automatically revoked for failure to file exempt organization tax returns for three consecutive years.

Since 2006, Internal Revenue Code Section 6033(j) has provided that an exempt organization’s failure to file information returns for three consecutive years will result in the revocation of the organization’s exempt status under Code Section 501(a). Over the past several years, the IRS has started enforcing this provision, sending notices to organizations that have failed to file, and revoking the exempt status of tens of thousands of exempt organizations.

In 2011, the IRS published two notices identifying ways for organizations that had run afoul of Code Section 6033(j) to retroactively reinstate exemption. Now, however, there is new guidance, and the IRS has provided three procedures for retroactively reinstating tax-exempt status:

1. Section 4 of the Revenue Procedure applies to organizations that: (i) could have filed Form 990-EZ or Form 990-N for each of the years that it failed to file; (ii) has not previously had its tax-exempt status automatically revoked; and (iii) is submitting its application for reinstatement no later than 15 months after the latter of the date of IRS’s revocation letter or the date on which IRS posted the organization’s name on its list of revoked exemptions. Organizations that qualify file a new Form 1023 (for organizations exempt under Code Section 501(c)(3)) or Form 1024 (for organizations seeking exemption under Code Section 501(a) but not Code Section 501(c)(3)) to obtain retroactive reinstatement. In contrast to the earlier process for 990-EZ filers, no statement of reasonable cause for its failure to file the returns is required. Under this process, exemption will be reinstated retroactively to the date of revocation, and no penalty will be assessed for failure to file the unfiled returns.

2. Section 5 of the Revenue Procedure establishes a retroactive reinstatement process for organizations that were not eligible to file Form 990-N or 990-EZ in each unfiled year that apply for reinstatement within 15 months of the latter of the date of IRS’s revocation letter or the date on which IRS posted the organization’s name on the revocation list. These organizations can obtain retroactive reinstatement by: (i) filing all unfiled Form 990s to Department of Treasury, Internal Revenue Service Center, Ogden, Utah 84201-0027; (ii) filing a Form 1023 or 1024 (to the address set forth in the Form’s instructions); (iii) attaching a statement to the Form 1023 or 1024 that all required Form 990s have been filed; and (iv) attaching a “Reasonable Cause Statement” to the Form 1023 or 1024 for at least one of the unfiled annual returns. If the application for reinstatement is approved, exemption will be reinstated retroactively to the date of revocation and no penalties for failure to file the annual returns will be assessed.

The Revenue Procedure states that “to establish reasonable cause . . ., an organization must establish that it exercised ordinary business care and prudence in determining and attempting to comply with” the requirement to file Form 990. The Revenue Procedure lists the following examples of factors that help to establish reasonable cause:

  1. That the failure to file the returns was due to the organization’s reasonable, good faith reliance on erroneous written information from the IRS, provided the IRS was made aware of all relevant facts;
  2. That the failure to file the return or notice arose from events beyond the organization's control;
  3. That the organization took and is continuing to take steps to avoid future failures in filing the required returns; and
  4. That the organization has an established history of complying with its tax reporting requirements.

3. Finally, Section 6 of the Revenue Procedure provides a retroactive reinstatement process for organizations applying after the 15 month period described above. The process is exactly the same as described in Section 5, except that the required Reasonable Cause Statement must be provided for all the years that it failed to file. As above, if the application for reinstatement under Section 6 is approved, exemption will be reinstated retroactively to the date of revocation and no penalties for failure to file the annual returns will be assessed.

In addition to the above processes, Section 7 of the Revenue Procedure provides that any organization may apply for a non-retroactive reinstatement of its tax-exempt status effective from the date on which it mails its application for reinstatement of its tax-exempt status (a Form 1023 or Form 1024). To facilitate processing, the organization should write “Revenue Procedure 2014-11, Reinstatement Post-Mark Date” on the top of the Application.

Notably, Revenue Procedure 2014-11 is effective for reinstatement applications submitted after January 2, 2014, but is also to be applied for all pending applications and for previously reinstated organizations.

If you have any questions about this, or any other exempt organization issue, please contact one of Dinsmore’s exempt organization attorneys.