In a legal advice, the IRS’s Chief Counsel has addressed
- Whether the automatic revocation of exemption provisions apply to exempt organizations that improperly filed Form 990-N (e-Postcard) for three or more consecutive years but were not provided with a nonfiling notice, and
- Whether these organizations must be afforded an administrative appeal.
Form 990-N compliance strategy.
The IRS’s Tax Exempt and Government Entities (TE/GE) division runs a compliance program to verify whether tax-exempt organizations are properly filing Form 990-N. Form 990-N may be used only by exempt organizations that normally have less than $50,000 in gross receipts.
As part of its compliance program, TE/GE uses financial information from other federal tax forms (such as Forms W-2, 1099-Misc, and 1099-K) to identify exempt organizations that may have improperly filed a Form 990-N because their normal gross receipts exceed $50,000. TE/GE then examines the identified organizations to determine their gross receipts.
Automatic revocation of exempt status.
Generally, exempt organizations must annually file a “required return” on one of the forms in the 990 series. Which form in the 990 series an exempt organization must use depends on the type of organization and the amount of the organization’s assets and gross receipts.
Under the regulations, organizations that improperly file Form 990-N, haven’t filed a “required return.” (Reg. § 1.6033-6(b)(1))
An organization will automatically lose its exempt status when, for three consecutive years, the organization doesn’t submit a required return. (Code Sec. 6330(j)(1)(B))
Organizations that automatically lose their exempt status don’t have an opportunity to appeal that revocation to the IRS’s Independent Office of Appeals (Appeals).
Required notice of nonfiling.
Generally, under Code Sec. 6033(j)(1)(A), the IRS is required to notify organizations when it has no record of the organization having filed a required return for two consecutive years (nonfiler notice). The notice must warn the organization that it will lose its exempt status if it fails to file a third consecutive required return.
Required notice and automatic revocation.
According to the Chief Counsel, Code Sec. 6033(j)(1)(B) doesn’t condition automatic revocation of an organization’s exempt status on the IRS’s issuance, or an organization’s receipt, of a nonfiler notice. Instead, the Chief Counsel explains, the statute has two separate conditional statements:
- If an organization fails to file the required return for two years, the IRS must provide the organization with a nonfiler notice under Code Sec. 6033(j)(1)(A).
- If an organization fails to file the required return for a third consecutive year, then the organization’s tax-exempt status is automatically revoked under Code Sec. 6033(j)(1)(B).
Thus, the organization’s failure to file the required return in the third consecutive year is the only condition required for automatic revocation.
In addition, the Chief Counsel noted that the notice requirement is separate from the annual reporting obligation imposed on exempt organizations. Accordingly, the lack of notice doesn’t excuse an organization from its obligation to file the “required return.”
Note. While the lack of notice doesn’t excuse an organization from its compliance with its reporting obligations, it could be relevant when determining whether an organization applying for retroactive reinstatement of its exempt status had reasonable cause for its failure to file.
The Chief Counsel determined that after an examination, the IRS must provide the notice required under Code Sec. 6033(j)(1)(A) to an organization whose exempt status wasn’t automatically revoked—that is, to an organization that improperly filed a Form 990-N for one year or two years.
However, the IRS isn’t required to provide a Code Sec. 6033(j)(1)(A) notice to an organization whose exempt status was automatically revoked under Code Sec. 6033(j)(1)(B).
According to Chief Counsel: “In these cases, it is arguably not accurate to say that the Service has “no record of such a return or notice from such organization for two consecutive years.” The IRS has a record of the organization’s submission of Forms 990-N and would not have had any basis to question the organization’s eligibility to submit them prior to undertaking the audit. Therefore, “notification within the meaning of section 6033(j)(1)(A) could not have occurred as a practical matter.”
Under Code Sec. 6033(j)(1)(B), an organization’s exempt status is automatically revoked by operation of law. Accordingly, the revocation isn’t an “adverse determination” an organization may administratively appeal (appeal rights).
However, TE/GE has the discretion to afford appeal rights on the issue of gross receipts when it has determined, after an examination, that an organization was not eligible to file Form 990-N because its annual gross receipts normally exceeded $50,000. Appeals would then consider whether the IRS properly determined the organization’s gross receipts.
If Appeals reverses the auditor’s gross receipts determination, the organization wouldn’t automatically lose its exempt status because the organization would not have failed to file its required annual return for three consecutive years.
However, if Appeals agrees with the auditor’s conclusion that the organization’s gross receipts made it ineligible to submit a Form 990-N, then the organization would automatically lose its exempt status and Appeals could not reverse the revocation because it occurs by operation of law.
To continue your research on revocation of exempt organization status for failing to file required returns for three consecutive years, see FTC 2d/FIN ¶ S-2802.