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Business Tax

IRS Revises Effective Date Language in Application for Tax-Exempt Status

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

On its website, the IRS has said that it is making two changes to the 2020 Instructions to Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. The changes relate to lines 2 and 2a of Schedule E (Effective Date).

Background—tax-exempt status application.

Unless an exception applies, an organization wishing to obtain tax-exempt status under Code Sec. 501(c)(3) must file a Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. If the IRS accepts the application, the IRS will issue a determination letter recognizing the organization’s tax-exempt status. (Instructions to Form 1023)

Exceptions apply to certain organizations such as churches, small public charities, and organizations formed before October 10, 1969. These organizations are eligible to self-declare their exemption from Federal income tax (“self-declared exempt organizations”). (IRS Pub 1828, Tax Guide for Churches and Religious Organizations)

Background—effective date of tax-exempt status.

An IRS-issued determination letter recognizing tax-exempt status of an organization is effective as of the date of formation of the organization if, among other things, the organization has filed a Form 1023 within 27 months from the end of the month in which it was organized. (Rev Proc 2021-5, 2021-1 IRB 250)

Generally, if the organization did not file Form 1023 within 27 months of formation, the effective date of exempt status will be the date it did file Form 1023 (submission date). But the IRS may grant requests for an earlier effective date when there is evidence to establish the organization acted reasonably and in good faith, and the grant of relief won’t prejudice the interest of the government. (Line 2, Schedule E (Effective Date), Form 1023) This grant is sometimes referred to as “late-filing relief.”

Line 2, Schedule E, Form 1023 has a box for an organization to check to indicate whether the organization accepts the submission date as the effective date of its exemption status or whether it is requesting an earlier effective date.

Line 2a provides space for an organization to explain why the IRS should grant a request for an earlier effective date if the organization did not file Form 1023 within 27 months. The January 2020 instructions to Line 2a read, “You may be eligible for consideration for relief from the requirement that you file Form 1023 within 27 months of formation if you can establish that you acted reasonably and in good faith, and that granting an extension won’t prejudice the interests of the government. Describe in detail your reasons for filing late, how you discovered your failure to file, any reliance on professional advice or advice from the IRS, and any other information you believe will support your request for relief. Also, you may want to provide a comparison of

  1. What your aggregate tax liability would be if you had filed this application within the 27-month period with
  2. What your aggregate liability would be if you were exempt as of your formation date.

We may consider the following factors.

  • You filed Form 1023 before we discovered your failure to file.
  • You failed to file because of intervening events beyond your control.
  • You exercised reasonable diligence, but you weren’t aware of the filing requirements. (The complexity of your filing and experience in these matters may be taken into consideration.)
  • You reasonably relied on written advice from us.
  • You reasonably relied on the advice of a qualified tax professional who failed to file or advise you to file Form 1023.” (emphasis added)

Background—self-declared organizations can’t request late-filing relief.

In legal advice issued this past November, the IRS determined that self-declared exempt organizations that have not filed applications for tax exemption within 27 months of their organization date are not entitled to late-filing relief, i.e., they are not entitled to have their exempt status recognized retroactively to their organization date. (Legal Advice Issued by Field Attorneys 20205201F, see Certain organizations not entitled to tax-exempt status retroactive to organization date (01/29/2021))

2020 instructions to be revised.

On its website, the IRS says that it will be making two revisions to the January 2020 instructions to Form 1023.

First, in the instructions for Line 2, Schedule E, a caution will be added to point out that an organization that is not required to apply for recognition of exemption in order to be tax-exempt should not check the box to request an effective date earlier than the submission date. The caution points out that these organizations are not eligible to make these requests. However, the caution says, such an organization may be exempt prior to the effective date that the IRS recognizes its exempt status because the organization may be considered tax exempt under Code Sec. 501(c)(3) without filing Form 1023.

Second, in Line 2A, the list of factors that the IRS may consider has been revised. The bullet point “You filed Form 1023 before we discovered your failure to file.” has been removed. And a new bullet point, “You filed the required Form 990 series returns [Return of Organization Exempt From Income Tax] consistent with your requested status.” has been added.

To continue your research on tax exemption requests by charitable, religious, scientific, literary, educational, etc., organizations, see FTC 2d/FIN ¶ T-10462.

 

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