IRS Issues Guidance On How Organizations Can Apply To Reinstate Their Tax-Exempt Status

IR 2011-63; Rev Proc 2011-36, 2011-25 IRB; Notice 2011-43, 2011-25 IRB; Notice 2011-44, 2011-25 IRB

In a news release and accompanying Revenue Procedure and Notices, IRS has announced that approximately 275,000 organizations lost their tax-exempt status due to their failure to file legally required annual reports for three consecutive years. Although IRS believes that many of these organizations are now defunct, it provided special procedures, including a reduced application fee for eligible small organizations, to help any existing organizations apply for reinstatement of their exempt status.

Background. Most organizations that are exempt from tax under Code Sec. 501(a) are required under Code Sec. 6033(a) to file annual information returns. For small organizations, the law imposed a filing requirement for the first time in 2007. Under Code Sec. 6033(j), an exempt organization's failure to file information returns for three consecutive years will result in the revocation of the organization's exempt organization status under Code Sec. 501(a).

Over the past few years, IRS had attempted to inform organizations of their filing responsibilities, including mailing over 1 million notices to organizations that had not filed and giving smaller organizations an additional five months to file.

New guidance. IRS issued the following Revenue Procedure and Notices to help organizations apply for reinstatement of their tax-exempt status, including retroactive reinstatement:

Rev Proc 2011-36, which modifies Rev Proc 2011-8, 2011-1 IRB 237, provides for a reduced user fee for certain small organizations (i.e., with annual gross receipts of $50,000 or less for 2010) whose exempt status was revoked under Code Sec. 6033(j) to apply for and reinstate their tax-exempt status. Instead of the typical $400 or $850 fee, eligible small organizations only have to pay $100.

Rev Proc 2011-36 is effective June 9, 2011, and the reduced fee applies to eligible organizations' applications to reinstate their tax-exempt status that are postmarked no later than Dec. 31, 2012.

Notice 2011-43 provides transitional relief for certain small organizations that lost their tax-exempt status because they failed to file a required annual electronic notice (Form 990-N e-Postcard) for tax years beginning in 2007, 2008, and 2009. Eligible organizations that apply for reinstatement of their tax-exempt status by Dec. 31, 2012 will be treated by IRS as having established reasonable cause for their filing failures, and their tax-exempt status will be reinstated retroactive to the date it was revoked.

Notice 2011-44 provides instructions on how organizations that lost their tax-exempt status under Code Sec. 6033(j) should go about requesting retroactive reinstatement. The request should include the following:

... a written statement setting forth all of the facts that support its claim for reasonable cause for failing to file a required return or notice in each of the three consecutive years and over the entire consecutive three-year period;

... a written statement describing the safeguards the organization has put into place to ensure that the organization will not fail to file returns or notices in the future;

... evidence to substantiate all material aspects of the written statements described above;

... properly completed and executed paper annual information returns for all tax years during and after the consecutive three-year period that the organization was required, but failed, to file an annual information return;

... properly completed and executed Forms 990-EZ for all tax years during and after the consecutive three-year period that the organization was eligible to file a Form 990-N e-Postcard but failed to file either a Form 990-N e-Postcard or an annual information return; and

... an original declaration, dated and signed under penalties of perjury by an officer, director, trustee, or other official who is authorized to sign for the organization in the provided form.

IRS also requested comments regarding Notice 2011-44 and suggestions for future guidance regarding Code Sec. 6033(j).

References: For information reporting and revocation of exempt status for failure to file information returns for three consecutive years, see FTC 2d/FIN ¶S-2802; United States Tax Reporter ¶60,334; TaxDesk ¶688,001 et seq.; TG ¶60701 et seq.