IRS Announces Automatic Retroactive Reinstatement for Certain Organizations

John Christopher, Manley Burke, john.christopher@manleyburke.com

On January 2, 2014, the Internal Revenue Service announced new procedures for reinstating the tax-exempt status of organizations that have had their tax-exempt status automatically revoked under section 6033(j) of the Internal Revenue Code (“Code”) for failure to file required annual returns or notices for three consecutive years.  The new procedures, to be published in Revenue Procedure 2014-11 (http://www.irs.gov/pub/irs-drop/rp-14-11.pdf) as part Internal Revenue Bulletin 2014-3 (Jan. 13, 2014), will allow small organizations to obtain retroactive reinstatement of exempt status automatically – without the burden of showing reasonable cause.

Passed as part of the Pension Protection Act of 2006, Code Section 6033(j)(1) automatically revokes the tax-exempt status of any organization that fails to file a required annual return  or notice (e.g., Forms 990, 990-EZ or 990-N) for three consecutive years. Revocation under section 6033(j)(1) is effective as of the due date for the filing of the third Annual Return or notice.

Any organization that has its tax-exempt status automatically revoked in this manner must apply to the IRS in order to obtain reinstatement of its tax-exempt status, regardless of whether the organization was originally required to apply for recognition of its tax exemption. For example, if the tax-exempt status of a subordinate organization included in a group exemption letter (such as a local chapter of a national fraternity) is automatically revoked under Code section 6033(j)(1), the subordinate organization must apply for reinstatement of its tax-exempt status on its own behalf.

Under the general rule, the effective date of the organization’s reinstated tax-exempt status generally will be the date on which the application was post-marked.  However, Code section 6033(j)(3) further provides that if an organization “can show to the satisfaction of the Secretary evidence of reasonable cause for the failure [to file required annual returns or notices], the organization’s exempt status may, in the discretion of the Secretary, be reinstated effective from the date of the revocation.”

Under the newly issued procedures, an organization that was eligible to file either Form 990-EZ or Form 990-N for each of the three consecutive years that it failed to file and that has not previously had its tax-exempt status automatically revoked may qualify to use the Revenue Procedure’s new streamlined retroactive reinstatement of its tax-exempt status process. In order to do so, the qualifying organization must submit an application for reinstatement (with the applicable user fee) not later than 15 months after the later of the date of the organization’s revocation letter or the date on which the IRS posted the organization’s name on its revocation list (see http://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check.) The IRS recommends that applying organizations write “Revenue Procedure 2014-11, Streamlined Retroactive Reinstatement” on the top of the application to facilitate processing.

If an organization files an application as provided above, and its application is approved, then the organization will be deemed to have reasonable cause for its failures to file Forms 990-EZ or 990-N, as applicable, for three consecutive years and, as a result, it will be reinstated retroactively to the revocation date.

The Revenue Procedure also addresses the potential application of failure to file penalties. In essence, if the organization is retroactively reinstated and files properly completed and executed paper Forms 990-EZ for each taxable year it was required to file a Form 990-EZ, then the IRS will not impose otherwise applicable failure to file penalties.  Note that for any year the organization was eligible to file a Form 990-N, the organization is not required to file a prior year Form 990-N or Form 990-EZ for such year.

We heard anecdotally from IRS representatives in the Cincinnati determinations office that a huge number of retroactive reinstatement applications are pending. These are in addition to the normal caseload of new applications for exemption. This caseload “bubble” has caused substantial delay in the IRS’ ability to timely respond to both new applications for exemption and applications for reinstatement. These new procedures appear to have been issued in response to the caseload bubble. The automatic retroactive reinstatement procedures implemented under the new Revenue Procedure are a welcome development in the IRS’ quest to reduce the period of time required for review and processing of applications for exemption.