The IRS continues to implement the “three years and you’re out” rule for Form 990 non-filers added by the Pension Protection Act of 2006 (the “PPA”). That legislation amended Section 6033 of the Internal Revenue Code to provide that exempt organizations required to file a Form 990-series return (i.e., a Form 990, Form 990-EZ or Form 990-N) that do not file the return for three consecutive years will have their tax-exempt status automatically revoked going forward. Organizations subject to automatic revocation are required to file exemption applications with the IRS to regain exempt status, even if they were not originally required to file an application for recognition of exempt status. Further, exempt status will not be restored retroactively unless the IRS finds there was reasonable cause for the failure to file.
In June of 2011, the IRS completed the process of identifying organizations in its exempt organizations database that failed to file during the three years following the PPA effective date and therefore were subject to automatic revocation. Since then, the IRS has been identifying organizations subject to automatic revocation on an ongoing basis and has made this information available to the public on its website. The IRS is now taking the next step: ensuring that past non-filers subject to automatic revocation don’t get retroactive exemption determinations (and, accordingly, cannot have their tax-exempt status retroactively reinstated unless they establish reasonable cause for the failure to file).
In this year’s annual update (Rev. Proc. 2013-9) of the revenue procedure establishing procedures for granting exemption determination letters, the IRS explains that only a few types of exempt organizations, such as Section 501(c)(3) organizations, have a deadline for filing an exemption application. This is because many other types of exempt organizations are not actually required to apply to the IRS for recognition of exempt status, although they may voluntarily do so. When such an organization voluntarily applies to the IRS for recognition of exemption, it has been the IRS’s practice to grant a determination letter recognizing exemption retroactively to the date of formation as long as the organization has always met the applicable requirements, which can be a number of years. This is demonstrated on the Form 1023, or application for recognition of Section 501(c)(3) status, which asks if the filing organization wishes to ask for retroactive recognition of its status as a Section 501(c)(4) organization if it has missed the Section 501(c)(3) filing deadline.
The IRS has now changed its procedures to conform this practice with the 27-month deadline for filing exemption applications already imposed by Section 508 of the Internal Revenue Code for Section 501(c)(3) organizations, even though there has been no statutory change imposing this limit. The IRS has also changed its procedures to conform to the PPA prohibition on tax exemption for non-filing organizations.
This makes it more important than ever for any organization that believes it is tax-exempt but has not applied to the IRS for a determination letter recognizing its exemption to do so promptly and to make sure that the necessary Form 990-series return is filed annually and on time. Failure to timely apply can mean generally foregoing the ability to receive a determination letter that recognizes the organization’s exemption retroactively to the date of its formation. Further, in the event that the organization is ever subject to automatic revocation, the organization will not be able to have its exempt status reinstated retroactively unless it can establish reasonable cause for its failure to timely file the applicable Form 990-series return for three consecutive years.