In 2006, Congress passed the Pension Protection Act (PPA) requiring most tax-exempt organizations to file an annual information return or notice with the IRS. The PPA imposed a filing requirement on many small organizations with revenues under $25,000 for the first time in 2007. In addition, the PPA requires automatic revocation of tax-exempt status whenever an exempt organization fails to file required returns or notices for three consecutive years.
Relief for Revoked Nonprofits
More helpfully, the IRS also announced relief for revoked nonprofits to permit them to reinstate their tax-exempt status, in some cases retroactively. There are separate rules for retroactive reinstatement depending upon the organization’s revenues and circumstances as follows:
Transitional Relief for Small Organizations
Notice 2011-43 provides transitional relief to small organizations that have lost their tax-exempt status because they failed to file an annual notice, known as Form 990-N, for three consecutive years. To qualify for the retroactive relief program, such organizations must meet the following criteria:
- The organization was not required to file annual information returns (such as Form 990, Return of Organization Exempt from Income Tax or Form 990-EZ, Short Form Return of Organization Exempt from Income Tax) for taxable years beginning before 2007.
- The organization was eligible in each of its taxable years beginning in 2007, 2008, and 2009 to file a Form 990-N e-Postcard (rather than an annual information return). Generally, organizations (other than private foundations and most section 509(a)(3) supporting organizations) with annual gross receipts that were normally not more than $25,000 in such taxable years would have been eligible to file a Form 990-N e-Postcard.
- On or before December 31, 2012, the organization submits to the IRS a properly completed and executed application for reinstatement of tax-exempt status.
The process for applying for retroactive reinstatement is similar to the application process for new organizations “ filing Form 1023 or 1024 depending on the type of exemption sought. Applicants that are seeking retroactive reinstatement under this notice must write Notice 2011-43 on the top of the application and attach the following statement:
[Name of Organization] was not required to file annual information returns for taxable years beginning before 2007; was eligible in each of its taxable years beginning in 2007, 2008 and 2009 to file a Form 990 e-Postcard; and had annual gross receipts of normally not more than $25,000 in each of its taxable years beginning in 2007, 2008 and 2009.
Organizations that qualify for the transitional relief program are eligible for a reduced application fee of $100 rather than the typical $400 or $850 fee if they apply by the end of 2012.
Reasonable Cause Relief
Notice 2011-44 provides relief for organizations that have had their tax-exempt status automatically revoked but that do not qualify for small organization programs. This is a welcome development because until now, there has been no clear process or procedure to request retroactive reinstatement. To qualify for retroactive reinstatement, such organizations must demonstrate that there was reasonable cause for failing to file a return or notice over the entire three-year period.
To establish reasonable cause, an organization must provide evidence that it exercised ordinary business care and prudence in determining and attempting to comply with its reporting requirements for each year it failed to file but was nevertheless unable to comply with its reporting obligations. In determining whether an organization has established reasonable cause, the IRS considers all of the facts and circumstances, including, but not limited to, the following factors that weigh in favor of finding the reasonable cause:
- The organization’s failure was due to its reasonable, good faith reliance on erroneous written information from the IRS, stating that the organization was not required to file a return or notice under section 6033, provided the IRS was made aware of all relevant facts.
- The failure to file the returns or notices arose from events beyond the organization’s control that made it impossible for the organization to file returns or notices for each of the three years at issue and over the entire three-year period.
- The organization acted in a responsible manner by undertaking significant steps to avoid or mitigate the failure to file the required returns or notices and to prevent similar failures in the future, including, but not limited to:
- Attempting to prevent an impediment or a failure, if it was foreseeable;
- Acting as promptly as possible to remove an impediment or the cause of the reporting failure, once the failure was discovered; and
- After the failure was discovered, implementing sufficient safeguards to ensure future compliance with reporting obligations.
- Aside from the three consecutive years in which the organization failed to file returns or notices, the organization has an established history of complying with its reporting requirements (if any) under section 6033 and/or any other applicable reporting or other requirements under the Code.
The process for applying for retroactive reinstatement based on reasonable cause is more involved than the process applicable to small organizations. To apply for retroactive reinstatement based on reasonable cause, organizations must:
- Submit the appropriate application for exemption (Form 1023 or Form 1024) and the appropriate application fee
- Include a written statement setting forth all of the facts that support the organization’s claim that it had reasonable cause including a detailed description of all of the facts and circumstances that led to the failure and the steps taken to mitigate the failures
- Submit evidence to substantiate all material aspects of the written statement
- File a completed Form 990 (or Forms 990-EZ or 990-PF, whichever is applicable) for each year that the organization failed to file an information return
- File a completed Form 990-EZ for all years that the organization failed to file an annual notice (990-N)
- Submit an original declaration dated and signed by an officer, director, trustee, or another authorized official as follows:
I, _______________(Name), ________________ (Title) declare, under penalties of perjury, that I am authorized to sign this request for retroactive reinstatement on behalf of [Name of Organization], and I further declare that I have examined this request for retroactive reinstatement, including the written explanation of all the facts and information pertaining to the claim for reasonable cause, and to the best of my knowledge and belief, this request is true, correct and complete.
Organizations requesting retroactive reinstatement due to reasonable cause must pay the standard $400 or $850 application fee.
Today’s announcements are a welcome relief to small organizations as well as others who have, until now, not had a clear procedure to apply for retroactive reinstatement of tax-exempt status.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations. Ellis is licensed to practice in Washington and Arizona and advises nonprofits on federal tax and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.
- Announcement 2011-35, Publication of the Auto-Revocation List
- Notice 2011-43 “ Small Organization Transitional Relief
- Notice 2011-44 “ Reasonable Cause Relief
- Revenue Procedure 2011-33