On January 2, 2014, the IRS issued an advance copy of Rev. Proc. 2014-11 (Procedure). This very helpful Procedure sets forth streamlined processes for organizations whose tax-exempt status has been automatically revoked for failure to file required annual returns or notices for 3 consecutive years. Successfully navigating the process results in regaining tax-exempt status retroactive to the date of revocation.
Table of contents
The Procedure describes 3 paths through which an organization whose tax-exempt status has been automatically revoked may apply for retroactive reinstatement back to the date of revocation.
3 Paths to Apply for Retroactive Reinstatement to Tax-Exempt Status
1. Small, Timely, First Offenders
The Procedure permits certain organizations to regain their tax-exempt status as of the date of revocation, no questions asked. The process is available for organizations that are:
- Small. Organizations that were eligible to file either Form 990-EZ, Short Form Return of Organization Exempt from Income Tax, OR Form 990-N, e-Postcard, for each of the 3 consecutive years it failed to file;
- Timely. That applies for retroactive reinstatement on Form 1023 or Form 1024 within 15 months of the date of revocation (the later of: (i) the day the organization received a letter notifying them of the revocation from the IRS; or (ii) the date the IRS published a notice that the organization’s exemption was automatically revoked); and
- First Offenders. Its the first time the organization’s tax-exempt status has been revoked.
An organization eligible for this process is not required to file a prior year Form 990-N or Form 990-EZ for any year in which the organization was eligible to file such forms. So, small, timely, first offenders can be reinstated back to the date of revocation, if they:
- re-submit an Application for Exemption with Streamlined Retroactive Reinstatement written across the top; and
- pay the applicable user fee.
2. Larger, but Timely Offenders
If an organization is not a small first offender, it may still be eligible for retroactive reinstatement if it applies within the 15-month window. Section 5 of the Procedure allows organizations in this situation to make a reasonable cause argument. If a reasonable cause for the failure to file a return can be established for any one of the 3 years the organization failed to file, the organization qualifies for retroactive reinstatement. To do this:
- apply on Form 1023 or Form 1024 for retroactive reinstatement within 15 months of the date of revocation;
- pay the applicable user fee;
- establish the organization had reasonable cause with respect to its failure to file a required annual return or notice for at least one of the 3 consecutive years in which it failed to file;
- file complete and executed paper returns for all tax years in the consecutive 3-year period (and for any other tax years after such period) for which the organization was required, and failed, to file; and
- include a statement with its request for reinstatement confirming it has filed the required annual returns.
3. Late Offenders of Any Size.
For any organization applying for retroactive reinstatement more than 15 months after the date of revocation, retroactive reinstatement may still be possible. Section 6 of the Procedure requires such organizations to make a reasonable cause argument for each of the 3 years it failed to file a required annual return or notice. Everything else is the same.
Penalty Relief
In each situation, the Procedure provides that the IRS will not impose a failure-to-file penalty for the 3 consecutive years for which the organization was required, but failed, to file required annual returns so long as,
- the organization’s application for retroactive reinstatement is approved,
- the organization satisfied all the requirements for reinstatement, and
- the organization is retroactively reinstated.
Effective Date
The Procedure, which modifies and supersedes Notice 2011-44, is effective for applications submitted after January 2, 2014. However, the Procedure generously includes transition relief for organizations that submitted applications for reinstatement prior to that date.
Transitional Relief
Organizations that would have qualified for the streamlined procedures outlined in sections 1 and 2 above and received a Post-Mark Date reinstatement (a reinstatement effective only back to the post-mark date on the organization’s application for reinstatement), are now automatically retroactively per Section 10 of the Procedure.
Such organizations may provide their post-mark determination letter along with a copy of the Procedure or may write to the IRS to obtain a revised determination reflecting their reinstatement back to the date of revocation. There is no fee associated with this request.
This is an especially helpful change as many contributions to organizations reinstated as of the post-mark may not have qualified for the charitable contribution deduction during the time they were revoked.
Establishing Reasonable Cause
The Procedure clarifies how organizations can establish reasonable cause for the failure to submit the proper returns or notices. To establish reasonable cause, the organization must show it, exercised ordinary business care and prudence in determining and attempting to comply with reporting requirements. The statement must include details regarding the facts and circumstances leading to the failure to submit, including:
- a account of how the failure was discovered, and
- an explanation of the steps taken to avoid or mitigate future failures.
The Procedure goes on to list four factors weighing in favor of finding a reasonable cause. Again, if you are filing within the 15-month window you may only need to establish reasonable cause for one tax year; whereas, if you are outside that window you will need to establish reasonable cause for all three.
The Procedure is a welcome and practical guidance at a time when an unprecedented number of small tax-exempt organizations are struggling with their tax compliance obligations.
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.