Nobody is Perfect – How to Handle an IRS Revocation Notice

First of all – do not panic.  Second of all – you are not alone, so don’t feel so bad.  At first count, there were over 275,000 organizations in a similar situation (and the IRS determined on a recount that there are actually thousands more).  If you have received notice from the IRS about your organization’s revocation, or if you see your organization’s name on the revocation list, the first thing to consider is whether the IRS may have made a mistake. Nobody is perfect. Afterall, that’s how most revocations came about.

But before calling the IRS, collect your documentation and consider the information below. It will help you determine your options and your next move and can help you make the most of your legal resources.  And of course, if, after reviewing the information, you believe that your organization’s tax-exempt status was revoked in error, you should contact the IRS Consumer Account Services by calling (877) 829-5500.

How fast does your organization need to act?

You should begin to address the issue of revocation as soon as you receive an IRS notice of revocation, see your organization’s name on the IRS revocation list, or if you know your organization has not filed IRS Forms 990 for three consecutive years.

Small organizations may save money on the reinstatement process if they file an application for reinstatement on or before the December 31, 2012 deadline– see more about this below about this cost-saving deadline.

For a brief introduction:

Watch this brief IRS video about revocation.

For additional background:

On the basics about exemption revocation, visit the National Council of Nonprofits.

On how to reinstate tax-exempt status, visit the IRS page on Reinstatement.

For details:

On transitional relief for small organizations, see IRS Notice 2011-43.

Also for thought:

Consider fiscal sponsorship as an alternative to reinstatement, or as an interim step. Greg Colvin’s Fiscal Sponsorship: 6 Ways to Do it Right is a great resource for learning more about fiscal sponsorship.

Consider donor relations issues, set out nicely by the National Council of Nonprofits with links to other helpful IRS resources.

Information to collect before calling legal counsel:

Collecting the information below before you consult with a qualified exempt organization lawyer about your organization’s options can help save you time and money.

Note: Going through this exercise will be productive for your organization’s future. You should store all of these documents in an accessible spot – so that you can locate them in less than five minutes, as the need arises (and it always arises). Your organization is required by law to make the following documents available to the public upon request.

1. Determination Letter. If it has one, your organization’s IRS determination letter (this is the letter recognizing your organization’s exemption from federal income tax). If you cannot find your organization’s determination letter, you can request it from the IRS directly by filing IRS Form 4506-A.
2. IRS Form 1023. If filed, the Application for Tax-Exempt Status submitted by your organization (this is either IRS Form 1023 or IRS Form 1024 depending on whether or not your organization is a 501(c)(3) organization). If you do not have a copy of your organization’s exemption application, you can request it from the IRS by filing IRS Form 4506-A.  Just know, the IRS may not have it, and it could take some time to obtain it as the IRS searches its records.
3. IRS Forms 990.  Any copies of your organization’s IRS Forms 990 (as they were filed, with signatures) and proof of their filing dates. If you do not have copies of the IRS Forms 990, you can check your organization’s filing history and obtain copies at the Economic Research Institute. You can also request copies from the IRS by filing IRS Form 4506-A, and can request a transcript to obtain information about filing dates from the IRS by calling 1-866-860-4259 x4.

What legal counsel wants to know:

Providing your exempt organization lawyer with the following information (along with the documentation above, if it is available) can help legal counsel provide an expedient review of your organization’s situation, which can save you time and money (and can help ensure that the issues are thoroughly considered).

1. The basis for your organization’s exemption (religious, charitable, trade association, etc.)
2. The fiscal date or calendar year end of the organization.
3. The years in which returns were not filed.
4. The amount of the annual gross receipts that your organization received beginning in 2007.  Was it less than $25, 000 in each of the following years: 2007, 2008, and 2009?
5. The filing date of the third IRS Form 990 in the three-year period that was required to be filed.
6. Reason(s) why the forms were not filed, or filed timely.  (Organizations must demonstrate reasonable cause in order for reinstatement to take effect retroactively.)
7. If your organization had an advance ruling period, the start date and end date of the advance ruling period.  Whether your organization is in the midst of its advance ruling period, and whether it completed IRS Form 8734 if the period has ended.
8. Any other reason(s), aside from non-filing that the IRS has presented as a basis
9. Whether any donations have been made (or are expected) from the effective date of revocation through reinstatement.

Parting words:

Think of the revocation notice as a chance to get your organization back in shape when the health of your organization matters most.  For many organizations, a fit life may mean fiscal sponsorship or winding down.

Please note: This article is provided only for informational purposes and for community benefit.  It is not legal advice. Please consult a qualified exempt organization lawyer for advice on your particular situation.