By Diara Holmes, Caplin & Drysdale
The November issue of Diakonie featured an article regarding IRS Form 990 filing requirements, explaining that CHHSM members that are not considered an "integrated auxiliary" of a church may have unknown annual filing obligations. The Form 990 filing obligation applies even if an organization is covered by a group exemption ruling (for example, if it is listed in the UCC Yearbook).
Unfortunately, if an organization has missed three consecutive Form 990 filings, even if it was unaware of the filing requirement, it is possible the organization’s tax-exempt status under section 501(c)(3) of the Internal Revenue Code has been automatically revoked.
This article will address how this might happen and more importantly, how to apply for reinstatement and guide an organization back into compliance with its federal tax reporting obligations as soon as possible – ideally, before the Internal Revenue Service (and donors) even notice.
Special Circumstances for Church Group Members
IRS guidance permits, but does not require, the parent of a group to file a group return reflecting aggregate information collected from all of its subordinate member organizations, thereby relieving them of their individual 990 filing obligations. The UCC, like many church parent organizations, does not file a group return. Instead, the UCC publishes its annual Yearbook, which lists the member organizations that currently qualify for inclusion in the group ruling.
Moreover according to IRS Publication 4573, unlike other central organizations, churches are not required to provide annual updates to the IRS regarding the composition of the group. As a result, IRS records regarding subordinate organizations in church-led group rulings may be woefully out of date. Consider, for example, that the UCC's group exemption letter, issued in 1964, explicitly exempted all of its subordinate organizations from filing an annual Form 990. Soon thereafter, in 1969, the Internal Revenue Code was amended to narrow the types of organizations that could qualify for a 990 filing exemption to churches, their integrated auxiliaries, and those qualifying under specific discretionary exceptions. Thus, some CHHSM members may have had independent 990 filing obligations since 1969.
Statutory Basis for Automatic Revocation
As part of the 2006 Pension Protection Act, Congress added section 6033(j) to the Internal Revenue Code to penalize organizations that fail to file annual information returns or notices (if required) for three consecutive years. The penalty is severe: automatic revocation of tax exempt status. The new law took effect for tax years beginning after the PPA passed in August 2006. Thus, for any organization that failed to file returns for tax years 2007, 2008, and 2009, automatic revocation likely occurred on May 17, 2010.
The IRS has published (and updates monthly) on its website a searchable list of organizations that have had their exempt status revoked under the new law. However, it is important to note that identification by the IRS is not a prerequisite to revocation. If your organization has failed to satisfy its filing obligation for three consecutive years, the revocation is automatic, as a matter of law.
The Consequences of Revocation
If you believe your organizations has been (or should have been) “auto-revoked,” please consult your legal counsel and other tax advisors as soon as possible to consider, and hopefully mitigate, the adverse consequences that may follow. For example:
• Once the organization is identified by the IRS as a revoked organization, donors will not be able to make tax-deductible charitable contributions.
• A revoked organization will have the tax and filing obligations of a non-exempt taxpayer, including the requirement to file annual tax returns on Form 1120 and pay corporate income tax.
• There may be adverse consequences for the operation of tax-exempt 403(b) plans.
• There may be adverse consequences for outstanding tax-exempt bonds.
• Favorable treatment under state and local tax laws that depend on compliance with section 501(c)(3) may be at risk.
The Path to Reinstatement – Act Now
Fortunately, the IRS has published helpful guidance on the website, to assist organizations that have been auto-revoked and wish to apply for reinstatement of exempt status. The process for applying for reinstatement is outlined in IRS Notice 2011-44, and there are additional details included in a series of FAQ’s available on the IRS website.
Moreover, the IRS appears to be particularly open to resolving issues with organizations that have been automatically revoked. In one FAQ, the service confirms that it will not assess civil tax penalties for failure to file past 990s.
If your organization is planning to apply for reinstatement, you will need to prepare an Application for Recognition of Exempt Status (IRS Form 1023). Thorough preparation of Form 1023 can be time consuming. In addition to the form itself (and any necessary schedules), you will need to include copies of organizing documents (charter, bylaws), as well as a detailed narrative statement describing the organization’s activities. You will also need to provide detailed financial data. You will want to read the Instructions to Form 1023 (available on the IRS website) carefully, as they contain clarifying (and not always intuitive) guidance regarding specific questions on the form.
If your organization would like to seek retroactive reinstatement of exempt status, you will need to submit a written request that sets forth the organization’s “reasonable cause” for its previous failures to file. In addition, you will need to include in your submission completed Form 990s for the three unfiled years that triggered revocation (e.g., 2007, 2008 and 2009 tax years) and any subsequent years that have expired since then (e.g., 2010).
Your organization may also qualify for expedited consideration of the application for reinstatement. Essentially, if the organization faces an imminent loss of funding (e.g., from a pending contribution, foundation grant or tax exempt bond issue), it is well worth the effort to submit a request for expedited consideration. The specific requirements for such a request are published on the IRS website.
Remember that all of the information submitted to the IRS as part of the reinstatement package will become a matter of public record. Indeed, going forward, the organization will have to make the application and its three most recent Form 990s available for review upon request.
Consult Your Organization’s Tax Advisors
Any CHHSM organization that is concerned that it might have failed to previously meet its 990 filing obligations should consult with its counsel or other tax advisors before venturing down the path toward reinstatement and, of course, along the way.
First, you will need to review closely the organization’s specific facts and circumstances to confirm that it does indeed still qualify for exemption under section 501(c)(3) and for classification as a public charity.
Second, even if the issue has been researched in the past, your organization should review the current applicable law and IRS guidance to determine whether the entity qualifies for any of the exemptions from Form 990 filing requirements.
Third, bearing in mind that you will be creating a public record, it is always helpful to have counsel assist in preparing (or at least to review) the required narrative statements –one describing your organization’s activities and qualifications for exempt status, another statement explaining the organization’s reasonable cause for failing to file three consecutive annual returns, and potentially a third statement justifying expedited review of the application.
You may also appreciate counsel’s advice on particular sections of the application. For example, together, the application and the Form 990 now require detailed disclosure regarding the organization’s governance structure and compensation arrangements, and there are separate schedules for hospitals and nursing homes.
Finally, if you are requesting retroactive reinstatement, you will want to work with an accountant who has experience preparing Form 990s (and, if necessary, Form 990-T to report any unrelated business activities).
