The exempt organization community received welcome news today from the IRS, signaling what hopefully will be the start to a good year! Revenue Procedure 2014-11 issued on January 2, 2014, outlines four new streamlined procedures for reinstating the tax-exempt status of organizations that have had their status automatically revoked for failure to file IRS Form 990s.
The Pension Protection Act of 2006 enacted a new law that automatically revokes the federal income tax exemption of an organization that fails to file information returns (Form 990s) for three consecutive years. Since the law’s enactment, the IRS has revoked the tax-exempt status of over 542,596 organizations. Once revoked, an organization must reapply to the IRS for tax-exemption by submitting an IRS Form 1023 or 1024 Application (depending on the Internal Revenue Code Section that the organization is seeking to qualify for exemption) and paying the applicable user fee, typically $850.00.
With the exception of some initial relief procedures for small nonprofits, the process for an organization to reinstate its tax-exempt status has been marred by: (1) a lack of IRS personnel to process the new requests, and (2) unclear guidance as to when and how an organization can demonstrate sufficient reasonable cause to be “retroactively reinstated” to the date it was revoked. Failure to secure a retroactive reinstatement results in the exempt status for the organization being dated on the post-mark date the IRS receives the application. This creates a lapse period of several months between the revocation and reinstatement date whereby the organization’s otherwise tax-exempt income is now subject to corporate income taxes, requiring the organization to file an IRS Form 1120 to report and pay income taxes at the federal and state level. Because the tax laws governing business income do not neatly apply to a public charity, it was often unclear what actually constituted taxable income to the nonprofit.
Rev. Proc. 2014-11 provides clear guidelines on what constitutes “reasonable cause” and establishes a fifteen-month window in which smaller nonprofits may automatically be granted the retroactive reinstatement without the need to prove “reasonable cause.” The Procedure also clarifies that the IRS will not impose late filing fees for failure to file Form 990s on organizations that have their tax-exempt status retroactively reinstated. Rev. Proc. 2014-11 modifies and supersedes the IRS’ previous guidance on this issue in Notice 2011-44 and also applies to reinstatement applications currently pending at the IRS. Thus, the Rev. Proc. is critical reading for all exempt organization attorneys, accountants, and any nonprofit leaders that have had their exempt status revoked.