Private Letter Rulings - Exempt Status Revoked for Reporting Failures
GiftLaw Note:
The Service sent an Information Document Request (IDR) to ORG requesting detailed documentation for the tax years ending 12/31/20XX and 12/31/20XX. Also, upon discovering ORG had not filed Forms 990 from year 19XX through 20XX, the IRS requested the delinquent returns. A field examination was set for May 13, 20XX, at which time ORG was to provide the requested information. At the time of the examination, it was discovered that ORG failed to keep and provide adequate records that were required for conducting the examination.
Section 6001 requires every organization to keep adequate records of finances and tax information as prescribed by the Secretary of the Treasury. All required records must be kept at all times available for inspection by authorized Internal Revenue officers in accordance with Treas. Reg. Sec. 1.6001-1(e). Section 6033(a)(1) provides that tax-exempt organizations must file an annual return (Form 990) stating items of gross income, receipts, disbursements, etc. The Service cited these code sections along with Rev. Rul. 59-95 in its decision to terminate ORG's tax-exempt status. Rev. Rul. 59-95 concerns an organization whose record keeping was so incomplete that it was impossible for them to provide the information required on Form 990. Here, the Service held ORG failed to meet the reporting and filing requirements under Secs. 6001 and 6033 and revoked ORG's exempt status.
Section 6001 requires every organization to keep adequate records of finances and tax information as prescribed by the Secretary of the Treasury. All required records must be kept at all times available for inspection by authorized Internal Revenue officers in accordance with Treas. Reg. Sec. 1.6001-1(e). Section 6033(a)(1) provides that tax-exempt organizations must file an annual return (Form 990) stating items of gross income, receipts, disbursements, etc. The Service cited these code sections along with Rev. Rul. 59-95 in its decision to terminate ORG's tax-exempt status. Rev. Rul. 59-95 concerns an organization whose record keeping was so incomplete that it was impossible for them to provide the information required on Form 990. Here, the Service held ORG failed to meet the reporting and filing requirements under Secs. 6001 and 6033 and revoked ORG's exempt status.
Dear * * *
This is a final notice of adverse determination that your exempt status under section 501(c)(3) of the Internal Revenue Code is revoked. Recognition of your exemption under Internal Revenue Code section 501(c)(3) is revoked effective January 1, 20XX the following reason(s):
You have failed to produce documents to establish that you are operated exclusively for exempt purposes within the meaning of Internal Revenue Code section 501(c)(3), and that no part of your net earnings inure to the benefit of private shareholders or individuals. Also, you have failed to keep adequate books and records as required by IRC section 6001 and the regulations there under.
Section 1.6033-2(h)(2) of the Income Tax Regulations provides, in part, that every organization which is exempt from tax, shall submit such additional information as may be required by the Internal Revenue Service for the purpose of inquiring into its exempt status. You have not provided the requested information.
You failed to meet the operational requirements for continued exemption under IRC 501(c)(3). You have not provided requested information. We hereby revoke your organization's exemption from Federal income tax under section 501(c)(3) of the Internal Revenue Code, effective January 1, 20XX.
Contributions to your organization are no longer deductible effective January 1, 20XX.
Since your exempt status has been revoked, you are required to file Form 1120, U.S. Corporation Income Tax Return, for all years beginning on or after January 1, 20XX.
Income tax returns for subsequent years are to be filed with the appropriate Service Center identified in the instructions for those returns.
It is further determined that your failure to file a written appeal constitutes a failure to exhaust your available administrative remedies. However, if you decide to contest this determination in court, you must initiate a suit for declaratory judgment in the United States Tax Court, the United States Claims Court, or the district court of the United States for the District of Columbia before the (ninety-first) 91st day after the date that this determination was mailed to you. Contact the clerk of the appropriate court for rules for initiating suits for declaratory judgment. To secure a petition form, write to the following address: * * *
Please understand that filing a petition for a declaratory judgment under IRC section 7428 will not delay the processing of subsequent income tax returns and assessment of any taxes due.
You also have the right to contact the Office of the Taxpayer Advocate. However, you should first contact the person whose name and telephone number are shown above since this person can access you tax information and can help you get answers. You can call 1-877-777-4778, and ask for the Taxpayer Advocate assistance or you can contact the Advocate from the site where this issue was determined by writing to: * * *
Taxpayer Advocate assistance cannot be used as substitute for established IRS procedures, formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically correct tax determination, nor extend the time fixed by law that you have to file a petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling.
This letter should be kept within your permanent records.
If you have any questions, please contact the person whose name and telephone number are shown above.
Sincerely,
Nanette M. Downing, Director, EO Examinations
* * * * *
February 12, 2010
Dear * * *
We have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under section 501(c)(3) of the Internal Revenue Code (Code) is necessary.
If you accept our findings, take no further action. We will issue a final revocation letter.
If you do not agree with our proposed revocation, you must submit to us a written request for Appeals Office consideration within 30 days from the date of this letter to protest our decision. Your protest should include a statement of the facts, the applicable law, and arguments in support of your position.
An Appeals officer will review your case. The Appeals office is independent of the Director, EO Examinations. The Appeals Office resolves most disputes informally and promptly. The enclosed Publication 3498, The Examination Process, and Publication 892, Exempt Organizations Appeal Procedures for Unagreed Issues, explain how to appeal an Internal Revenue Service (IRS) decision. Publication 3498 also includes information on your rights as a taxpayer and the IRS collection process.
You may also request that we refer this matter for technical advice as explained in Publication 892. If we issue a determination letter to you based on technical advice, no further administrative appeal is available to you within the IRS regarding the issue that was the subject of the technical advice.
If we do not hear from you within 30 days from the date of this letter, we will process your case based on the recommendations shown in the report of examination. If you do not protest this proposed determination within 30 days from the date of this letter, the IRS will consider it to be a failure to exhaust your available administrative remedies. Section 7428(b)(2) of the Code provides, in part: "A declaratory judgment or decree under this section shall not be issued in any proceeding unless the Tax Court, the Claims Court, or the District Court of the United States for the District of Columbia determines that the organization involved has exhausted its administrative remedies within the Internal Revenue Service." We will then issue a final revocation letter. We will also notify the appropriate state officials of the revocation in accordance with section 6104(c) of the Code.
You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling. You may call toll-free 1-877-777-4778 and ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at: * * *
If you have any questions, please call the contact person at the telephone number shown in the heading of this letter. If you write, please provide a telephone number and the most convenient time to call if we need to contact you.
Thank you for your cooperation.
Sincerely,
Nanette M. Downing, Acting Director, EO Examinations
* * * * *
ISSUE
Whether ORG qualifies for exemption under Section 501(c)(3) of the Internal Revenue Code.
FACTS
Letter 3613 and Form 4564, Information Document Request (IDR), mailed on March 13, 20XX to ORG (ORG) confirming a field examination set for May 13th, 20XX. The IDRs requested detailed documentation involving books and records for tax years ending 12/31/20XX and 12/31/20XX. Additional IDRs informed ORG that annual information returns Form 990 from 19XX through 20XX did not appear to have been filed by the organization. Therefore, a request for the delinquent returns was made by the Internal Revenue Service agent who conducted the examination.
Additionally ORG failed to keep and provide adequate records required to conduct examination.
LAW
IRC § 6001 provides that every person liable for any tax imposed by the IRC, or for the collection thereof, shall keep adequate records as the Secretary of the Treasury or his delegate may from time to time prescribe.
IRC § 6033(a)(1) provides, except as provided in IRC § 6033(a)(2), every organization exempt from tax under section 501(a) shall file an annual return, stating specifically the items of gross income, receipts and disbursements, and such other information for the purposes of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe, and keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary may from time to time prescribe.
Treas. Reg. § 1.6001-1(a) in conjunction with Treas. Reg. § 1.6001-1(c) provides that every organization exempt from tax under IRC § 501(a) and subject to the tax imposed by IRC § 511 on its unrelated business income must keep such permanent books or accounts or records, including inventories, as are sufficient to establish the amount of gross income, deduction, credits, or other matters required to be shown by such person in any return of such tax. Such organization shall also keep such books and records as are required to substantiate the information required by IRC § 6033.
Treas. Reg. § 1.6001-1(e) states that the books or records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees, and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law.
Treas. Reg § 1.6033-1(h)(2) provides that every organization which has established its right to exemption from tax, whether or not it is required to file an annual return of information, shall submit such additional information as may be required by the district director for the purpose of enabling him to inquire further into its exempt status and to administer the provisions of subchapter F (section 501 and the following), chapter 1 of the Code and IRC § 6033.
Rev. Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested to produce a financial statement and statement of its operations for a certain year. However, its records were so incomplete that the organization was unable to furnish such statements. The Service held that the failure or inability to file the required information return or otherwise to comply with the provisions of IRC § 6033 and the regulations which implement it, may result in the termination of the exempt status of an organization previously held exempt, on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status.
In accordance with the above cited provisions of the Code and regulations under IRC §§ 6001 and 6033, organizations recognized as exempt from federal income tax must meet certain reporting requirements. These requirements relate to the filing of a complete and accurate annual information (and other required federal tax forms) and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated business income tax.
CONCLUSION
It is the IRS's position that the organization failed to meet the reporting and filing requirements under IRC §§ 6001 and 6033 to be recognized as exempt from federal income tax under IRC § 501(c)(3). Accordingly, the organization's exempt status is revoked effective December 31, 20XX.