Organization loses exemption after failing to provide audit records

Plain-English summary

The IRS revoked an organization's section 501(c)(3) exemption after it repeatedly failed to provide requested financial records and information about its activities. The organization did not respond to a series of letters and telephone calls concerning an audit of its Form 990-N. Without the requested information, the IRS concluded that the organization had not established that it was operated exclusively for exempt purposes or met the recordkeeping and reporting requirements of sections 6001 and 6033. The IRS relied in part on Revenue Ruling 59-95, which addresses termination of exempt status when an organization cannot furnish required records and operational information. Revocation was effective January 1 of a redacted year, and the organization was required to file Form 1120 returns.

Ruling snapshot

• Question: Did the organization remain exempt when it failed to provide records and information needed to verify its operations?
• Outcome: revocation
• Key authorities: IRC §§ 501(c)(3), 511, 6001, and 6033; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, and 1.6033-1; Rev. Rul. 59-95

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street, MC 4920 DAL
Dallas, TX 75242
TAX EXEMPT AND

GOVERNMENT ENTITIES
DIVISION

Date: FEB 22 2017

Form:

Number: 201731013
Release Date: 8/4/2017 Tax Year Ended:

Person to Contact:
Identification Number:

Contact Telephone Number:
Telephone Number:
Fax:

EIN:
UIL: 501.03-00

CERTIFIED MAIL - Return Receipt Requested

Dear

This is a final 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 for the following reason(s):

You did not provide us with the information requested about your financial records and activities
necessary to complete our examination. Therefore, you have not demonstrated that you are operated
exclusively for exempt purposes within the meaning of Internal Revenue Code section 501(c)(3).

As such, you failed to meet the requirements of Internal Revenue Code section 501(c)(3) and
Treasury Regulation Section 1.501(c)(3)-1(d), in that you failed to establish that you were operated
exclusively for an exempt purpose.

Contributions to your organization are no longer deductible under section 170 of the Internal
Revenue Code effective January 1, 20XX.

You are required to file Federal income tax returns on Form 1120. These returns should be filed
with the appropriate Service Center for the year ending December 31, 20XX, and for all subsequent

years.

Processing of income tax returns and assessment of any taxes due will not be delayed should a
petition for declaratory judgment be filed under section 7428 of the Internal Revenue Code.

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 Claim Court or the District Court of
the United States for the District of Columbia before the 91st day after the date this determination
was mailed to you. Contact the clerk of the appropriate court for the rules for initiating suits for
declaratory judgment. Please contact the clerk of the respective court for rules and the
appropriate forms regarding filing petitions for declaratory judgment by referring to the enclosed
Publication 892. Please note that the United States Tax Court is the only one of these courts
where a declaratory judgment action can be pursued without the services of a lawyer. You may
write to the courts at the following addresses:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

U.S. Court of Federal Claims
717 Madison Place, NW
Washington, DC 20005

U. S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, DC 20001

You may call the IRS telephone number listed in your local directory. An IRS employee there may
be able to help you, but the contact person at the address shown on this letter is most familiar with
your case. You may also call the Internal Revenue Service Taxpayer Advocate. The Taxpayer
Advocate Service (TAS) is an independent organization within the IRS that can help protect your
taxpayer rights. We can offer you help if your tax problem is causing a hardship, or you've tried but
haven't been able to resolve your problem with the IRS. If you qualify for our assistance, which is
always free, we will do everything possible to help you. Visit taxpayeradvocate.irs.gov or call 1-877-
777-4778.

If you have any questions, please contact the person whose name and telephone number are
shown in the heading of this letter.

Sincerely yours,

for

Mary A. Epps
Acting Director, EO Examinations

Enclosures:
Publication 892

Department of the Treasury Date:

Internal Revenue Service July 20, 2016
IRS Tax Exempt and Government Entities Division Taxpayer Identification Number:

9350 Flair Drive, 3rd Floor

El Monte, CA 91730 Form:

Tax year(s) ended:

Person to contact / ID number:

Contact numbers:
Phone Number:

Fax Number:
Manager's name/ ID number:

Manager's contact number:
Phone Number:
Certified Mail - Return Receipt Requested Response due date:

Dear

Why you are receiving this letter
We propose to revoke your status as an organization described in section 501(c)(3) of the Internal Revenue
Code (Code). Enclosed is our report of examination explaining the proposed action.

What you need to do if you agree

If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed Action — Section
7428, and return it to the contact person at the address listed above (unless you have already provided us a
signed Form 6018). We'll issue a final revocation letter determining that you aren't an organization described in
section 501(c)(3).

After we issue the final revocation letter, we'll announce that your organization is no longer eligible for
contributions deductible under section 170 of the Code.

If we don't hear from you

If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final
revocation letter. Failing to respond to this proposal will adversely impact your legal standing to seek a
declaratory judgment because you failed to exhaust your administrative remedies.

Effect of revocation status
If you receive a final revocation letter, you'll be required to file federal income tax returns for the tax year(s)
shown above as well as for subsequent tax years.

What you need to do if you disagree with the proposed revocation
If you disagree with our proposed revocation, you may request a meeting or telephone conference with the
supervisor of the IRS contact identified in the heading of this letter. You also may file a protest with the

Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

IRS Appeals office by submitting a written request to the contact person at the address listed above within 30
calendar days from the date of this letter. The Appeals office is independent of the Exempt Organizations
division and resolves most disputes informally.

For your protest to be valid, it must contain certain specific information including a statement of the facts, the
applicable law, and arguments in support of your position. For specific information needed for a valid protest,
please refer to page one of the enclosed Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status,
and page six of the enclosed Publication 3498, The Examination Process. Publication 3498 also includes
information on your rights as a taxpayer and the IRS collection process. Please note that Fast Track Mediation
referred to in Publication 3498 generally doesn't apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication 892. Please
contact the individual identified on the first page of this letter if you are considering requesting technical
advice. If we issue a determination letter to you based on a technical advice memorandum issued by the
Exempt Organizations Rulings and Agreements office, no further IRS administrative appeal will be available to
you.

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate. Their assistance isn't a substitute for
established IRS procedures, such as the formal appeals process. The Taxpayer Advocate can't reverse a legally
correct tax determination or extend the time you have (fixed by law) to file a petition in a United States court.
They can, however, see that a tax matter that hasn't 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:

Internal Revenue Service
Office of the Taxpayer Advocate

Phone Number:

For additional information

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,

For
Margaret Von Lienen
Director, EO Examinations
Enclosures:
Form 886-A
Form 4621-A
Form 6018
Publication 892
Publication 3498

Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Year/Period Ended
December 31, 20XX

Name of Taxpayer

Date of Notice: July 20, 2016
Issues:

Whether the Organization continues to qualify for exemption from Federal income tax under
Section 501(c)(3) of the Internal Revenue Code.

Facts:

The Organization filed Form 1023 for exemption on January 18, 20XX and was granted
exemption as a 501(c)(3) on July 7, 20XX, with an effective date of exemption of December
13, 20XX.

An organization exempt under 501(c)(3) needs to be organized and operated exclusively for
religious, charitable, scientific, testing for public safety, literary or educational purposes and to
foster national and amateur sports competition.

The Organization was selected for audit to ensure that the examined organization's activities
and operations align with its approved exempt status.

The Organization failed to respond to the Internal Revenue Service attempts to obtain
information to perform an audit of Form 990-N for the above mentioned tax period.

• Correspondence for the audit was as follows:

o Letter 3606 (Rev. 6-2012) with attachments was mailed to the organization on
May 20, 20XX, with a response date of June 11, 20XX.

o EOCA Letter 0000 with attachments was mailed to the organization on July 27,
20XX, with a response date of August 11, 20XX.

o Letter 3606 (Rev. 6-2012) with attachments was mailed to the organization on
October 28, 20XX, with a response date of November 19, 20XX. Letter faxed;
fax transmission confirmed.

o EOCA Letter 0000 with attachments was mailed to the organization on December
4, 20XX; with a response date of December 21, 20XX. Letter faxed; fax
transmission confirmed.

o EOCA Letter 0000 was mailed certified to the organization on March 25, 20XX;
with a response date of April 8, 20XX. Article Number:
. This was signed for on April 1, 20XX (signature not legible).

o EOCA Letter 0000 was mailed certified to the organization on June 14, 20XX;

with a response date of June 24, 20XX. Article Number:
. This was signed for by (no date).

• Telephone contact for the audit was as follows:

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -1-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit

Year/Period Ended
December 31, 20XX

Name of Taxpayer

o October 27, 20XX, Revenue Agent (RA) called the phone number listed on the
Form 1023 application for , Principal Officer. Phone number
was incorrect. RA searched website and found phone number for officer. RA
unable to leave message.

o October 28, 20XX, RA called and spoke to . Officer
indicated he did not receive any prior correspondence from the IRS regarding the
audit. Explained organization selection for audit. Verified address. Prior address
used did not reflect a suite number. Verified the fax number. Indicated would
mail and fax audit notification letter with attachments.

o December 4, 20XX, RA called officer and left message regarding organization’s
failure to respond to information request. Phone call was not returned.

o May 26, 20XX, RA called officer and left message. Phone call was not returned.

o July 6, 20XX, RA called officer and left message. Phone call was not returned.

Law:

Internal Revenue Code (IRC) §501(c)(3) provides that an organization organized and operated
exclusively for charitable or educational purposes is exempt from Federal income tax, provided
no part of its net earnings inures to the benefit of any private shareholder or individual.

IRC §511 imposes a tax at corporate rates under section 11 on the unrelated business taxable
income of certain tax-exempt organizations, including those described in section 501(c)(3).

IRC §6001 provides that every person liable for any tax imposed by this title, or for the
collection thereof, shall keep such records, render such statements, make such returns, and
comply with such rules and regulations as the Secretary may from time to time prescribe.
Whenever in the judgment of the Secretary it is necessary, he may require any person, by
notice served upon such person or by regulations, to make such returns, render such
statements, or keep such records, as the Secretary deems sufficient to show whether or not
such person is liable for tax under this title.

IRC §6033 (a)(1) provides, except as provided in section 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.

Regulation §1.501(c)(3)-1(a) states in order to be exempt under §501(c)(3) the organization
must be both organized and operated exclusively for one or more of the purposes specified in
the section. (religious, charitable, scientific, testing for public safety, literary or educational).

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -2-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit

Year/Period Ended
December 31, 20XX

Name of Taxpayer

Regulation §1.501(c)(3)-1(a)(1) states that in order to be exempt as an organization described
in section 501(c)(3), an organization must be both organized and operated exclusively for one
or more of the purposes specified in such section. If an organization fails to meet either the
organizational test or the operational test, it is not exempt.

Regulation §1.501(c)(3)-1(c)(1) provides that an organization will not be regarded as "operated
exclusively" for one or more exempt purposes described in Section 501(c)(3) of the Code if
more than an insubstantial part of its activities is not in furtherance of a 501(c)(3) purpose.
Accordingly, the organization does not qualify for exemption under Section 501(c)(3) of the
Code.

Treasury Regulation (Regulation) §1.61-1 provides that Gross income means all income from
whatever source derived, unless excluded by law. Gross income includes income realized in
any form, whether in money, property, or services. Income may be realized, therefore, in the
form of services, meals, accommodations, stock, or other property, as well as in cash.

Regulation §1.6001-1(c) provides that such permanent books and records as are required by
paragraph (a) of this section with respect to the tax imposed by section 511 on unrelated
business income of certain exempt organizations, every organization exempt from tax under
section 501(a) shall keep such permanent books of account or records, including inventories,
as are sufficient to show specifically the items of gross income, receipts and disbursements.
Such organizations shall also keep such books and records as are required to substantiate the
information required by IRC Section 6033. See IRC Section 6033 and Regulation §1.6033-1
through 1.6033-3.

Regulation §1.6001-1(e) provides that the books or records required by this section shall be
kept at all time 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.

Regulation §1.6033(a)(1) provides, except as provided in section 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.

Regulation §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 section 6033.

Revenue Ruling 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

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -3-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
December 31, 20XX

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 section 6033 of the Code 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.

Organization’s Position
The Organization has failed to respond to all attempts to contact them.
Government’s Position

Based on the above facts, the Organization did not respond to verify that it is organized and
operated exclusively for one or more of the purposes specified in IRC Section 501(c)(3). If
an organization fails to meet either the organizational test or the operational test, it is not
exempt.

In accordance with the above-cited provisions of the Code and Regulations under sections
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.

Regulations Section 1.6033-1(h)(2) specifically states that exempt organizations shall submit
additional information for the purpose of enabling the Internal Revenue Service to inquire
further into its exempt status.

Using the rationale that was developed in Revenue Ruling 59-95, the Organization’s failure
to provide requested information should result in the termination of exempt status

Conclusion:

Based on the foregoing reasons, the Organization does not qualify for exemption under
section 501(c)(3) and its tax-exempt status should be revoked.

It is the Service's position that the organization failed to meet the reporting requirements
under Sections 6001 and 6033 to be recognized as exempt from federal income tax under
501(c)(3) of the Internal Revenue Code. Accordingly, the Organization's exempt status is
revoked January 1, 20XX.

Form 1120 returns should be filed for the tax periods after January 1, 20XX.

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -4-