Exemption revoked after the organization ignored audit requests

Plain-English summary

A section 501(c)(3) organization was selected for an examination of its Form 990-N but did not provide the information needed for the audit. The IRS sent repeated letters to the organization, a secondary address, and members of its governing board, and also made repeated telephone calls. Although an agent eventually spoke with an officer and explained the document request, the organization still did not supply records. Without those records, it could not establish that it remained organized and operated exclusively for exempt purposes, complied with sections 6001 and 6033, or avoided private inurement. The IRS revoked exemption effective on the redacted date and required Form 1120 returns for later periods.

Ruling snapshot

• Question: Could the organization retain section 501(c)(3) status after failing to provide records requested for its examination?
• Outcome: revocation
• Key authorities: IRC §§ 501(c)(3), 6001, 6033; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, 1.6033-1; Rev. Rul. 59-95

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE EO Examinations
1100 Commerce Street
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Number: 201737012
Release Date: 9/15/2017

Date: April 14, 2017
Taxpayer Identification Number:
Person to Contact:
Identification Number:
Telephone Number:
(Phone)
(Fax)

UIL: 501.03-00

CERTIFIED MAIL — Return Receipt Requested

Dear :

This is a Final Adverse Determination Letter as to your exempt status under
section 501(c)(3) of the Internal Revenue Code. Your exemption from Federal
income tax under section 501(c)(3) of the Code is hereby revoked effective
January 1, 20XX.

Our adverse determination was made for the following reasons:

Organizations described in I.R.C. § 501(c)(3) and exempt under section
501(a) must be both organized and operated exclusively for exempt
purposes. You have failed to produce documents or otherwise establish
that you are operated exclusively for exempt purposes and that no part of
your net earnings inures to the benefit of private shareholders or
individuals. You failed to respond to repeated reasonable requests to
allow the Internal Revenue Service to examine your records regarding
your receipts, expenditures, or activities as required by I.R.C. § 6001,
6033(a)(1) and Rev. Rul. 59-95, 1959-1 C.B. 627.

Contributions to your organization are no longer deductible under section 170 of
the Internal Revenue Code.

Organizations that are not exempt under section 501 of the Code generally are
required to file federal income tax returns and pay tax, where applicable. For
further instructions, forms, and information please visit www.irs.gov. Processing of
income tax returns and assessments 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, you may file an action for declaratory
judgment under the provisions of section 7428 of the Code in one of the following
three venues: United States Tax Court, the United States Court of Federal
Claims, or the United States District Court for the District of Columbia. A petition
or complaint in one of these three courts must be filed before the 91st day after
the date this determination was mailed to you if you wish to seek review of our
determination. 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. You may write to the courts at the following
addresses:

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

US 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

The Taxpayer Advocate Service (TAS) is an independent organization within the
IRS that can help protect you taxpayer rights. TAS 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 TAS’ assistance, which is always
free, TAS 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,

Maria D. Hooke
Director, EO Examinations

Enclosure:
Publication 892


Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
Exempt Organizations Examinations

Date:
August 17, 2016
Taxpayer Identification Number:
Form:
Tax Year(s) Ended:
Person to Contact/ID Number:
Contact Numbers:
Telephone:
Fax:
Manager's Name/ID Number:
Manager's Contact Number:
Response due date:

Certified Mail — Return Receipt Requested
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.

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

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 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.

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,

Margaret Von Lienen
Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

2

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


Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit 990-N
Name of Taxpayer Year/Period Ended
20XX12

Date of Notice: August 17, 20xx
Issues:

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

Facts:

The organization filed Form 1023 for exemption on April 29, 20XX and was granted
exemption under IRC Sec. 501(c)(3) on June 26, 20XX with an effective date of exemption
of March 23, 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 amatuer 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:

— May 7, 20XX_Letter 3606 (Rev. 6-2012) with attachments were mailed to the
organization with a response date of June 5, 20XX.

— July 10, 20XX_EOCA 2nd request Letter was mailed to the organization with a
respond date of July 24, 20XX.

— August 14, 20XX_EOCA Letter was mailed certified to the organization on with a
respond date of August 28, 20XX. Article Number .

— October 22, 20XX_Letter 3606 (Rev. 6-2012) with attachments were mailed to
with a response date of November 24, 20XX.

— October 29, 20XX_Letter 3606 (Rev. 6-2012) with attachments were mailed to
the organization with a response date of November 24, 20XX. This letter was
mailed to a secondary address.

— March 31, 20XX_Certified Letter was mailed certified to the organization on with a
response date of April 21, 20XX. Article Number

— May 12, 20XX_per discussion with GM mail contact letters 3606 to all members
of governing board except, , with a response date of June 16, 20XX.
• 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 990-N
Name of Taxpayer Year/Period Ended
20XX12

— October 20, 20XX_ Revenue Agent (RA) called the phone number listed on Form
1023 application for . RA received voice mail and left a message for an
officer to return the phone call.

— October 22, 20XX_ RA called the phone number listed on Form 1023 application
for . RA received voice mail and left a message for an officer to return the
phone call.

— October 29, 20XX_RA called phone number as a result of Accurint research,
make telephone contact to confirm new address, leave message with individual
...to call me and that information letter will be mailed...

— December 4, 20XX_RA called the phone number listed obtained from Accurint
Search for . Revenue Agent received voice mail and left a message for an
officer to return the phone call.

— December 8, 20XX_RA returned telephone call from . Spoke to Officer of
. RA discussed that was randomly selected for an audit. The Letter
3606 was being mailed to the organization with attachments. RA went over Letter
3606, Form 4564 (Information Document Request), and Publication 1 (Your
Rights as a Taxpayer). RA informed Officer, , that the information
has a response date of January 8, 20XX. RA_ also confirmed address of

Law:

Internal Revenue Code (IRC) §1.61-1 of the regulations 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.

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.

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 990-N
Name of Taxpayer Year/Period Ended
20XX12

IRC §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 section 6033. See section 6033 and §§ 1.6033-1 through 1.6033-3.

IRC §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.

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.

Federal Tax Regulations _(FTR) §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.

Section 1.501(c)(3)-1(a) 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).

FTR §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.

Section 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.

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 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.

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 990-N
Name of Taxpayer Year/Period Ended
20XX12

Organizations Position:
The organization has failed to respond to all attempts to contact them.
Governments Position:

Based on the above facts, the organization failed to verify that they are 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.

Section 1.6033-1(h)(2) of the regulations specifically state that exempt organizations shall
submit additional information for the purpose on 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 revocation of exempt status.

Conclusion:

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

It is the IRS's position that the organization failed to meet the reporting requirements
under IRC 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 effective 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-