Exemption revoked after organization ignored audit document requests

Plain-English summary

A recognized section 501(c)(3) organization was selected for an audit of its Form 990-N filing. The IRS mailed two document requests, made repeated telephone calls, confirmed the organization's address, and explained the requested items and response deadlines. A board officer acknowledged receiving the letters and promised to send the material, but the organization never provided the requested documents. Without those records, the IRS could not verify that the organization remained organized and operated exclusively for exempt purposes or met the recordkeeping and reporting duties in sections 6001 and 6033. The IRS revoked the organization's exemption effective January 1 of the redacted year and required corporate income tax returns for later periods.

Ruling snapshot

• Question: Could the organization retain section 501(c)(3) status without supplying records requested in an IRS audit?
• Outcome: revocation
• Key authorities: IRC §§ 501(c)(3), 6001, 6033; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, 1.6033-1(h)(2); Rev. Rul. 59-95

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Date: May 17, 2017

Number: 201749019
Release Date: 12/8/2017 Tax Year Ending:

Taxpayer Identification Number:
Person to Contact:
Employee Identification Number:

Employee Telephone Number:

UIL: 501.01-00

CERTIFIED MAIL — RETURN RECEIPT
Dear

This is a final determination that you do not qualify for exemption from Federal income tax under
Internal Revenue Code (the “Code”) section 501(a) as an organization described in Code section
501(c)(3) effective January 1, 20xx. Your determination letter dated is revoked.

The revocation of your exempt status was made for the following reason(s):

Organizations described in section 501(c)(3) of the Internal Revenue Code and exempt from tax
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 inure 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 sections 6001 and 6033(a)(1) and the regulations thereunder.

Contributions to your organization are no longer deductible under IRC §170 after January 1, 20xx

Organizations that are not exempt under section 501 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.


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: 1) United States
Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for
the District of Columbia. A petition or complaint in one of these three courts must be filed within
90 days from the date this determination letter was mailed to you. Please contact the clerk of the
appropriate court for rules and the appropriate forms for 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, N.W.
Washington, D.C. 20217

U.S. Court of Federal Claims
717 Madison Place, N.W.
Washington, D.C. 20439

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

Processing of income tax returns and assessments of any taxes due will not be delayed if you file
a petition for declaratory judgment under section 7428 of the Internal Revenue Code.

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help
protect your 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
www.taxpayeradvocate.irs.gov or call 1-877-777-4778.

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

Sincerely,

Director, EO Examinations
Enclosure:
Publication 892


Date: September 6, 2016

Department of the Treasury
Taxpayer Identification Number:

Internal Revenue Service
Tax Exempt and Government Entities

IRS Exempt Organizations Examinations Form:

Tax Year(s) Ended:
Person to Contact/ID Number:

Contact Numbers:
Telephone:

Fax:
Manager's Name/ID Number:

Manager's Contact 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

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


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. If you prefer, you may
contact your local Taxpayer Advocate at:

For City: For City:
Internal Revenue Service Internal Revenue Service
Office of the Taxpayer Advocate Office of the Taxpayer Advocate
2 Letter 3618 (Rev. 6-2012)

Catalog Number 34809F


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,

Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

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


Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax identification Number | Year/Period ended

12/31/20xx

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 application Form 1023 for exemption on April 20, 20xx. They were granted
exemption as a 501(c)(3) organization on June 27, 20xx, with an effective date of exemption of

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 tax period ending December 31, 20xx.

• Correspondence for the audit was as follows:

◦ Letter 3606 (Rev. 6-2012) with attachments were mailed to the organization on
December 8, 20xx, with a response date of December 29, 20xx. The attachments
consisted of Form 4564 (Information Document Request) and Publication 1 (Your
Rights As A Taxpayer).

◦ Letter 3844-A (Rev. 12-2015) with attachments were mailed to the organization on
December 30, 20xx, with a response date of January 13, 20xx. The attachments
were a copy of the original Letter 3606 and its enclosures.

• Telephone contact for the audit was as follows:
◦ December 8, 20xx, agent called the phone number listed on application Form 1023

for . at . has power of attorney only for Form
1023 via Form 2848. said he was no longer on the board but the
current board chairman, , is listed on the return. Confirmed the address
listed on Form 990-N for is current and confirmed ’s address,

too. Mailed Letter 3606 with attachments Form 4564 and Publication 1 to the
address listed on Form 990-N for year ending December 31, 20xx. Response due

Form 886-A (1-1994) | Catalog Number 20810W Page 1 publish.no.irs.gov | Department of the Treasury-Internal Revenue Service


Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax identification Number | Year/Period ended

12/31/20xx

December 29, 20xx.

◦ December 16, 20xx, Call to . and left message after unable to locate
a current telephone number for board officer, .

◦ December 23, 20xx, Call to . Secured telephone
number as . Called and he confirmed the address Letter
3606 was mailed is correct. Explained the reason for the audit and explained the
items requested. Reminded of the response due date, December 29,
20xx. At request, agent left voice mail message providing agent's office
and eFax telephone numbers.

◦ August 1, 20xx, Call to board president, , to determine whether the
organization provided a response to prior letters since our record showed no
documents received. Explained the reason for case delay. said they
did receive the letters and he agreed to fax items by the next day, August 2, 20xx.

◦ August 3, 20xx, Call to since no documents received. Left a voice mail
message requesting the items again and for a status of the items.

◦ August 19, 20xx, Call to since no documents received. Left voice
mail message.

LAW:

IRC Section 501(c)(3) provides tax exemption for corporations and foundations that are operated
exclusively for religious, charitable, scientific, testing for public safety, literary or educational purpose,
no part of the net earnings of which inures to the benefit of any private shareholder of individual.

Treasury Regulation Section 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 organized and operated exclusively for one
or more of the purposes specified in such section. If an organization fails to meet either the
organizational or the operational test, it is not exempt.

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

IRC Section 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.

Treasury Regulation Section 1.6001-1(c) of the Code 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

Form 886-A (1-1994) Catalog Number 20810W Page 2 publish.no.irs.gov | Department of the Treasury-Internal Revenue Service


Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax identification Number | Year/Period ended

12/31/20xx

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.

Treasury Regulation Section 1.6001-1(e) provides 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.

IRC Section 6033(a)(1) of the Code 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 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.

Federal Tax Regulations Section 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.

Treasury Regulation 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 (1-1994) Catalog Number 20810W Page 3 publish.no.irs.gov © Department of the Treasury-Internal Revenue Service


Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax identification Number | Year/Period ended

12/31/20xx

ORGANIZATION’S POSITION:

The organization acknowledge receipt of Letter 3606 and Letter 3844-A, with all enclosures for both
letters; however, they failed to provide any of the documents requested.

GOVERNMENT’S POSITION:

Based on the above facts, the organization did not respond 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 termination of exempt status.

CONCLUSION:
Based on the foregoing reasons, it is the government's position that the Organization's exempt status
should be revoked due its’ failure to substantiate the organization's operational test required by IRC
Section 501(c)(3).
Accordingly, the organization's exempt status should be revoked effective January 1, 20xx.

Form 1120, US Corporation Income Tax Return, should be filed for the tax periods ending on and after
January 1, 20xx.

Form 886-A (1-1994) Catalog Number 20810W Page 4 publish.no.irs.gov Department of the Treasury-Internal Revenue Service