IRS revokes exemption after organization ignores audit requests

Plain-English summary

An organization recognized under Section 501(c)(3) was selected for an audit of its Form 990. The IRS repeatedly sent examination letters and information requests and made numerous telephone calls, but the organization did not provide the records needed to complete the audit. Without those records, the IRS could not verify that the organization operated exclusively for exempt purposes, avoided private inurement, or met its reporting obligations. It revoked the exemption under Sections 6001 and 6033 and Revenue Ruling 59-95. Because the organization was a private foundation when the revocation took effect, the letter stated that it would remain a taxable private foundation until it terminated that status under Section 507.

Ruling snapshot

• Question: Did the organization establish continued qualification under Section 501(c)(3) by supplying the requested audit records?
• 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
TE/GE EO Examinations

1100 Commerce Street M/C 4920 DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES Date: FEB 13 2018
DIVISION
Number: 201829018 Person to Contact:
Release Date: 7/20/2018 Identification Number:
Telephone Number:
In Reply Refer to:
LAST DATE FOR FILING A PETITION
UIL: 501.03-00 WITH THE TAX COURT:

CERTIFIED MAIL – Return Receipt Requested
Dear

This is a Final Adverse Determination Letter that your exempt status under section 501(c)(3)
of the Internal Revenue Code (IRC), as determined in our letter to you of September 4,
20 , is hereby revoked. It is revoked effective January 1, 20 .

Our adverse determination was made for the following reason(s):

You have not established that you are operated exclusively for an exempt
purpose or that you have been engaged primarily in activities that accomplish
one or more exempt purposes within the meaning of IRC section 501(c)(3).

You have not established that no part of your net earnings inure to the benefit
of any private shareholder or individual within the meaning of IRC section
501(c)(3).

You did not respond to our repeated requests to you about material matters
concerning your operations as required by IRC sections 6001, 6033(a)(1), and
Rev. Rul. 59-95, 1959-1 C.B. 627.

Contributions to your organization are not deductible under section 170 of the Internal
Revenue Code.

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, 20 , and for all
years thereafter.

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.

As you were a private foundation as of the effective date of the revocation, you are a taxable
private foundation until you terminate your private foundation status under section 507 of
the Internal Revenue Code. In addition to your income tax return, you must also continue
to file Form 990-PF by the 15th day of the fifth month after the end of your annual
accounting period.

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.

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.

We will notify the appropriate State Officials of this action, as required by section 6104(c) of
the Internal Revenue Code.

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 Hooke
Director, Exempt Organizations Examinations

Enclosure:
Publication 892

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

Date: June 7, 2017
Identification Number:
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.

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,

Maria Hooke
Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

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

Date of Notice: = June 7, 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 August 8, 20XX and was granted
exemption under IRC Sec. 501(c)(3) on September 4, 20XX with an effective date of
exemption of January 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 for the above mentioned tax period.

• Correspondence for the audit was as follows:

— January 4, 20XX: Letter 3611 (Rev. 6-2012) with attachments were mailed to the
organization with a scheduled examination date of January 31, 20XX.

— January 18, 20XX: Letter 3611, 2nd request was mailed to the organization. This letter
was mailed to a secondary address with a scheduled examination date of January
31, 20XX.

— February 3, 20XX: Revenue Agent (RA) mailed a second Information Document
Request (IDR) with sample test worksheets to EO in advance of scheduling
appointment.

— April 20, 20XX: Certified Letter was mailed to the organization with a response date
of May 19, 20XX. Article Number

• Telephone contact for the audit was as follows:
— January 18, 20XX: RA called the phone number listed on Form 1023 application for
EO. RA left a message for an officer to return the phone call to confirm appointment

scheduled for January 31, 20XX.

— January 24, 20XX: RA makes 3 attempts to return call from . RA leaves voice
message... advise to call RA to confirm appointment and location.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -1-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
20XX
— January 25, 20XX: RA talks to to confirm location and date for initial interview

scheduled for February 1, 20XX.

— January 27, 20XX: RA leaves voice message for , confirming receipt of
documents, would review and follow up on January 31, 20XX.

— January 31, 20XX: RA called and left voice message that appointment would need to
be re-scheduled due to computer issues...advise EO that I will call to reschedule.

— February 2, 20XX: RA called EO and left voice message reschedule meeting time
and place.

— February 15, 20XX: RA called EO and left voice message...you should have received
IDR...calling to confirm scheduled meeting for February 22, 20XX at Revenue Agent
Post of Duty...

— February 24, 20XX: RA called EO and left voice message...to acknowledge
information received. In addition, remind EO that I have not received information
requested on IDR dated January 18, 20XX. Request that items 1, 2, 5 & 6 need to
be submitted...remind EO that we still need to meet to discuss examination.

~ March 21, 20XX: RA called EO and left voice message...need to call me regarding
IDR dated February 28, 20XX...advise that Adverse Action may be taken if I do not
hear from you.

— March 29, 20XX: RA called EO and left voice message...request call back no later
than April 18, 20XX.

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

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -2-

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

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 §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

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

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

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.

Organizations Position:
The organization has failed to respond to repeated 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-