Charity loses exemption after failing to provide audit records

Plain-English summary

The IRS revoked an organization's section 501(c)(3) exemption because it did not respond to repeated requests for information needed to audit its activities and operations. The organization had received exemption through Form 1023-EZ, but it did not provide records showing that it continued to operate exclusively for exempt purposes or that its earnings did not benefit private persons. The examination report recounts several letters and telephone calls that produced no substantive response, and it also states that the organization had not filed a Form 990-series return for the audited year. Sections 6001 and 6033 require exempt organizations to keep records, file required returns, and provide information the IRS needs to examine their continued qualification. Applying those provisions and Revenue Ruling 59-95, the IRS revoked the exemption effective January 1 of a redacted year.

Ruling snapshot

• Question: Did the organization establish that it continued to qualify under section 501(c)(3) when it did not provide requested audit records?
• Outcome: Revoked effective January 1 of a redacted year.
• Key authorities: IRC §§ 501(c)(3), 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)

Scanned document; transcription proofread from IRS OCR. Obvious scan misreads were corrected. Wording is otherwise verbatim.

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE EO Examinations
1100 Commerce Street MC 4920 DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES Date: February 5, 2019
DIVISION
Release Number: 201922034 Person to Contact:
Release Date: 5/31/2019 Identification Number:
UIL Code: 501.03-00 Telephone Number:

In Reply Refer to:

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT:

CERTIFIED MAIL — Return Receipt Requested

Dear

This is a final adverse determination regarding your exempt status under section 501(c)(3) of the
Internal Revenue Code (IRC). Our favorable determination letter to you dated November 12,
20XX, is hereby revoked and you are no longer exempt under section 501(a), as an organization
described in section 501(c)(3) of the IRC, effective January 1, 20XX.

Our adverse determination was made for the following reasons:

You have not established that you are organized and 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 no longer deductible under section 170 of the 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, 20XX 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.

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 Court of Federal Claims 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. 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 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,

for Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Publication 892

Department of the Treasury Date:
Internal Revenue Service August 13, 2018

Tax Exempt and Government Entities Division Taxpayer ID number:

IRS Exempt Organizations Examination

Form:
Tax periods ended:

Person to contact:

Employee ID number:
Telephone number:

Fax:

Address:

Manager’s contact information:
Employee ID number:

Telephone number:

Response due date:

CERTIFIED MAIL — Return Receipt Requested

Dear

Why you’re receiving this letter

We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke
your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). We
enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that your organization
doesn’t qualify as an organization described in Internal Revenue Code (IRC) Section 501(c)(3).

This letter is not a determination of your tax-exempt status under IRC Section 501 for any period other than the
tax periods above.

If you agree

If you haven’t already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the
contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an
organization described in IRC Section [insert code section] for the periods above.

After we issue the final adverse determination letter, we’ll announce that your organization is no longer eligible
to receive tax deductible contributions under IRC Section 170.

If you disagree

1. Request a meeting or telephone conference with the manager shown at the top of this letter.

2. Send any information you want us to consider.

3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional
information as stated in 1 and 2, above, you’ll still be able to file a protest with IRS Appeals Office after
the meeting or after we consider the information.

Letter 3618 (Rev. 9-2017)
Catalog Number 34809F

The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes
informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of
limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case.
For your protest to be valid, it must contain certain specific information, including a statement of the
facts, applicable law, and arguments in support of your position. For specific information needed for a
valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status.

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn’t
apply now that we’ve issued this letter.

4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities)
if you feel the issue hasn’t been addressed in published precedent or has been treated inconsistently by the
IRS.

If you’re considering requesting technical advice, contact the person shown at the top of this letter. If you
disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as
explained above. A decision made in a technical advice memorandum, however, generally is final and
binding on Appeals.

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

adverse determination letter.

In the future, if you believe your organization qualifies for tax-exempt status and would like a status
determination letter from the IRS, you can request a determination by filing Form 1024, Application for
Recognition of Exemption Under Section 501(a), and paying the required user fee.

Revenue Procedure 80-27 requires that, in the event your tax-exempt status is revoked, your group exemption
will also be revoked. If that occurs, none of your subordinates will be able to rely on the group ruling for tax-
exempt status. You should notify each subordinate of this proposed action.

Contacting the Taxpayer Advocate Office is a taxpayer right
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 877-777-4778.

Additional information
You can get any of the forms and publications mentioned in this letter by visiting our website at

www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676).
If you have questions, you can contact the person shown at the top of this letter.

Sincerely,

for Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018

Form 4621-A Report of Examination
Letter 3618 (Rev. 9-2017)
Catalog Number 34809F

Publication 892
Publication 3498-A

Letter 3618 (Rev. 9-2017)
Catalog Number 34809F

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

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

Date of Notice: August 13, 20XX

Issues:

Whether (the organization), which qualified for exemption from Federal
income tax under Section 501(c)(3) of the Internal Revenue Code, should be revoked due
to its failure to respond and produce records to establish that it is observing the conditions
required for the continuation of exempt status.

Facts:

applied for tax-exempt status by filing the Form 1023-EZ, Streamlined
Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue
Code, on November 10, 20XX and was granted tax-exempt status as a 501(c)(3) on
November 12, 20XX, with an effective date of September 17, 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 activities and operations align
with their 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 tax year December 31, 20XX.

The organization has not filed a Form 990 series return for the December 31, 20XX tax

year.

The Form 1023-EZ application list the phone number of for

of .

Per the State of web-site, it lists the organization in good standing, copy attached

from state web-site.
• Correspondence for the audit was as follows:
  ◦ Letter 3606 (Rev. 6-2012) with attachments, was mailed to the organization
    on April 3, 20XX, with a response date of May 3, 20XX. This letter was not

    return by the post office as being undeliverable.

  ◦ Letter 3844-A (Rev. 12-2015) with attachments, was mailed certified to
    on May 21, 20XX, with a response date of June 21, 20XX, Article Number

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 Exhibit
Explanation of Items

Year/Period Ended

Name of Taxpayer
December 31, 20XX

. Per the United States Postal Service (USPS) tracking, this was delivered,
Front Desk/Reception on May 30, 20XX at 3:33 pm. The PS Form 3811 was
signed and dated by on May 30, 20XX.

  ◦ Letter 3844-A (12-2015), with attachments, was mailed certified to
    , the Director per Form 1023-EZ application, on May 21, 20XX, with a
    response date of June 21, 20XX. Article Number
    Per USPS tracking this letter, Unable to deliver item, problem with address
    and returned to the Internal Revenue Service on May 28, 20XX. This letter
    was received back at the Internal Revenue Service on June 8, 20XX, yellow
    postal sticker indicates not deliverable as addressed, unable to forward.

  ◦ Letter 3844-A (12-2015), with attachments, was mailed certified to
    , the Director per Form 1023-EZ application, on May 21, 20XX, with a
    response date of June 21, 20XX. Article Number
    Per USPS tracking this letter, Unable to deliver item, problem with address
    and returned to the Internal Revenue Service on May 28, 20XX. This letter
    was received back at the Internal Revenue Service on June 8, 20XX, yellow
    postal sticker indicates not deliverable as addressed, unable to forward.

  ◦ Letter 3844-A (12-2015), with attachments, was mailed certified to
    , the Director per Form 1023-EZ application, on May 21, 20XX, with a
    response date of June 21, 20XX. Article Number
    Per USPS tracking this letter, Unable to deliver item, problem with address
    and returned to the Internal Revenue Service on May 28, 20XX. This letter
    was received back at the Internal Revenue Service on June 8, 20XX, yellow
    postal sticker indicates not deliverable as addressed, unable to forward.

  ◦ Letter 3844-A (12-2015), with attachments, was mailed certified to
    , the Director per Form 1023-EZ application, on May 21, 20XX, with a
    response date of June 21, 20XX. Article Number
    Per USPS tracking this letter, Unable to deliver item, problem with address
    and returned to the Internal Revenue Service on May 28, 20XX. This letter
    was received back at the Internal Revenue Service on June 8, 20XX, yellow
    postal sticker indicates not deliverable as addressed, unable to forward.

  ◦ Letter 5077-B, TE/GE IDR Delinquency Notice, was mailed to
    , the Director, on June 25, 20XX, with a response date of July 16, 20XX.
    Article Number . Per USPS tracking this letter was
    Unclaimed/Being Returned to Sender on July 16, 20XX at 9:29 am. PS Form
    3800 was not received back from USPS.

  ◦ Letter 5077-B, TE/GE IDR Delinquency Notice, was mailed to the
    organization, on June 25, 20XX, with a response date of July 16, 20XX.

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 Exhibit
Explanation of Items

Name of Taxpayer Year/Period Ended
December 31, 20XX
Article Number . Per USPS tracking this letter was

Unclaimed/Being Returned to Sender on July 5, 20XX. This letter was
received back at the Internal Revenue Service on July 12, 20XX.

• Telephone contact for the audit was as follows:

  ◦ April 18, 20XX, Tax Compliance Officer (TCO) called the phone number listed
    on the Form 1023-EZ application for of and
    received a message that wireless caller was not available. Unable to leave a
    message for an officer of the organization to return my phone call.

  ◦ May 8, 20XX, through external research located a different phone number for

    , the Director of , when calling this phone
    number, it just rang busy. Unable to leave VMS. Called the phone number
    listed on the Form 1023-EZ application for of
    and received VMS. Left a message for to return my phone

    call.

  ◦ June 12, 20XX, called the phone number listed on the Form 1023-EZ
    application for of . The call just rang and
    unable to leave a VMS. Called , the Director of

    . This call just rang busy and unable to leave a VMS.

  ◦ June 25, 20XX, called the phone number listed on the Form 1023-EZ
    application for of . The call just rang and
    unable to leave a VMS.

  ◦ July 20, 20XX, called the phone number listed on the Form 1023-EZ
    application for of . The caller that answered
    indicated I had the wrong number, no one by the name of

Law:

Internal Revenue Code (IRC) §501(c)(3) of the Code 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 of the Internal Revenue Code imposes a tax at corporate rates under section 11
on the unrelated business taxable income of certain tax-exempt organizations.

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 Exhibit
Explanation of Items

Year/Period Ended

Name of Taxpayer
December 31, 20XX

IRC §6001 of the Code 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) 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.

Treasury Regulations (Regulation) 1.501(c)(3)-1 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).

Regulation §1.501(c)(3)-1(a)(1) of the regulations 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) of the regulations 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.

Regulation §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 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.

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

Page: -4-

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

Year/Period Ended

Name of Taxpayer
December 31, 20XX

Regulation §1.6001-1(e) of the Code 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 §1.6033-1(h)(2) of the regulations 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.

Regulation §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.

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.

Organization’s Position
Taxpayer's position is unknown at this time.

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

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

Page: -5-

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

Year/Period Ended

Name of Taxpayer
December 31, 20XX

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

It is the IRS's position that the organization failed to establish that it meets the reporting
requirements under IRC §§ 6001 and 6033 to be recognized as exempt from federal
income tax under IRC § 501(c)(3). Furthermore, the organization has not established
that it is observing the conditions required for the continuation of its exempt status or
that it is organized and operated exclusively for an exempt purpose. Accordingly, the
organization's exempt status is revoked effective January 1, 20XX.

Form 1120, U.S. Corporation Income Tax Return, 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: -6-