Charity lost exemption after failing to respond to repeated examination requests

Plain-English summary

A recently recognized section 501(c)(3) organization did not respond to repeated IRS efforts to examine its Form 990-N filing period. The IRS mailed several information requests and delinquency notices to the organization and its officers, with some delivered, one refused, and others unclaimed or returned. A telephone call reached a disconnected number. Without records about receipts, expenditures, and activities, the IRS could not verify that the organization remained operated exclusively for exempt purposes or avoided private inurement. It revoked the exemption effective January 1 of the redacted year and required Form 1120 returns for later periods.

Ruling snapshot

• Question: Does the organization continue to qualify under section 501(c)(3) when it does not provide records needed for an IRS examination?
• Outcome: revocation, because the organization did not substantiate its exempt operations or comply with recordkeeping and reporting requirements
• Key authorities: IRC §§ 501(c)(3), 6001, 6033; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1(e), 1.6033-1(h)(2); Rev. Rul. 59-95

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Number: 201943023
Release Date: 10/25/2019

Date: May 17, 2019

EIN:

Person to Contact:
UIL: 501.03-00                                  Identification Number:

                                                Telephone Number:
CERTIFIED MAIL - Return Receipt Requested

LAST DAY FOR FILING A PETITION WITH THE TAX COURT:

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 December 16,
20XX is revoked.

Our adverse determination as to your exempt status was made for the following reasons:

    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.

As such, you failed to meet the requirements of I.R.C. § 501(c)(3) and Treasury Regulation §
1.501(c)(3)-1(a), in that you have not established that you were organized and operated
exclusively for exempt purposes and that no part of your earnings inured to the benefit of private
shareholders or individuals.

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

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 was mailed to you. Please contact the clerk of the
appropriate court for the rules for initiating suits for declaratory judgment. 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, 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

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.

You may be eligible for help from the Taxpayer advocate Service (TAS). (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 yours,

Maria Hooke
Director, EO Examinations

Enclosures:
Publication 892

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

Date:
August 30, 2018
Taxpayer ID number:

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.

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 501(c)(3) 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.

   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.

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.

For 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,
Michelle Henson FOR
Maria Hooke

Director, Exempt Organizations
Examinations

Enclosures:

Form 886-A

Form 6018

Form 886A
Department of the Treasury - Internal Revenue Service
Explanation of Items

Name of Taxpayer                              Year/Period Ended
                                              12/31/20XX

Date of Notice: August 30, 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 Form 1023-EZ for exemption on December 04, 20XX and was granted
exemption as a 501(c)(3) on December 16, 20XX with the effective date of exemption of
December 04, 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                         failed to respond
to the Internal Revenue Service attempts to obtain information to perform an examination of
Form 990-N or the above-mentioned tax period.

Correspondence for the examination was as follows:

• November 27, 20XX: Letter 3606, Form 4564 IDR 0001, Pub 1 sent to address of
  record with a response date of December 28, 20XX.

• January 11, 20XX: Letter 3844-A was mailed certified to the organization and all
  officers listed on the Form 1023-EZ with a response date of February 12, 20XX. Return
  receipt requested for the following officers and corresponding Certified Receipt number:

  ○                         - Treasurer, Certified Receipt #
    ▪ Undeliverable/Unclaimed January 16, 20XX
  ○                         - President, Certified Receipt #
    ▪ Delivered February 18, 20XX
  ○                         - Secretary, Certified Receipt #
    ▪ Delivered January 19, 20XX
  ○                         - Vice President, Certified Receipt #
    ▪ Return Receipt signed by                         on January 19, 20XX

• February 27, 20XX: Sent Letter 5077-A certified to the organization on February
  27, 20XX: with a response date of March 19, 20XX, Certified Receipt #

  ○ This was unclaimed and returned to sender on April 24, 20XX.

• May 09, 20XX: Discovered the first letter 3844-A sent had incorrect EIN. Resent
  with correct EIN. Mailed 3844-A letters certified w/ return receipt requested on May
  09, 20XX with a response date of May 23, 20XX for the following officers and
  corresponding Certified Receipt number:

  ○                         - Treasurer #
    ▪ Undeliverable/Unclaimed May 05, 20XX
  ○                         - President #
    ▪ Refused May 15, 20XX
  ○                         - Secretary #
    ▪ Delivered May 17, 20XX
  ○                         - Vice President #
    ▪ Notice Left (No Authorized Recipient Available) May 17, 20XX

• Telephone contact for the audit was as follows:

  ○ December 12, 20XX: Called the organization and got a message that phone has
    been disconnected

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
cash.

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, including those
described in section 501(c)(3).

IRC §6001 of the Code provides that every person liable for any tax imposed by the Code, or
for the collection thereof, shall keep adequate records as the Secretary of the Treasury or his
delegate may from time to time prescribe.

IRC §1.6001-1(e) of the regulations states 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) 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 (FTR) §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.

FTR §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.

Section 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.

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

The organization has failed to respond at all attempts to contact them so the taxpayer's position
is unknown.

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, 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 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. 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 01, 20XX.

Form 1120 returns should be filed for the tax periods after December 31, 20XX.