Charity lost exemption after ignoring audit requests

Plain-English summary

A cultural education organization was selected for an audit of its Form 990-N filing and exempt activities. The IRS mailed multiple information requests, called the organization and its representative, and found that the telephone number on the organization’s website had been disconnected. The organization supplied no records or other evidence that it conducted activities in furtherance of its charitable purpose. The IRS concluded that it had not established continued compliance with the operational test or the recordkeeping and information requirements for exempt organizations. It revoked the Section 501(c)(3) exemption effective January 1 of the redacted year.

Ruling snapshot

• Question: Did an organization that failed to answer an audit or document its activities continue to qualify under Section 501(c)(3)?
• Outcome: Revocation effective January 1 of the redacted year.
• Key authorities: IRC §§ 501(c)(3), 6001, and 6033; Treas. Reg. §§ 1.501(c)(3)-1 and 1.6001-1; 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: 202110018
Release Date: 3/12/2021
UIL: 501.03-00
Date: August 27, 2020
Taxpayer ID Number:
Form:
Tax Period(s) Ending:
Person to Contact:
Identification Number:
Telephone Number:
Fax 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 (IRC) Section 501(a) as an organization described in IRC Section
501(c)(3), effective January 1, 20XX. Your determination letter dated April 15, 20XX is

revoked.

Our adverse determination as to your exempt status was made for the following reasons:
Organizations described in IRC Section 501(c)(3) 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

As such, you failed to meet the requirements of IRC Section 501(c)(3) and Treasury
Regulations Section 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 IRC Section 170.

Organizations that are not exempt under IRC 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.

1

If you decide to contest this determination, you may file an action for declaratory judgment under
the provisions of IRC Section 7428 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 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 IRC Section 7428.

We'll notify the appropriate state officials (as permitted by law) of our determination that you
aren't an organization described in IRC Section 501(c)(3).

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.

Taxpayer Advocate assistance can't be used as substitute for established IRS procedures,
formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or
technically correct tax determination, nor extend the time fixed by law that you have to file a
petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not have
been resolved through normal channels gets prompt and proper handling.

You can get any of the forms or publications mentioned in this letter by calling 800-TAX-FORM
(800-829-3676) or visiting our website at www.irs.gov/forms-pubs.

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,

Sean E. O'Reilly
Director, EO Examinations

Enclosures:
Publication 892

¥7 Department of the Treasury Date: September 24, 2019

| Internal Revenue Service T identification Number:
IRS Tax Exempt and Government Entities axpayer ideninicalion Number.

Exempt Organizations Examinations
Form:

Tax Year(s) Ended:
Person to Contact:

Employee ID:
Telephone:
Fax:
Manager's Contact Information:

Employee ID:
Telephone:
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

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

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,

John A. Mattias
Supervisory Internal Revenue Agent for
Maria Hooke
Director, Exempt Organizations
Examinations

Enclosures:
Form 886-A
Form 6018

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

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
December 31,
20XX
Issues
Whether the (Organization) continues to qualify for exemption

from Federal income tax under Internal Revenue (IRC) section (Sec.) 501(c)(3).
Facts

The Organization’s Form 1023- Application for Recognition of Exemption under Section 501(c)(3)
of the Internal Revenue Code was received by the Internal Revenue Service on October 10, 20XX.
The Organization stated on Form 1023, it was organized and operated exclusively for charitable
purposes, specifically to promote and introduce the Cultures to the local community. The
Organization was established to educate the public about the culture through different
programs. The Organization received its determination letter on April 15, 20XX granting the
organization exemption from Federal income tax under IRC Section 501(c)(3), with an effective date
of August 11, 20XX.

The Organization's website states the Organization’s address as

The Form 990-N for the periods ending December 31, 20XX, states the Organization’s address as
. It also states the Principal Officer's address as

; . Internal Revenue Service Internal information confirms
the Organization’s address as the same stated on the Organization’s website and Forms 990-N.

According to the Secretary of State website, the
status is suspended. The Secretary of State website states “Suspended” means, the
business entity's powers, rights and privileges which include the right to use the entity’s name in

, were suspended or forfeited in the

The Organization was selected for audit to ensure the 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 on Form 990-N for period ending December 31,
20XX. The following are the Agent’s attempts to contact the Organization.

1. On February 25, 20XX, the Agent mailed Letter 3606 (Initial contact letter), Information Document
   Request and Publication 1 to , with a response due date
   of March 27, 20XX. The Agent did not receive a response or return mail.

2. On May 21, 20XX, the Agent called the number on the Form 2848- Power of Attorney and
   Declaration of Representative for Form 1023. The Agent left a message for both the Organization
   and Representative.

Catalog Number 20810W Page 1 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
December 31,
20XX

3. On May 21, 20XX, the Agent mailed the initial contact letter, Information Document Request and
   Publication 1 to , with a response due date

of June 21, 20XX. The Agent did not receive a response or return mail.

4. On July 08, 20XX, the Agent called the number listed on the Organization’s website and it is
   stated the phone number has been disconnected.

No further communication was made, and no information was provided by Organization or its
President. The Organization did not provide evidence to support its conducting activities in
furtherance of its exempt purpose.

Law

Internal Revenue Code Section (IRC Sec.) 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 Sec. 11(a) imposes a tax for each taxable year on the taxable income of every corporation.

IRC Sec. 11(b)(1) provides the amount of the tax imposed by subsection (a, which shall be the sum

of:

— IRC Sec. 11(b)(1)(A) 15 percent of so much of the taxable income as does not exceed $50,000,

— IRC Sec. 11(b)(1)(B) 25 percent of so much of the taxable income as exceeds $50,000 but does
not exceed $75,000,

— IRC Sec. 11(b)(1)(C) 34 percent of so much of the taxable income as exceeds $75,000 but does
not exceed $10,000,000, and

— IRC Sec. 11(b)(1)(D) 35 percent of so much of the taxable income as exceeds $10,000,000.

IRC Sec. 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 Sec. 162(a) allows as a deduction all the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business, including:

— IRC Sec. 162(a)(1) - a reasonable allowance for salaries or other compensation for personal
services actually rendered;

— IRC Sec. 162(a)(2) - traveling expenses (including amounts expended for meals and lodging
other than amounts which are lavish or extravagant under the circumstances) while away from
home in the pursuit of a trade or business; and

— IRC Sec. 162(a)(3) - rentals or other payments required to be made as a condition to the
continued use or possession, for purposes of the trade or business, of property to which the
taxpayer has not taken or is not taking title or in which he has no equity.

Catalog Number 20810W Page 2 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
December 31,
20XX

IRC Sec. 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.

IRC Sec. 6020(a) states that if any person shall fail to make a return required by this title or by
regulations prescribed thereunder but shall consent to disclose all information necessary for the
preparation thereof, then, and in that case, the Secretary may prepare such return which being
signed by such person, may be received by the Secretary as the return of such person.

IRC Sec. 6020(b)(1) states that if any person fails to make any return required by any Internal
Revenue law or regulation made thereunder at the time prescribed therefore, or makes, willfully or
otherwise, a false or fraudulent return, the Secretary shall make such return from his own knowledge
and from such information as he can obtain through testimony or otherwise.

IRC Sec. 6020(b)(2) states that any return so made and subscribed by the Secretary shall be prima
facie good and sufficient for all legal purposes.

IRC Sec. 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.

Treasury Regulation Section (Regulation Sec.) 1.501(c)(3)-1(a) states 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 Sec. 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.

Regulation Sec. 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.

Catalog Number 20810W Page 3 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
December 31,
20XX

Regulation Sec. 1.61-1 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.

Regulation Sec. 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 IRC Sec. 6033 and Regulation Sec. 1.6033-1 through 1.6033-3.

Regulation Sec. 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 Service 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 Sec. 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 and Section 6033 of the Code.

Revenue Ruling 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 failed to provide information as requested through correspondence.

Government’s Position

The Organization failed to provide information and/ or documentation to support that it is conducting
activities in furtherance of its exempt status, which was requested by correspondences. Therefore,
exempt status of Organization should be revoked and Form 1120, U.S. Corporation Income Tax

Catalog Number 20810W Page 4 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number
. or exhibi
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
December 31,
20XX

Return, should be filed for 20XX and each year thereafter as long as the organization remains
subject to Federal income tax. If the proposed revocation becomes final, appropriate State officials
will be notified of such action in accordance with Section 6104(c) of the Internal Revenue Code.

Catalog Number 20810W Page 5 www.irs.gov Form 886-A (Rev. 5-2017)