IRS revokes a charity's § 501(c)(3) status for failing to produce records for an audit

Plain-English summary

A small charity that had been recognized as tax-exempt under Section 501(c)(3) (it had applied using the streamlined Form 1023-EZ) was picked for a routine audit. The IRS mailed a series of certified letters and made phone calls asking the organization to produce its books and records, but the organization never turned over the documents needed to show it was actually operated for exempt purposes. Under Sections 6001 and 6033, an exempt organization has to keep adequate records and make them available, and Rev. Rul. 59-95 says that failing to do so can cost an organization its exemption. Because the group did not establish that it was observing the conditions for continued exemption, the IRS issued this final adverse determination revoking its 501(c)(3) status, effective January 1 of the redacted year. The practical consequences: the organization must file regular income tax returns, and contributions to it are no longer deductible under Section 170. The organization can contest the revocation in court under Section 7428 within 90 days.

Ruling snapshot

• Question: Should a 501(c)(3) organization lose its exemption for failing to respond to an audit and produce its records?
• Outcome: revocation (final adverse determination; exemption revoked)
• Key authorities: IRC §§ 501(c)(3), 6001, 6033(a)(1), 170; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, 1.6033-1; Rev. Rul. 59-95

Full text (IRS public release)

Transcription note: This is a scanned document, made up of the final adverse
determination (Letter 6337), the enclosed proposed adverse determination (Letter 3618),
and the Form 886-A "Explanation of Items" audit report. Per the runbook's OCR
proofreading duty, obvious scanning misreads have been corrected and the repeating
Form 886-A page furniture has been replaced with [Page N] markers; genuinely unreadable
spots are marked [illegible]; blanks where the IRS redacted identifying details are left as
gaps. Two date fields were garbled by the scan and corrected against the original PDF
images: the final letter is dated March 11, 2021 (scanned as "2024") and the proposed
letter is dated 12/11/2019 (scanned as "42/44/2019"). Wording is otherwise reproduced
verbatim.

Department of the Treasury                          Date: March 11, 2021
Internal Revenue Service ,
Tax Exempt and Government Entities
I 1100 Commerce Street
MC 4920DAL
Dallas, TX 75242

Taxpayer ID number:

Form:

Number: 202216017 Tax periods ended:
Release Date: 4/22/2022

Person to contact:

UIL: 501.03-00

CERTIFIED MAIL - RETURN RECEIPT REQUESTED
Dear

Why we are sending you this letter

This is a final determination that you don’t 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 1,20 Your determination letter dated January 27,20, is revoked.

Our adverse determination as to your exempt status was made for the following reasons: You have failed to
produce documents to establish that you are operated exclusively for exempt purposes within the meaning of
IRC Section 501(c)(3), 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 IRC Sections 6001 and
6033 (a)(1) and Rev. Rul. 59-95, 1959-1 CB. 627.

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.

Contributions to your organization are no longer deductible under IRC Section 170.

What you must do if you disagree with this determination
If you want to contest our final determination, you have 90 days from the date this determination letter was

mailed to you to file a petition or complaint in one of the three federal courts listed below.

How to file your action for declaratory judgment

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.

Please contact the clerk of the appropriate court for rules and the appropriate forms for filing an action for
declaratory judgment by referring to the enclosed Publication 892, How to Appeal an IRS Determination on
Tax-Exempt Status. You may write to the courts at the following addresses:

United States Tax Court ULS. Court of Federal Claims U.S. District Court for the District of Columbia
400 Second Street, NW 717 Madison Place, NW 333 Constitution Ave., N.W.
Washington, DC 20217 Washington, DC 20439 Washington, DC 20001

Letter 6337 (12-2020)
Catalog Number 74808E

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).

Information about the IRS Taxpayer Advocate Service

The IRS office whose phone number appears at the top of the notice can best address and access your tax
information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate
Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an [RS procedure just isn't
working as it should. TAS is an independent organization within the [RS that helps taxpayers and protects
taxpayer rights. Contact your local Taxpayer Advocate Office at:

Internal Revenue Service
Taxpayer Advocate Office

Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights,
go to taxpayeradvocate.irs.gov. Do not send your federa! court pleading to the TAS address listed above. Use
the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to
file an action for declaratory judgment.

Where you can find more information
Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The [RS Collection Process, for
more comprehensive information.

Find tax forms or publications by visiting www.irs.gov/forms or calling 800-lTAX-FORM (800-829-3676).
If you have questions, you can call the person shown at the top of this letter.

If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best
time to call, and a copy of this letter.

Keep the original letter for your records.

Sincerely,
P ‘ —~ {2 “,

Sean E. O'Reilly
Director, Exempt Organizations Examinations

2

Enclosures:
Publication 1
Publication 594
Publication 892

Letter 6337 (12-2020)
Catalog Number 74808E

Department of the Treasury Date:

Internal Revenue Service                          12/11/2019

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:

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 vou disagree

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

no

. 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 | and 2, above, you'll still be able to file a protest with IRS Appeals Office after
the meeting or afler 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.

Letter 3618 (Rev, 9-2017}
Catalog Number 34809F

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.

Hf you're considering requesting technical advice. contact the person shown at the top of this letter. Ifyou
disagree with the technical advice decision, you will be able to appeal to the [RS 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
[f 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

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 4621-A Report of Examination
Form 6018

Publication 892

Publication 3498-A

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

Date of Notice:
Issues:
Whether (the organization), which qualified for exemption from Federal

income tax under Section 5014 (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:

apphed for tax-exempt status by filing the Form 1023-EZ, Streamlined
Application for Recagnition af Fxemption Under Sectlon 50 1 {c}(8) of the Internal
Revenue Code, on January 23, 20, and was granted tax-exempt status as a
501(c)(3) on January 27, 20° with an effective date of March 27, 20

An organization exempt under 501(c}(3) needs to be organized and operated exclusively
for religious, charitabie, 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 for the tax year December 31, 20

The Form 1023-EZ application list ihe phone number of for the Person
to contact of

« Correspondence for ihe audit was as follows:

© Letter 3606 (Rev. 6-2012) with attachments, was mailed certified to the
organization on May 22,20 _, with a response date of June 24,20 = Article
Number . Per the United States Postal Service
(USPS) tracking, this was delivered on May 29,20 at am. The
certified return receipt for the certified Letter 3606 was received by the Tax
Compliance Officer (TCO) as being signed for by

o Letter 3844-A (Rev. 12-2015) with attachments, was mailed certified to the
Organization’s Secretary/Director on September 23.20. with a response
date of October 23,20 | Article Number Per
the United States Postal Service (USPS) tracking, this was returned on
October 4,20 at am as Return to Sender-No Such Number-Unable to
Forward. This letter was received back at the Internal Revenue Service on

[Page 1]

October 4, 20

o Letter 3844-A (Rev. 12-2015) with attachments, was mailed certified to the
Organization on September 23, 20__, with a response date of October 23,
20, Article Number Per the United States
Postal Service (USPS) tracking, this was returned on October 4, 20 at
am as Return to Sender-Unclaimed-Unable to Forward. This letter was
received back at the Internal Revenue Service on October 21, 20

o Letter 3844-A (Rev. 12-2015) with attachments, was mailed certified to the
Organization's Treasurer/Director on September 23,20, with a response

date of October 23, 20°, Article Number Per
the United States Postal Service (USPS) tracking, this was delivered on
October 17, 20° at pm. The certified return receipt was received by the

TCO on October 30,20 as being signed for by

o Letter 3844-A (Rev. 12-2015) with attachments, was mailed certified to the
Organization's President/Director on September 23, 20 __, with a response
date of October 23,20 Article Number Per
the United States Postal Service (USPS) tracking, this was delivered on
October 17,20 at pm. The certified return receipt was received by the
TCO as being signed for by

o Letter 5077-B (Rev. 1-2017) with attachments, was mailed certified to the
Organization's President/Director at the address listed on the Form 1023-EZ
on October 25, 20° , with a response date of November 8,20 = Article
Number Per the United States Postal Service
(USPS) tracking, delivery was attempted on November 2,20 . Anotice was
left (No Authorized Recipient Available) on November 2,20 at pm.
The letter is available for pick up but has not yet been delivered or returned to
IRS as of the date of this form.

o Letter 5077-B (Rev. 1-2017) with attachments, was mailed certified to the
Organization's President/Director at the address of record on October 25,
20 , with a response date of November 8, 20, Article Number

_ Per the United States Postal Service (USPS) tracking, the

letter is available for pick up as of October 29, 20, am. The letter has
not been delivered or returned to IRS as of the date of this form. Per the
USPS.com website, this certified letter is being returned to the sender, IRS as
of Nov. 27,20 .as Unclaimed, Being Returned to Sender.

o Letter 5077-B (Rev. 1-2017) with attachments, was mailed certified to the
Organization's Treasurer/Director at the address listed on the Form 1023-EZ
on October 25,20 with aresponse date of November 8,20 = Article

Form 386-ARev.4-68) Department of the Treasury - Internal Revenue Service
[Page 2]

Number Per the United States Postal Service

(USPS) tracking, delivery was attempted on November 2,20 at pm. A
notice was left (No Authorized Recipient Available) on November 2, 20 at

pm. The letter is available for pick up but has not yet been delivered or
returned to IRS as of the date of this form.

o Letter 5077-B (Rev. 1-2017) with attachments, was mailed certified to the
Organization’s Treasurer/Director at the address of record on October 25,
20 _ ~—with a response date of November 8, 20 ___, Article Number

. Per the United States Postal Service (USPS) tracking, the

letter is available for pick up as of October 29, 20, am. The letter has
nol been delivered or returned to IRS ag of the date of this form. Per the
USFS.com website, this certified letter is being returned to the sender, IRS as
of Nov. 27,20 .as Unclaimed, Being Returned to Sender.

e Telephone contact for the audit was as follows:

o June4, 20, called the phone number listed on the Form 1023-EZ
application for the Person to Contact of ’. Received a voice
recording. TCO left a voice message stating the TCO’s name and asked if
the organization had received the initial letter and to please return the phone
call. , Treasurer/Director, called back the same day.
confirmed she is an officer and can bind the organization. She confirmed she
had received the initial letter which was reviewed. She had no additional
questions. The due date was renegotiated an additional daysto ;
August 23, 20

o September 16,20 , No response had been received from the organization
by phone, fax or mail. Called . Treasurer/Director, at
_ TCO was unable to reached officer of the organization and unable to
leave a voice message. TCO prepared Letter 3844-A to send to all officers of
the organization.

ec October 22,20 _ called Treasurer/Director, and
received a voice recording. TCO left a message for the Treasurer stating
multiple letters have been sent to the organization and no response has been
received. Please call back.

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

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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.

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, of keep such records, as Ihe 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)(8) purpose. Accordingly, the organization does not qualify for exemption under
section 501 (c){8) 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

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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.

Regulation §1.6001-1(e) of the Code provides thal lhe 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 as no response has been received from the
organization by phone, fax or mail. Organization has failed to return TCO’s phone calls or
respond to the multiple certified letters sent to the organization’s officers at the address of
record and the addresses of the officers listed on the Form 1023-EZ.

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

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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 infornialion for the purpose on enabling the intemal 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.

lt 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, 20

Form 1120, U.S. Corporation Income Tax Return, should be filed for the tax periods
after January 7, 2C

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