New procedures for reinstatement of tax-exempt status are introduced

Tax-exempt organizations that have had their tax-exempt status automatically revoked because they failed to file required annual returns for three consecutive years have new procedures for getting their exempt status reinstated, under guidance issued by the IRS on Thursday (Rev. Proc. 2014-11). Earlier guidance providing methods for reinstating exempt status (Notice 2011-44) is modified and superseded.

Organizations that are exempt from tax under Sec. 501(a) and private foundations under Sec. 4947(a)(1) are required to file an annual return with the IRS or, if their annual gross receipts are normally $50,000 or less, an annual notice (Form 990-N, e-Postcard). Any organization that fails to file the required annual return or notice for three consecutive years has its tax-exempt status automatically revoked under Sec. 6033(j)(1) and must reapply to the IRS to have its exempt status reinstated.

The new procedures include a streamlined retroactive reinstatement process for organizations that were eligible to file either form Form 990-EZ, Short Form Return of Organization Exempt from From Income Tax, or Form 990-N during the years they failed to file. There are also different retroactive reinstatement processes for organizations to use within 15 months of the revocation of their exempt status and beyond 15 months. And finally, the IRS is also introducing a “post-mark date” process, under which, if an organization does not seek retroactive reinstatement, it can instead apply for reinstatement from the postmark date of its application.

Under the streamlined procedure, the organization will have to attest that its failure to file was not intentional and that it has put procedures in place to file in the future. Organizations that are not eligible for the streamlined procedure and are applying for reinstatement within 15 months of revocation will have to provide facts that support their claim that the organization had reasonable cause for failure to file for at least one of the three consecutive years it failed to file.

Organizations that are applying for reinstatement 15 months or more after revocation will have to provide facts that support the claim that the organization had reasonable cause for failure to file for all three of the consecutive years it failed to file.

Organizations will be required to file annual returns for the years they did not file (except if they were required to file Form 990-N), and, if their application for reinstatement is approved, the IRS will waive failure-to-file penalties for those years.

Effective date and effect on prior applications

The new procedures are effective for applications filed after Jan. 2, 2014, but the IRS says it will also apply the new rules to pending applications, if that will benefit the organization. Organizations that previously had their tax-exempt status reinstated effective from the date of their application, but that would have been eligible for retroactive reinstatement under the new streamlined procedure, will be reinstated effective from their revocation date. Organizations that previously had their tax-exempt status reinstated effective from the date of their application and that would have been eligible for retroactive reinstatement under the other two new procedures may reapply for retroactive reinstatement.

—Alistair M. Nevius (anevius@aicpa.org) is the JofA’s editor-in-chief, tax.