Charity lost its exemption after failing to provide requested records

Plain-English summary

A charitable organization provided some financial records for one tax year but then stopped responding to IRS letters and phone calls seeking clarification, source documents, and records for another year. The IRS explained that exempt organizations must keep records and provide information needed to determine whether they continue to qualify for exemption. Because the organization did not provide the requested materials, it failed to establish that it continued to operate for exempt purposes and comply with its reporting duties. The IRS revoked its § 501(c)(3) status and required it to file corporate income tax returns.

Ruling snapshot

• Question: Did the organization continue to qualify under § 501(c)(3) after failing to respond to examination requests and produce records?
• Outcome: revocation
• 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)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES Date:
DIVISION MAR 2 8 2016

Person to Contact:

Release Number: 201645014 Identification Number:
Release Date: 11/4/2016 Telephone Number:
UIL-Code: 501.03-00 In Reply Refer to:

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT:
JUN 2 7 2016

CERTIFIED MAIL - Return Receipt Requested

Dear

This is a Final Adverse Determination Letter that your exempt status under section 501(c)(3)
of the Internal Revenue Code (IRC) is revoked. Recognition of your exemption under IRC
section 501(c)(3) is revoked effective January 1, 20XX.

Our adverse determination was made for the following reasons:

You have not established that you are 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 failed to respond to repeated reasonable requests to allow the Internal
Revenue Service to examine your receipts, expenditures, or activities as
required by the Code sections 6001 and 6033(a)(1).

Contributions to your organization are not deductible under section 170 of the Internal
Revenue 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 Claim Court 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.

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,

Paul A. Marmolejo
Acting Director, EO Examinations
Enclosures:
Publication 892

Department of the Treasury
Internal Revenue Service
IRS 324 25th St Rm 6025 Mail Stop 1112
Ogden, UT 84401

Date:

September 2, 2015
Person to Contact/ID Number:

Contact Numbers:
Telephone:

Fax:

Taxpayer Identification Number:
Form: 990
Tax Year(s) Ended: December 31, 20XX
December 31, 20XX

Certified Mail - Return Receipt Requested
Dear

We have enclosed a copy of our report of examination explaining why we believe revocation of
your organization's exempt status is necessary.

If you do not agree with our position you may appeal your case. The enclosed Publication
3498, The Examination Process, explains how to appeal an Internal Revenue Service (IRS)
decision. Publication 3498 also includes information on your rights as a taxpayer and the IRS
collection process.

If you request a conference, we will forward your written statement of protest to the Appeals
Office and they will contact you. For your convenience, an envelope is enclosed.

If you and Appeals do not agree on some or all of the issues after your Appeals conference, or
if you do not request an Appeals conference, you may file suit in United States Tax Court, the
United States Court of Federal Claims, or United States District Court, after satisfying
procedural and jurisdictional requirements as described in Publication 3498.

You may also request that we refer this matter for technical advice as explained in Publication
892, Exempt Organization Appeal Procedures for Unagreed Issues. If a determination letter is
issued to you based on technical advice, no further administrative appeal is available to you
within the IRS on the issue that was the subject of the technical advice.

If you accept our findings, please sign and return the enclosed Form 6018, Consent to
Proposed Adverse Action. We will then send you a final letter revoking your exempt status. If
we do not hear from you within 30 days from the date of this letter, we will process your case
on the basis of the recommendations shown in the report of examination and this letter will

Letter 3610 (Rev. 11-2003)
Catalog Number: 34801V

become final. In that event, you will be required to file Federal income tax returns for the tax
period(s) shown above. File these returns with the Ogden Service Center within 60 days from
the date of this letter, unless a request for an extension of time is granted. File returns for later
tax years with the appropriate service center indicated in the instructions for those returns.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate
assistance is not a substitute for established IRS procedures, such as the formal appeals
process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend
the time fixed by law that you have to file a petition in a United States 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 may call toll-free 1-877-777-4778 and ask for
Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate
at:

If you have any questions, please call the contact person at the telephone number shown in
the heading of this letter. If you write, please provide a telephone number and the most
convenient time to call if we need to contact you.

Thank you for your cooperation.

Sincerely,

Margaret Von Lienen
Director, Exempt Organizations Examinations

Enclosures:
Publication 892
Publication 3498
Form 6018

Report of Examination

Letter 3610 (Rev. 11-2003)
Catalog Number: 34801V

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS 1

Name of taxpayer Tax Identification Number Year/Period ended

December 31, 20XX
December 31, 20XX

Issue:

Should a 501(c)3 exempt organization be revoked due
to failure to respond and failure to produce records?

Facts:

has not provided the requested information for the
examination of the Form 990 for the tax year ending December 31, 20XX and December 31,
20XX. The organization received their approval for tax exemption in June 19XX. The
organization was established for the purpose of

Exhibit A (below) provides a list of the Internal Revenue Service correspondence or phone
contact made to you or your Power of Attorney (POA) requesting that you provide
information pertaining to your Form 990 for the years ending December 31, 20XX and
December 31, 20XX.

Summary of Exhibit A
Contact Correspondence Date Certified Receipt
type sent / Phone sent or Mail? Signed date or phone
contact called Y/N response
Letter Sent Letter 3606C 01-29- N 03-24-XX Response with
for tax year 20XX XX copies of the
to organization's Balance
Sheet, Profit & Loss, and
the General Ledger for tax
year 20XX.
Response was signed by
No Unable to contact 03-24-
contact organization XX thru
because of other 08-14-
priorities XX
Phone 08-14- Left message to return
call XX call.
returned call
and stated he can sign
and bind the organization.
He will review letter again
and determine what

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

Page: -1-

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS 1
Name of taxpayer Tax Identification Number Year/Period ended

December 31, 20XX

December 31, 20XX
remaining information
needs to be sent.

Phone 10-08- Left message for
call XX to return my call
Phone 11-07- Left message for
call XX to return my call
Phone 11-10- Left message for
call XX to return my call
Letter 11-13- No response
XX
Phone 01-27- Left message for
call XX to return my call
Letter No response letter 01-27- Certified No response
XX mail
Letter No Response 02-26- Returned as Unclaimed
XX by USPS on 03-10-XX
Phone 02-26- Left message for
call XX to return my call
Letter Letter EOCA with 06-23- Certified Returned as Unclaimed
Form 886A XX mail by USPS on 07-23-XX

has failed to respond to the Internal Revenue
Service correspondence for information pertaining to the Form 990 for the tax periods ending
December 31, 20XX and December 31, 20XX.

Law:

501(c)(3)

§501(c)(3) Requires tax exempt entities 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.

§Reg 1.501(c)(3)-1(a) 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)

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

Page: -2-

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS 1
Name of taxpayer Tax Identification Number Year/Period ended

December 31, 20XX
December 31, 20XX

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

Treas. Reg. § 1.6001-1(a) in conjunction with Treas. Reg. § 1.6001-1(c) provides that every
organization exempt from tax under IRC § 501(a) and subject to the tax imposed by IRC § 511
on its unrelated business income must keep such permanent books or accounts or records,
including inventories, as are sufficient to establish the amount of gross income, deduction,
credits, or other matters required to be shown by such person in any return of such tax. Such
organization shall also keep such books and records as are required to substantiate the
information required by IRC § 6033.

Treas. Reg. § 1.6001-1(e) states that the books or records required by this section shall be
kept at all times 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) provides, except as provided in IRC § 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.

Treas. Reg § 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 of the Code and IRC § 6033.

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 IRC § 6033 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.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -3-

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS 1
Name of taxpayer Tax Identification Number Year/Period ended

December 31, 20XX
December 31, 20XX

Government's Position:

In accordance with the above cited provisions of the Code and regulations under

IRC §§ 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 return (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.

Several attempts have been made to contact the organization. The organization was
contacted via phone call to send information about the December 31, 20XX tax year since
the organization sent the information for the December 31, 20XX period. The information for
the December 31, 20XX was reviewed and other question arose that needed to be clarified.
The organization was issued a second letter informing the organization of the expansion of
the examination to include the December 31, 20XX tax year. In order to properly review the
information provided I needed to review source documents for items listed in the General
Ledger. The letter was sent by certified mail and the letter returned by USPS as unclaimed.
Several phone calls and voice messages to contact the organization have not been returned.
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.

Organization's Position:

Several attempts to contact the organizations have been made by either letters or phone
calls. The organization responded to the original letter sent on January 29, 20XX and phone
call on August 14, 20XX. After the initial contact the organization has not responded to any
attempts by either mail or phone for clarification of the original response and additional
information for the audit.

Conclusion:

It is the IRS's position that the organization failed to meet 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 failed to establish that it continues to
qualify for tax exempt status. Accordingly, the organization's exempt status is revoked
effective January 1, 20XX.

Form(s) 1120, U.S. Corporation Income Tax Return should be filed for the tax periods
ending on or after December 31, 20XX.

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