Nonprofit loses exemption after failing to provide audit records

Plain-English summary

A section 501(c)(3) organization was selected for an audit of a Form 990-N filing. The IRS sent repeated letters to the organization and several officers, and it made multiple telephone calls, but the organization did not provide the requested records or otherwise participate in the examination. Without those records, the IRS said it could not verify that the organization operated exclusively for exempt purposes, avoided private inurement, or met its reporting duties. Relying on sections 6001 and 6033 and Revenue Ruling 59-95, the IRS revoked the exemption effective as of the redacted date. The organization was also directed to file corporate income-tax returns for later periods.

Ruling snapshot

• Question: Could the organization keep its section 501(c)(3) exemption after failing to respond to an audit and produce records?
• Outcome: revocation
• Key authorities: IRC §§ 501(a), 501(c)(3), 6001, 6033, 7428; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, 1.6033-1; Rev. Rul. 59-95

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TEGE EO Examinations Mail Stop 4920 DAL
1100 Commerce St.
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: December 14, 2016

Taxpayer Identification Number:
Person to Contact:

Number: 201717043 Employee Identification Number:

Release Date: 4/28/2017 Employee Telephone Number:

UIL: 501.03-00

CERTIFIED MAIL — RETURN RECEIPT
Dear

This is a final adverse determination regarding your exempt status under section 501(c)(3) of the
Internal Revenue Code. Our favorable determination letter to you dated July 29, 20XX is hereby
revoked and you are no longer exempt under section 501(a) of the Code effective January 1, 20XX.

The revocation of your exempt status was made for the following reason(s):

You have failed to produce documents to establish that you are operated exclusively for exempt
purposes and that no part of your net earnings inures 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) of the Code and Rev. Rul. 59-95, 1959-1 C.B. 627. Organizations
described in section 501(c)(3) of the Code and exempt under section 501(a) of the Code must be
both organized and operated exclusively for exempt purposes.

Contributions to your organization are no longer deductible under IRC §170 after January 1, 20XX.

You are required to file income tax returns on Form 1120. These returns should be filed with the
appropriate Service Center for the tax year ending December 31, 20XX, and for all tax years
thereafter in accordance with the instructions of the return.

Processing of income tax returns and assessments 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 under the declaratory judgment provisions of section
7428 of the Code, a petition to the United States Tax Court, the United States Claims Court, or the
district court of the United States for the District of Columbia must be filed before the 91st Day
after the date this determination was mailed to you. Please contact the clerk of the appropriate
court for rules regarding filing petitions for declaratory judgments by referring to the enclosed
Publication 892. You may write to the United States Tax Court at the following address:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

You also have the right to contact the Office of the Taxpayer Advocate. 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 taxpayeradvocate.irs.gov or call 1-
877-777-4778. If you prefer, you may contact your local Taxpayer Advocate at:

Internal Revenue Service
Office of the Taxpayer Advocate

If you have any questions, please contact the person whose name and telephone number are
shown in the heading of this letter.

Sincerely,

Mary A. Epps
Acting Director, EO Examinations

Enclosures:
Publication 892

Department of the Treasury                         Date: May 23, 2016
Internal Revenue Service                            Taxpayer Identification Number:

IRS Tax Exempt and Government Entities Division
Exempt Organizations Examinations Form:

Tax year(s) ended:
Person to contact/ ID number:

Contact numbers:

Toll Free

Long Distance

Fax:

Manager's name/ ID number:

Manager's contact number:

UIL: 501.03-00 Response due date:

Certified Mail - Return Receipt Requested
Dear

Why you are receiving this letter
We propose to revoke your status as an organization described in section 501(c)(3) of the Internal
Revenue Code (Code). Enclosed is our report of examination explaining the proposed action.

What you need to do if you agree

If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed Action —
Section 7428, and return it to the contact person at the address listed above (unless you have already
provided us a signed Form 6018). We'll issue a final revocation letter determining that you aren't an
organization described in section 501(c)(3).

After we issue the final revocation letter, we'll announce that your organization is no longer eligible for
contributions deductible under section 170 of the Code.

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 revocation letter. Failing to respond to this proposal will adversely impact your legal standing to
seek a declaratory judgment because you failed to exhaust your administrative remedies.

Effect of revocation status
If you receive a final revocation letter, you'll be required to file federal income tax returns for the tax
year(s) shown above as well as for subsequent tax years.

What you need to do if you disagree with the proposed revocation

If you disagree with our proposed revocation, you may request a meeting or telephone conference
with the supervisor of the IRS contact identified in the heading of this letter. You may also file a
protest with the IRS Appeals office by submitting a written request to the contact person at the
address listed above within 30 calendar days from the date of this letter. The Appeals office is
independent of the Exempt Organizations division and resolves most disputes informally.

Letter 3618 (06-2012)
Catalog Number 34809F

For your protest to be valid, it must contain certain specific information including a statement of the
facts, the applicable law, and arguments in support of your position. For specific information needed
for a valid protest, please refer to page one of the enclosed Publication 892, How to Appeal an IRS
Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498, The Examination
Process. Publication 3498 also includes information on your rights as a taxpayer and the IRS
collection process. Please note that Fast Track Mediation referred to in Publication 3498 generally
doesn’t apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication 892.
Please contact the individual identified on the first page of this letter if you are considering requesting
technical advice. If we issue a determination letter to you based on a technical advice memorandum
issued by the Exempt Organizations Rulings and Agreements office, no further IRS administrative
appeal will be available to you.

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate. Their assistance isn’t a substitute
for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate can't
reverse a legally correct tax determination or extend the time you have (fixed by law) to file a petition
in a United States court. They can, however, see that a tax matter that hasn’t 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:

Internal Revenue Service
Office of the Taxpayer Advocate

For additional information

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:

Report of Examination
Form 6018

Form 4621-A
Publication 892
Publication 3498

Letter 3618 (06-2012)
Catalog Number 34809F

Form 886A        Department of the Treasury - Internal Revenue Service        Schedule No. or Exhibit
Explanation of Items
Name of Taxpayer                                                        Year/Period Ended: 20XX12

Date of Notice: May 23, 2016
Issues:

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

Facts:

The organization filed Form 1023 for exemption on May 14, 20XX and was granted
exemption as a 501(c)(3) on July 29, 20XX with an effective date of December 12,
20XX.

A 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 organization was selected for audit to ensure that the examined 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 of Form 990-N for the above mentioned tax period.

• Correspondence for the audit was as follows:

o Letter 3606 (Rev. 6-2012) with attachments were mailed to the
organization on January 5, 20XX, with a response date of February 5,
20XX. This letter was returned to the Internal Revenue Service on May 7,
20XX. Returned to sender. No such number, unable to forward.

o Letter 3844-A (Rev 110-2015) with attachment Form 4564 was mailed
certified to the President on February 22, 20XX; with a response date of
February 26, 20XX. Article Number . Per USPS
tracking, this was delivered on March 9, 20XX at XX:XX AM. Also,
received PS Form 3811, was signed but unable to make name of
signature.

o Letter 3844-A (Rev 12-2015) with attachment Form 4564 was mailed
certified to the Secretary on April 7, 20XX; with a
response date of April 21, 20XX. Article Number
. Per USPS tracking this was unclaimed and returned to the Internal
Revenue Service on May 9, 20XX.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -1-

Form 886A        Department of the Treasury - Internal Revenue Service        Schedule No. or Exhibit
Explanation of Items
Name of Taxpayer                                                        Year/Period Ended: 20XX12
o Letter 3844-A (Rev 12-2015) with attachment Form 4564 was mailed

certified to the Treasurer on April 7, 20XX; with a response
date of April 21, 20XX. Article Number . Per
USPS tracking, this was delivered on April 18, 20XX at 10:37 AM. Also,
received PS Form 3811, was signed by

Letter 3844-A (Rev 12-2015) with attachment Form 4564 was mailed
certified to on April 7, 20XX; with a response date of April
21, 20XX. Article Number . Per USPS tracking
this was unclaimed and returned to the Internal Revenue Service on April
25, 20XX.

• Telephone contacts for the audit was as follows:

o

January 1, 20XX, Tax Compliance Officer (TCO), called the phone
number listed on the Form 1023 application for the organization at XXX-
XXX-XXXX. TCO left a Message for to return the
phone call. The call was returned on January 11, 20XX. left a voice
mail that she had just helped the org with the initial application and the
person to contact was President @ XXX-XXX-XXXX. TCO
called the phone number and was unable to leave a message.

February 18, 20XX, TCO called the President @ XXX-XXX-XXXX. The
number had been disconnected.

March 17, 20XX, TCO researched google for a different phone number
and found the phone number for the President was XXX-XXX-XXXX. TCO
left a message for a return call. The call was not returned.

March 22, 20XX, TCO called the President at both XXX-XXX-XXXX and
XXX-XXX-XXXX. TCO was unable to leave a message at either number.

April 5, 20XX, TCO called the President at XXX-XXX-XXXX. TCO was
unable to leave a message.

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.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -2-

Form 886A        Department of the Treasury - Internal Revenue Service        Schedule No. or Exhibit
Explanation of Items
Name of Taxpayer                                                        Year/Period Ended: 20XX12

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.

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.

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.

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

Form 886A        Department of the Treasury - Internal Revenue Service        Schedule No. or Exhibit
Explanation of Items
Name of Taxpayer                                                        Year/Period Ended: 20XX12

Organization Position

The organization has failed to respond to all attempts to contact them. The taxpayer's
position on the issue(s) is currently unknown at this time.

Government 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. Accordingly, the organization's exempt status is
revoked effective January 1, 20XX.

Form 1120 returns should be filed for the tax periods after January 1, 20XX.

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