Charity lost exemption after ignoring audit requests

Plain-English summary

A section 501(c)(3) organization did not provide the financial and activity information requested during an examination of its Form 990-N. The IRS mailed several requests and made repeated telephone calls, including contact with a family member who said the organization was gathering the material, but no records were submitted. Without the records, the organization could not demonstrate that it remained organized and operated exclusively for exempt purposes. Applying the recordkeeping and reporting requirements of sections 6001 and 6033 and Revenue Ruling 59-95, the IRS revoked the exemption. The organization was required to file Form 1120 for later periods, and contributions were no longer deductible.

Ruling snapshot

• Question: Could the organization retain section 501(c)(3) status without responding to the IRS examination requests or providing supporting records?
• Outcome: exemption revoked
• Key authorities: IRC §§ 501(c)(3), 6001, 6033; 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

TE/GE EO Examinations
1100 Commerce St., MC 4920DAL
Dallas, TX 75242
TAX EXEMPT AND
GOVERNMENT ENTITIES Date:
DIVISION March 9, 2017

Taxpayer Identification Number:

Person to Contact:
Release Number: 201732033
Release Date: 8/11/2017 Employee Identification Number:
UIL Code: 501.03-00

Employee Telephone Number:

(Phone)
(Fax)

CERTIFIED MAIL — Return Receipt Requested

Dear

This is a final adverse determination that your exempt status under section 501(c)(3) of
the Internal Revenue Code is revoked. Recognition of your exemption under Internal
Revenue Code section 501(c)(3) is revoked effective July 1, 20xx for the following
reason(s):

You did not respond to our requests for information regarding your finances
and activities. You have not demonstrated that you are organized or operated
exclusively for exempt purposes within the meaning of Internal Revenue Code
section 501(c)(3) and Treasury Regulation section 1.501(c)(3)-1(d).

Contributions to your organization are no longer deductible under section 170 of the
Internal Revenue Code.

You are required to file Federal income tax returns on Form 1120. If you have not
already filed these returns and the agent has not provided you instructions for converting
your previously filed Form 990 to Form 1120, you should file these income tax returns
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, you may file an action for declaratory
judgment under the provisions of section 7428 of the Code in one of the following three
venues: United States Tax Court, the United States Court of Federal Claims, or the
United States District Court for the District of Columbia. A petition or complaint in one

of these three courts must be filed before the 91st day after the date this determination
was mailed to you if you wish to seek review of our determination. Please contact the
clerk of the respective court for rules and the appropriate forms regarding filing petitions
for declaratory judgment by referring to the enclosed Publication 892. Please note that the
United States Tax Court is the only one of these courts where a declaratory judgment
action can be pursued without the services of a lawyer. 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

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

Sincerely yours,

Mary A. Epps
Acting Director, EO Examinations

Enclosures:
Publication 892

Department of the Treasury Date:
Internal Revenue Service August 31, 2016
Taxpayer Identification Number:

IRS Tax Exempt and Government Entities Division

Exempt Organizations Examinations Form:
990-N
Tax year(s) ended:
December 31, 20XX
Person to contact/ ID number:

Contact numbers:
Toll Free
Long Distance
Fax:
Manager's name/ ID number:

Manager’s contact number:

Response due date:
October 3, 20XX

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
Publication 892
Publication 3498

Letter 3618 (06-2012)
Catalog Number 34809F

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

December 31, 20xx

Date of Notice: August 31, 2016
Issues:

Whether continues to qualify for exemption from Federal income tax
under Section 501(c)(3) of the Internal Revenue Code.

Facts:

filed Form 1023 for exemption on August 20, 20XX and was granted exemption as a
501(c)(3) on June 8, 20XX with an effective date of exemption of July 01, 20XX.

An 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 amatuer sports competition.

was selected for audit to ensure that the examined organization's activities and
operations align with its approved exempt status.

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:

○ Letter 3606 (Rev. 6-2012) with attachments were mailed to on December
30, 20XX, with a response date of February 3, 20XX.

○ EOCA Letter 0000 was mailed certified to on August 19, 20XX; with a respond
date of September 3, 20XX. Article Number . This was
signed for on August 25, 20XX by who marked “Addressee” and is
listed as the primary officer on the Form 990-N

○ Letter 3844-A was mailed certified to on May 17, 20XX with a respond date of
June 20, 20XX. Article Number . This was signed for on
June 1, 20XX. The signature is not legible.

• Telephone contact for the audit was as follows:

○ March 13, 20XX, Tax Compliance Officer (TCO) called a phone
number located in the Administrative File for . TCO spoke with
mother who explained had started the organization for a high school
project. She stated was still in high school and not at home at that time.
She proceeded to state they had received the Letter 3606 and its attachments and
had received the amended articles along with certification from their state and they

Form 886-A (1-1994) Catalog Number 20810W Page publish.no.irs.gov Department of the Treasury-Internal Revenue Service


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

December 31, 20xx

were working on the information pertaining to their activities. She stated she was
under the impression was planning on completing the information over the
weekend. TCO verified they had the correct mailing address and fax number to
send the information.

○ April 14, 20XX, No information has been received from the org, TCO called
and received voice mail. TCO left a message requesting
or an officer return the phone call.

○ June 8, 20XX, No information has been received from the org, TCO called
and received voice mail. TCO left a message requesting or
an officer return the phone call.

○ July 14, 20XX, No information has been received from the org, TCO called
and received voice mail. TCO left a message requesting or an
officer return the phone call.

Law:

Internal Revenue Code (IRC) §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 §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 §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 §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.

Regulation §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).

Form 886-A (1-1994) Catalog Number 20810W Page publish.no.irs.gov Department of the Treasury-Internal Revenue Service


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

December 31, 20xx

Regulation §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 §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.

Treasury Regulation (Regulation) §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 §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 IRC Section 6033. See IRC Section 6033 and Regulation §1.6033-1
through 1.6033-3.

Regulation §1.6001-1(e) provides 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.

Regulation §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.

Regulation §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 section 6033.

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

Form 886-A (1-1994) Catalog Number 20810W Page publish.no.irs.gov Department of the Treasury-Internal Revenue Service


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

December 31, 20xx

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
has failed to respond to all attempts to contact them.
Government’s Position

Based on the above facts, did not respond to verify that it is 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.

Regulations Section 1.6033-1(h)(2) specifically states that exempt organizations shall submit
additional information for the purpose of 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, does not qualify for exemption under section 501(c)(3)
and its tax-exempt status should be revoked.

It is the Service'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, 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 (1-1994) Catalog Number 20810W Page publish.no.irs.gov Department of the Treasury-Internal Revenue Service