Charity lost exemption after failing to provide audit records

Plain-English summary

The IRS repeatedly asked a section 501(c)(3) organization for records needed to examine its receipts, expenditures, activities, and Form 990. Although the organization's president spoke with the examiner and received extensions, the organization never supplied the requested material. Without adequate books, records, and responses, the organization could not establish that it operated exclusively for exempt purposes or that no earnings benefited private persons. Relying on sections 6001 and 6033 and Revenue Ruling 59-95, the IRS revoked the organization's exemption effective at the start of the specified year. Contributions were no longer deductible after that date, and the organization was required to file Form 1120 for later periods.

Ruling snapshot

• Question: Could the organization retain section 501(c)(3) status without producing the records and information required for its examination?
• 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
TEGE EO Examinations Mail Stop 4920 DAL
1100 Commerce St.
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: March 3, 2017
Release Number: 201732034
Release Date: 8/11/2017

UIL Code: 501.03-00
Taxpayer Identification Number:

Person to Contact:
Employee Identification Number:

Employee Telephone Number:

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 May 6, 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):

Organizations described in IRC 501(c)(3) and exempt under section 501(a) must be both organized
and operated exclusively for exempt purposes. 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.

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. This return was filed with the
appropriate Service Center for the tax year ending December 31, 20XX. These returns should be
filed 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,

Margaret Von Lienen
Director, EO Examinations

Enclosures:
Publication 892

Internal Revenue Service

IRS Tax Exempt and Government Entities Division
324 25th St Rm 6025 Mail Stop 1112

Ogden, UT 84401

Department of the Treasury

Date:
March 11, 2016
Taxpayer Identification Number:

Form:
990

Tax year(s) ended:
December 31, 20XX

Person to contact/ ID number:

Contact numbers:

Phone Number: Toll Free
Long Distance

Fax Number:

Manager's name/ ID number:

Manager's contact number:

Response due date:
April 11, 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.

Letter 3618 (06-2012)
Catalog Number 34809F

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.

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

Letter 3618 (06-2012)
Catalog Number 34809F

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,

Paul A. Marmolejo
Acting Director, Exempt Organizations Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

Letter 3618 (06-2012)
Catalog Number 34809F

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
December 31, 20xx

Date of Notice: March 11, 2016

Issues:

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

Facts:

The organization filed Form 1023 for exemption on August 23, 20XX, and was granted
exemption as a 501(c)(3) on May 06, 20XX, with an effective date of exemption of June
10, 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.

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 for the above mentioned tax period.

• Correspondence for the audit was as follows:

○ Letter 3606 (Rev. 6-2012) with attachments, was mailed to the organization
on August 28, 20XX, with a response date of September 28, 20XX.

○ A letter was sent to the organization on September 9, 20XX, letting the
organization know the Tax Compliance Officer (TCO) mailing address and
phone number had changed.

○ EOCA Letter 0000, EO Exam Follow Up for No Response (2012-10) with
attachments, was mailed certified to the organization on October 07, 20XX,
with a response date of October 29, 20XX. Article Number
. Per the United States Postal Service (USPS) tracking, this was delivered on
October 13, 20XX at pm.

○ EOCA Letter 0000, EO Exam Follow Up for No Response (2012-10) with
attachments, was mailed certified to the President ( ), per Form
1023 application, on December 09, 20XX, with a respond date of December
30, 20XX. Article Number . Per USPS tracking this
was unclaimed and returned to the Internal Revenue Service (IRS) on
January 13, 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
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
December 31, 20xx

○ EOCA Letter 0000, EO Exam Follow Up for No Response (2012-10) with
attachments, was mailed certified to the Treasurer/Secretary ( );
per Form 1023 application, on December 09, 20XX, with a respond date of
December 30, 20XX. Article Number . Per USPS
tracking this was unclaimed and returned to the IRS on January 13, 20XX.

• Telephone contact for the audit was as follows:

○ August 24, 20XX, Tax Compliance Officer (TCO) was not able to locate a
phone number for an officer of the organization to notify the organization they
were under audit. The phone number listed on the Form 1023 application
was for the Power of Attorney for the 1023 application.

○ November 05, 20XX, TCO received a phone call from -
President , President said he had received the certified letter
dated October 7, 20XX in the mail. President said he just looking at it
yesterday and realized it had a due date of October 29, 20XX. He just sent
the letter over to the accountant yesterday.

TCO reviewed the Individual Document Request (IDR) with the President, as
well as Publication 1. TCO asked if the organization is terminating and the
President said “NO” they want to be a 501(c)(3) organization.

TCO also let the organization know they should be filing a Form 990 each
year. The organization said for the 20XX year the gross receipts were over
XX,XXX.XX. I let him know a Form 990 should have been filed by May 15,
20XX. As part of the audit the President will need to submit a Form 990 and
a letter of reasonable cause for late filing, if applicable.

The TCO granted an extension to November 23, 20XX.

○ December 01, 20XX, TCO had not received a response from the
organization. TCO called — President , and
received a voice mail system (VMS). TCO left a message for the President to
return the phone call.

○ December 09, 20XX, TCO received a return phone call from
— President . President said he was still waiting to get
information back from the accountant. TCO let the President know certified
letters had been mailed to all the officers. TCO told the President the
certified letter has a response date of December 30, 20XX. TCO let the
President know, if a response is not received by December 30, 20XX, then

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
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
December 31, 20xx

TCO would be starting the paper work for a no response and proposing
revocation. The President said TCO would have the information by
December 30, 20XX.

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 in cash.

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.

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, or keep such records, as the Secretary deems sufficient to show
whether or not such person is liable for tax under this title.

IRC §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 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.

IRC §1.6001-1(e) of the Code 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.

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

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
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
December 31, 20xx

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.

Section 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).

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.

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.

Organizations Position
The organization has failed to respond to all attempts to contact them.
Governments 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.

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

¢
Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
December 31, 20xx

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: -5-