Exemption revoked after organization ignored audit requests

Plain-English summary

A section 501(c)(3) organization was selected for examination but did not respond to repeated letters and telephone calls seeking records needed to audit its Form 990. Some certified letters were returned unclaimed, other letters were not returned as undeliverable, and telephone messages received no response. The examination report also stated that the organization had not filed Form 990 series returns for multiple years and was listed by its state as not in good standing. Without records, the organization could not establish that it continued to operate exclusively for exempt purposes or that its earnings did not benefit private persons. The IRS revoked exemption for failure to meet the recordkeeping and reporting requirements of sections 6001 and 6033, effective on the redacted date, and required Form 1120 filings thereafter.

Ruling snapshot

• Question: Can the organization retain section 501(c)(3) status after failing to provide records, respond to the examination, and file required information returns?
• Outcome: revocation
• 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 Street, MC 4920DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: March 29, 2017

Taxpayer Identification Number:

Release Number: 201738013
Release Date: 9/22/2017
UIL Code: 501.03-00

Person to Contact:

Employee Identification Number:

Employee Telephone Number:
(Phone)
(Fax)

CERTIFIED MAIL — Return Receipt Requested
Dear :

This is a Final Adverse Determination Letter as to your exempt status under section
501(c)(3) of the Internal Revenue Code (the Code). Our favorable determination letter to
you dated June 10, 20XX is hereby revoked and you are no longer exempt under section
501(a) of the Code effective January 1, 20XX.

Organizations described in section 501(c)(3) of the Code and exempt from tax under
section 501(a) of the Code must be both organized and operated exclusively for exempt
purposes. You have failed to produce documents or otherwise 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, Treasury Regulation 1.6033-2(i)(2), and Rev. Rul. 59-95, 1959-1
C.B. 627.

Contributions to your organization are no longer deductible under section 170 of the
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 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,

for

Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Publication 892

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities Division
Exempt Organizations Examinations
324 25th St Rm 6025 Mail Stop 1112
Ogden, UT 84401

Date: July 11, 2016
Taxpayer Identification Number:

Form:
990
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:

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

Phone Number:

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

Year/Period Ended
December 31, 20xx

Name of Taxpayer

Date of Notice: July 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:

(__) applied for tax-exempt status by filing the Form 1023 on April 22,
20xx, and was granted tax-exempt status as a 501(c)(3) on June 10, 20xx, with an
effective date of April 02, 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 activities and operations align with their
approved exempt status.

failed to respond to the Internal Revenue Service attempts to obtain information to
perform an audit of Form 990 for the tax year December 31, 20xx.

has not filed a Form 990 series return for the tax years December 31, 20xx through
December 31, 20xx tax year.

The Form 1023 application list the phone number of xxx-xxx-xxxx for the president of

Per the State of web-site, lists the organization as not in good standing,
copy attached from state web-site.

• Correspondence for the audit was as follows:

  ○ Letter 3606 (Rev. 6-2012) with attachments, was mailed to the organization
on January 05, 20xx, with a response date of February 08, 20xx. This letter
was not return by the post office as being undeliverable.

  ○ Letter 3844-A (12-2015) with attachments, was mailed certified to the
organization/president on February 22, 20xx, with a response date of March
16, 20xx, Article Number . Per the United States
Postal Service (USPS) tracking, this was returned on March 30, 20xx at 1:08
pm as unclaimed/max hold time expired. This letter was received back at the
Internal Revenue Service on April 06, 20xx.

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

Page: -1-

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

Year/Period Ended
December 31, 20xx

Name of Taxpayer

  ○ Letter 3844-A (12-2015), with attachments, was mailed certified to the
Secretary ( ), per Form 1023 application, on April 06, 20x, with

a respond date of May 06, 20xx. Article Number
. Per USPS tracking this was unclaimed/max hold

time expired and returned to the Internal Revenue Service on May 11, 20xx
at 10:35 am. This letter was received back at the Internal Revenue Service

on May 19, 20xx.

  ○ Letter 3844-A (12-2015), with attachments, was mailed to the
organization/President, on May 25, 20xx, with a respond date of June 22,
20xx. This letter was not return by the post office as being undeliverable.

• Telephone contact for the audit was as follows:

  ○ March 22, 20xx, 2:33 PM MST, called the phone number listed on the Form
1023 application for the President of xxx-xxx-xxxx and received VMS. I left a
message for an officer of the organization to return my phone call.

  ○ May 25, 20xx, through external research located a different phone number
for the president of xxx-xxx-xxxx, when calling this phone number it is for a

fax machine.

  ○ June 29, 20xx, 3:21 PM MST, called the phone number listed on the Form
1023 application for the President of xxx-xxx-xxx and received VMS. I left a
message for the president to return my phone call

  ○ July 7, 20xx, 12:24 PM MST, tried calling xxx-xxx-xxxx, instead of the fax
machine answering the phone rang ten times without it answering.

Law:

Internal Revenue Code (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

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

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

Year/Period Ended
December 31, 20xx

Name of Taxpayer

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) 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.

Treasury Regulations (Regulation) 1.501(c)(3)-1 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).

Regulation §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.

Regulation 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.

Regulation §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.

Regulation §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.

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

Page: -3-

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

Year/Period Ended
December 31, 20xx

Name of Taxpayer

Regulation §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.

Regulation §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.

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.

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

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

Page: -4-

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

Name of Taxpayer

Year/Period Ended
December 31, 20xx

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-