Exempt status revoked after organization failed to provide audit records

Plain-English summary

The IRS selected a charitable organization for an audit of its annual return and repeatedly requested financial records, minutes, and other information. An officer said the records were stored on a computer in a property he could no longer enter, and the organization did not provide the requested material or respond to later contacts. The IRS concluded that the organization had not shown that it continued to operate exclusively for exempt purposes or complied with the recordkeeping and reporting requirements of Sections 6001 and 6033. It revoked the organization's Section 501(c)(3) status effective on the redacted date.

Ruling snapshot

• Question: Did the organization continue to qualify under Section 501(c)(3) when it failed to provide records needed for an IRS examination?
• Outcome: revocation
• Key authorities: IRC §§ 501(a), 501(c)(3), 6001, 6033; Treas. Reg. §§ 1.6001-1(c), 1.6001-1(e), 1.6033-1(h)(2); Rev. Rul. 59-95

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

Internal Revenue Service
TE/GE EO Examinations
1100 Commerce Street MC4920DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES Date: MAR 13 2018
DIVISION

Taxpayer Identification Number:

Release Number: 201830019 Person to Contact:
Release Date: 7/27/2018 Employee Identification #:
UIL Code: 501.03-00 Contact Telephone Number:

In Reply Refer to: TE/GE Review Staff

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT: JUN 11, 2018

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. Your exemption from Federal income tax under
section 501(c)(3) of the code is hereby revoked effective January 1, 20XX.

Our adverse determination was made for the following reasons:

Organizations described in I.R.C. § 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 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 requests to allow the Internal Revenue Service
to examine your records regarding your receipts, expenditures, or activities as
required by I.R.C. § 6001, 6033(a)(1) and Rev. Rul. 59-95, 1959-1 C.B. 627.

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. 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, 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. 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.

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

Sincerely yours,

Maria Hooke

Director, EO Examinations

Enclosures:
Publication 892

Date:
Department of the Treasury
Internal Revenue Service January 8, 2018

IRS Tax Exempt and Government Entities Taxpayer Identification Number:

Exempt Organizations Examinations
Form:

Tax Year(s) Ended:
December 31, 20XX
Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Manager’s Name/ID Number:

Manager's Contact Number:

Response due date:
February 8, 2018

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. 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

Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

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 also
may 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

2 Letter 3618 (Rev. 6-2012)
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,
Peter Jensen

for Maria Hooke
Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

3 Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

December 31, 20XX

Date of Notice: January 8, 20XX
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 March 28, 20XX and was granted exemption as a
501(c)(3) on July 22, 20XX with an effective date of exemption of August 23, 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 its 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.

Attempts to secure documents for the audit were as follows:

o Letter 3606 with attachments was mailed to the organization on September 21, 20XX, with a
response due date of October 21, 20XX. During a telephone conversation with on
October 24, 20XX, Revenue Agent(RA) verified the mailing address: ; .
RA then sent another L3606 with attachments to on the same day by regular mail.

o On November 7, 20XX, a follow up letter, Letter 3844-A, L3606 and attachments with an extension
was mailed to ; ; and due on November 21, 20XX. No response was
received from

o On November 10, 20XX, (RA) called and spoke with , who was the officer of the
organization. He said that he was not able to obtain the financial statements and minutes which,
only kept in his home computer from the house. He said he was no longer able to gain entrance to
the property, but said he would speak to his attorney to obtain the computer from the property.

o On May 3, 20XX and May 11, 20XX, RA called and left messages to return call.
However, no returned calls were made from on both dates.

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

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer Tax Identification Number Year/Period ended

December 31, 20XX

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 §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.

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
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.

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.

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

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

December 31, 20XX

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 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

With the exception of the telephone conversation with on November 10, 20XX, the
Organization has failed to respond to all attempts to contact them.

Government’s Position

Based on the above facts, the Organization 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
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.

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 revocation of exempt status

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

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

December 31, 20XX

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 Service's position that the organization failed to meet the substantiation 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 ending after January 1, 20XX.

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