IRS revokes a nonprofit's 501(c)(3) status after it ignored an audit

Plain-English summary

A charity exempt under Internal Revenue Code § 501(c)(3) must keep adequate records and, when the IRS examines it, provide enough information to show it is still organized and operated for exempt purposes (Code §§ 6001 and 6033). This organization obtained § 501(c)(3) status through the streamlined Form 1023-EZ application and was later selected for an audit of its Form 990-N filing. Despite repeated certified letters and numerous phone calls, the organization never provided the requested records. The examiner's log shows the director repeatedly promised to mail or fax the information but never did, blaming vacations and business travel, and eventually stopped responding altogether. Because the organization failed to substantiate that it operates exclusively for exempt purposes, and relying on the rationale of Revenue Ruling 59-95 (failure to comply with § 6033 can end exempt status), the IRS issued a final adverse determination revoking its exemption effective the tax year at issue. The organization must now file corporate income tax returns on Form 1120, contributions to it are no longer deductible, and the IRS will notify the appropriate state officials under § 6104(c). The release bundles the final revocation letter, the proposed revocation letter, and the examiner's Form 886-A report.

Ruling snapshot

• Question: Does the organization still qualify under § 501(c)(3) when it failed to respond to the IRS's audit requests and produce records?
• Outcome: Revocation (exempt status revoked effective the tax year at issue; must file Form 1120)
• Key authorities: IRC §§ 501(c)(3), 6001, 6033(a)(1); Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, 1.6033-1(h)(2); Rev. Rul. 59-95

Full text (IRS public release)

Scanned document; transcription proofread from the IRS OCR text. The standard IRS letterhead and the repeated Form 886-A page furniture were normalized to a consistent form; redacted identifiers are marked [redacted]; unrecoverable OCR spots are marked [illegible]; and "20XX" is the IRS's own redaction placeholder for dates in the release. Wording is otherwise verbatim, including the examiner's original spelling (e.g., "amatuer").

DEPARTMENT OF THE TREASURY
Internal Revenue Service
TE/GE EO Examinations
1100 Commerce Street MC 4920 DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION                                   Date: JUN 26, 2018

                                           Person to Contact:
Number: 201843014                          [redacted]
                                           Identification Number:
Release Date: 10/26/2018                   [redacted]
                                           Telephone Number:
                                           [redacted]
                                           In Reply Refer to:
                                           [redacted]

UIL: 501.03-00

CERTIFIED MAIL - Return Receipt Requested

Dear [redacted]:

This is a final adverse determination regarding your exempt status under section 501(c)(3) of
the Internal Revenue Code (IRC). Our favorable determination letter to you dated
September 18, 20XX, is hereby revoked and you are no longer exempt under section 501(a),
as an organization described in section 501(c)(3) of the IRC, effective January 1, 20XX.

Our adverse determination was made for the following reasons:

You have not established that you are organized and operated exclusively for
an exempt purpose or that you have been engaged primarily in activities that
accomplish one or more exempt purposes as required by Treas. Reg. section
1.501(c)(3)-1(c)(1), and that no part of your net earnings inure to the benefit
of private shareholders or individuals.

You failed to provide information and documents to repeated reasonable
requests to allow the Internal Revenue Service to examine your receipts,
expenditures, or activities as required by the Code sections 6001 and
6033(a)(1). As such, you failed to meet the operational requirements for
continued exemption under section 501(c)(3) of the Code and Treas. Reg.
section 1.501(c)(3)-1(a)(1).

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 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 in court, you must initiate a suit for declaratory
judgment in the United States Tax Court, the United States Court of Federal Claims or the
District Court of the United States for the District of Columbia before the 91st day after the
date this determination was mailed to you. Contact the clerk of the appropriate court for the
rules for initiating suits for declaratory judgment. 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.

We will notify the appropriate State Officials of this action, as required by section 6104(c) of
the Internal Revenue Code.

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, Exempt Organizations Examinations

Enclosures:
Publication 892


Department of the Treasury                 Date: October 30, 2017
Internal Revenue Service                   Taxpayer Identification Number:
IRS TE/GE Exempt Organizations            [redacted]
                                           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:
                                           Response due date:

Certified Mail - Return Receipt Requested
Dear [redacted]:

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,

For Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Report of Examination
Form 6018
Form 886-A
Publication 892
Publication 3498
State of Indiana information

Letter 3618 (06-2012)
Catalog Number 34809F


Form 886-A                Explanation of Items                Schedule No. or Exhibit
Name of Taxpayer: [redacted]    Year/Period Ended: December 31, 20XX

Date of Notice: October 30, 20XX
Issues:

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

Facts:

[redacted] applied for tax-exempt status by filing the Form 1023-EZ on August 22, 20XX, and
was granted tax-exempt status as a 501(c)(3) on September 18, 20XX, with an effective
date of October 17, 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 activities and operations align
with their 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 tax year December 31, 20XX.

The Form 1023-EZ application list the phone number of [redacted] for the director of [redacted].

Per the State of [redacted] web-site, it lists the organization as in good standing, copy
attached from state web-site.

• Correspondence for the audit was as follows:

o Letter 3606 (Rev. 6-2012) with attachments, was mailed to the organization
on May 31, 20XX, with a response date of June 30, 20XX. This letter was not
return by the post office as being undeliverable.

o Letter 3844-A (Rev. 12-2015) with attachments, was mailed certified to the
organization on August 30, 20XX, with a response date of September 18,
20XX, Article Number [redacted]. Per the United States Postal
Service (USPS) tracking, this was returned on September 26, 20XX at 9:15
am as unclaimed/unable to forward. This letter was received back at the
Internal Revenue Service on October 13, 20XX.

o Letter 5077-B (1-2017), with attachments, was mailed certified to the
organization, per Form 1023-EZ application, on September 27, 20XX, with a
respond date of October 18, 20XX. Article Number [redacted]

Per USPS tracking this was delivered to an individual on record as addressed
on October 2, 20XX at 1:29 pm. The unsigned return receipt was received
back at the Internal Revenue Service on October 16, 20XX.

• Telephone contact for the audit was as follows:

o July 5, 20XX, [redacted], called the phone number listed on the Form 1023-EZ
application for the director of [redacted] and spoke with the director of
the organization. He apologized for not responding saying all the officers
have been on vacation. He said he had all the information ready for me and
would put the reply in the mail come Monday.

o July 21, 20XX, [redacted], called the director of the organization again and this
time had to leave a voicemail asking the status of mailing the information to
us. The director said he could fax us the information since we hadn't yet got
the reply via mail. He promised he would fax their reply to us the first of the
following week.

o July 31, 20XX, [redacted], No reply by fax or mail. I called the director's phone
number again and had to leave a voice message asking to either fax their
reply immediately or mail the information to us as soon as possible.

o August 2, 20XX, [redacted], Called the director's number again and spoke
with him about responding to our letter and calls. He apologized saying he
had been on vacation and now was on a business trip. He said when he got
back he would see the information faxed to us by the end of the week,
August 5, 20XX.

o August 15, 20XX, [redacted], Still no reply. I called director's phone again and
left a stern voice message to respond or it could put their organization's
exempt status in jeopardy.

o August 21, 20XX, [redacted], No reply. Researched Google, Accurint,
Superpages and Dogpile and was only able to find the organization's phone
number. I called the director's phone number and left another stern message
and I called the org's number and ask to have an officer of the organization to
please call me back.

o August 29, 20XX, [redacted] still no reply, called and left voice messages
again to both phone numbers.

o September 18, 20XX, [redacted], no phone contact from organization at all. I
tried one last time to contact organization by phone and had to leave a
message to both director's phone and the org's phone to call me back.

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
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.

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
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 starting January 1, 20XX.

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