IRS revoked charity that did not produce records for its audit

Plain-English summary

A section 501(c)(3) organization was selected for an audit of its operations and Form 990-N filing. The IRS sent repeated information requests and delinquency notices to the organization and its directors, and it made several telephone calls. The organization supplied only a partial response and did not provide enough records for the IRS to verify that it continued to operate exclusively for exempt purposes. Relying on sections 6001 and 6033 and Revenue Ruling 59-95, the IRS concluded that the organization had not met its recordkeeping and information-reporting duties or established its continued qualification for exemption. The IRS revoked the exemption effective July 1 of the redacted year and directed the organization to file Form 1120 for later periods.

Ruling snapshot

• Question: Can the organization retain section 501(c)(3) status after failing to provide records and complete responses during an IRS audit?
• Outcome: revocation, effective July 1 of the redacted year
• Key authorities: IRC §§ 501(c)(3), 6001, and 6033; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, and 1.6033-1; Rev. Rul. 59-95

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street, MC 4920DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Number: 201943024
Release Date: 10/25/2019

Date: May 14, 2019
EIN:

UIL: 501.03-00 Person to Contact:
Identification Number:

Telephone Number:

CERTIFIED MAIL — Return Receipt Requested
LAST DAY FOR FILING A PETITION WITH THE TAX COURT:

Dear

This is a final determination that you do not qualify for exemption from Federal income tax under
Internal Revenue Code (the “Code”) section 501(a) as an organization described in Code
section 501(c)(3), effective July 1, 20XX. Your determination letter dated November 6, 20XX is
revoked.

Our adverse determination as to your exempt status 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 within the meaning of IRC section 501(c)(3). You did
not respond to our repeated requests to you about material matters concerning your
operations as required by IRC sections 6001, 6033(a)(1), and Rev. Rul. 59-95, 1959-1

C.B. 627

As such, you failed to meet the requirements of I.R.C. § 501(c)(3) and Treasury Regulation §
1.501(c)(3)-1(a), in that you have not established that you were organized and operated
exclusively for exempt purposes and that no part of your earnings inured to the benefit of private
shareholders or individuals.

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


Organizations that are not exempt under section 501 generally are required to file federal
income tax returns and pay tax, where applicable. For further instructions, forms, and
information please visit www.irs.gov.

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: 1) United States
Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for
the District of Columbia. A petition or complaint in one of these three courts must be filed within
90 days from the date this determination was mailed to you. Please contact the clerk of the
appropriate court for the rules for initiating suits for declaratory judgment. Please contact the
clerk of the appropriate court for rules and the appropriate forms for filing petitions for
declaratory judgment by referring to the enclosed Publication 892. 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

Processing of income tax returns and assessments of any taxes due will not be delayed if you
file a petition for declaratory judgment under section 7428 of the Internal Revenue Code.

You may be eligible for help from the Taxpayer Advocate Service (TAS). (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 www.taxpayeradvocate.irs.gov or call 1-877-777-
4778.

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

Sincerely yours,

Enclosures: Maria Hooke
Publication 892 Director, EO Examinations

Department of the Treasury Date:
vA Internal Revenue Service December 13, 2018
Tax Exempt and Government Entities Division Taxpayer ID number:
IRS Exempt Organizations Examination

Form:
Tax periods ended:

Person to contact:

Employee ID number:
Telephone number:

Fax:

Address:

Manager’s contact information:
Employee ID number:

Telephone number:

Response due date:

CERTIFIED MAIL — Return Receipt Requested

Dear

Why you’re receiving this letter

We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke
your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3). We
enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that your organization
doesn’t qualify as an organization described in Internal Revenue Code (IRC) Section 501(c)(3).

This letter is not a determination of your tax-exempt status under IRC Section 501 for any period other than the
tax periods above.

If you agree

If you haven’t already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the
contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an
organization described in IRC Section [insert code section] for the periods above.

After we issue the final adverse determination letter, we’ll announce that your organization is no longer eligible
to receive tax deductible contributions under IRC Section 170.

If you disagree

1. Request a meeting or telephone conference with the manager shown at the top of this letter.

2. Send any information you want us to consider.

3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional
information as stated in 1 and 2, above, you’ll still be able to file a protest with IRS Appeals Office after
the meeting or after we consider the information.

Letter 3618 (Rev. 9-2017)
Catalog Number 34809F

The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes
informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of
limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case.
For your protest to be valid, it must contain certain specific information, including a statement of the
facts, applicable law, and arguments in support of your position. For specific information needed for a
valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status.

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn’t
apply now that we’ve issued this letter.

4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities)
if you feel the issue hasn’t been addressed in published precedent or has been treated inconsistently by the
IRS.

If you’re considering requesting technical advice, contact the person shown at the top of this letter. If you
disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as
explained above. A decision made in a technical advice memorandum, however, generally is final and
binding on Appeals.

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
adverse determination letter.

In the future, if you believe your organization qualifies for tax-exempt status and would like a status
determination letter from the IRS, you can request a determination by filing Form 1024, Application for
Recognition of Exemption Under Section 501(a), and paying the required user fee.

Revenue Procedure 80-27 requires that, in the event your tax-exempt status is revoked, your group exemption
will also be revoked. If that occurs, none of your subordinates will be able to rely on the group ruling for tax-
exempt status. You should notify each subordinate of this proposed action.

Contacting the Taxpayer Advocate Office is a taxpayer right
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 www.taxpayeradvocate.irs.gov or call 877-777-4778.

Additional information
You can get any of the forms and publications mentioned in this letter by visiting our website at
www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676).

If you have questions, you can contact the person shown at the top of this letter.

Sincerely,

for Maria Hooke
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A
Form 6018

Form 4621-A Report of Examination
Letter 3618 (Rev. 9-2017)
Catalog Number 34809F

Publication 892
Publication 3498-A

Letter 3618 (Rev. 9-2017)
Catalog Number 34809F

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

Name of Taxpayer Year/Period Ended
June 30, 20XX

Date of Notice: December 13, 20XX

Issues:

Whether (the organization), which qualified for exemption from Federal
income tax under Section 501(c)(3) of the Internal Revenue Code, should be revoked due
to its failure to respond and produce records?

Facts:

applied for tax-exempt status by filing the Form 1023-EZ, Streamlined .
Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue
Code, on October 26, 20XX, and was granted tax-exempt status as a 501(c)(3) on
November 4, 20XX, with an effective date of October 15, 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 June 30, 20XX.

The Form 1023-EZ application list the phone number of for

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

e Correspondence for the audit was as follows:

o Letter 3606 (Rev. 6-2012) with attachments, was mailed to the organization
on December 11, 20XX, with a response date of January 11, 20XX. This
letter was not returned by the post office as being undeliverable.

o Letter 3844-A (Rev. 12-2015) with attachments, was mailed certified to the
organization on January 24, 20XX, with a response date of February 26,
20XX, Article Number . Per the United States Postal
Service (USPS) on line tracking system, this item was delivered, left with
individual on January 29, 20XX at 12:35 pm.

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 Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
June 30, 20XX

o Letter 5077-B (Rev. 1-2017), with attachments, was mailed certified to the
organization, on February 26, 20XX, with a response date of March 19, 20XX.
Article Number . Per USPS tracking this item was
delivered, left with individual on March 5, 20XX at 12:00 pm.

o March 2, 20XX, responded with a partial response to Form 4564,
Information Document Request with the organizations Income statement,
Balance sheet and General ledger.

o Letter 3844-B (Rev. 11-2015), with attachments, was mailed to the
organization, on May 9, 20XX, with a response date of May 23, 20XX. This
letter was not returned by the post office as being undeliverable.

o Letter 3844-B (Rev. 11-2015), with attachments, was mailed certified to the
organization, on July 25, 20XX, with a response date of August 1, 20XX.
Article Number . Per USPS online tracking system
item was never delivered. This letter was not returned by the post office as
being undeliverable.

o Letter 5077-B (Rev. 1-2017), TE/GE IDR Delinquency Notice, was mailed
certified to the organization, on August 27, 20XX, with a response date of
September 10, 20XX. Article Number . Per the
United States Postal Service (USPS) on line tracking system, this item was
returned to original sender on October 2, 20XX at 1:08 pm.

o Letter 5077-B (Rev. 1-2017), TE/GE IDR Delinquency Notice, was mailed
certified to the organization, on August 27, 20XX, with a response
date of September 10, 20XX. Article Number . Per
the United States Postal Service (USPS) on line tracking system, this item
was returned to original sender due to problem with address on September
14, 20XX at 10:32 am.

o Letter 5077-B (Rev. 1-2017), TE/GE IDR Delinquency Notice, was mailed

certified to , Director of the organization, on
August 27, 20XX, with a response date of September 10, 20XX. Article
Number . Per the United States Postal Service

(USPS) on line tracking system, this item was never delivered. This letter was
not returned by the post office as being undeliverable.

o Letter 5077-B (Rev. 1-2017), TE/GE IDR Delinquency Notice, was mailed
certified to Timothy Flanigan, Director the organization, on August 27, 20XX,
with a response date of September 10, 20XX. Article Number

re) . Per the United States Postal Service (USPS), PS Form 3811,
this item was delivered and signed for on September 1, 20XX at 9:09 am.

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 Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
June 30, 20XX

o Letter 5077-B (Rev. 1-2017), TE/GE IDR Delinquency Notice, was mailed
certified to , Director the organization, on August 27, 20XX,
with a response date of September 10, 20XX. Article Number

. Per the United States Postal Service (USPS), PS Form 3811,
this item was delivered and signed for on September 1, 20XX at 5:24 pm.

e Telephone contact for the audit was as follows:
o December 19, 20XX, Tax Compliance Officer (TCO) called the phone number

listed on the Form 1023-EZ application of . was no
longer at the number, no forwarding number available.

o April 12, 20XX, called , the Director of
and received VMS. Left a message for the Director to return phone call.
o April 13, 20XX, called , the Director of
and received VMS. Left a message for the Director to return phone

call.

o May 9, 20XX, called , the Director of
and received VMS. Left a message for the Director to return phone

call.

o August 23, 20XX, called , the Director of
and received VMS. Left a message for the Director to return

phone call.

o September 17, 20XX, called , the Director of

and received VMS. Left another message for the Director to
return my phone call.

o October 22, 20XX, called , the Director of
and , the Director of and received
VMS. Left a message for both Director’s to return my phone call.

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.

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 Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
June 30, 20XX

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

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 Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
June 30, 20XX

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.

Organization’s Position
Taxpayer's position is unknown at this time.

Government’s Position
Based on the above facts, the organization did not provide a complete response 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

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -5-


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

Name of Taxpayer Year/Period Ended
June 30, 20XX

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 establish that it meets the reporting
requirements under IRC §§ 6001 and 6033 to be recognized as exempt from federal
income tax under IRC § 501(c)(3). Furthermore, the organization has not established
that it is observing the conditions required for the continuation of its exempt status or
that it is organized and operated exclusively for an exempt purpose. Accordingly, the
organization's exempt status is revoked effective July 1, 20XX.

Form 1120, U.S. Corporation Income Tax Return, should be filed for the tax periods
after July 1, 20XX.

Form 886-A (Rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: -6-