Exemption revoked after organization failed to provide audit records

Plain-English summary

The IRS audited an organization that had received section 501(c)(3) status through Form 1023-EZ. The organization had not filed a Form 990-series return for the audited year and did not provide the records requested by the IRS. Its accountant said the organization had never conducted activities or had income, expenses, financial records, or meeting minutes, and recommended revocation. Sections 6001 and 6033 require exempt organizations to keep records and provide information needed to verify their continued qualification. The IRS revoked the organization's exemption effective January 1 of a redacted year because it did not establish that it continued to meet the section 501(c)(3) requirements.

Ruling snapshot

• Question: Did the organization establish that it continued to qualify under section 501(c)(3)?
• Outcome: revocation, because it failed to provide records and information required to verify exempt status
• Key authorities: IRC §§ 501(c)(3), 6001, and 6033; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, and 1.6033-1(h)(2); Rev. Rul. 59-95

Full text (IRS public release)

Transcriber's note: this document is a nine-page scan containing a final revocation letter, a proposed revocation letter, and an examination report. Obvious OCR errors in agency headings, form labels, citations, spacing, and punctuation were corrected by comparison with every page image. Redacted identifying fields are marked [redacted], while IRS-substituted dates remain 20XX. Original grammatical and typographical irregularities are preserved. The wording is otherwise preserved verbatim.

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: OCT 07, 2019

Number: 202003005
Release Date: 1/17/2020
UIL: 501.03-00

EIN: [redacted]
Person to Contact: [redacted]
Identification Number: [redacted]
Telephone Number: [redacted]

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

Dear [redacted]:

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 January 1, 20XX. Your determination letter dated April 23, 20XX is
revoked.

Our adverse determination as to your exempt status was made for the following reasons:

You have failed to provide documents to establish that you are operated exclusively
for exempt purposes within the meaning of Internal Revenue Code 501(c)(3), and that
no part of your net earnings inure 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 I.R.C. 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 rules and the appropriate forms for filing petitions for declaratory judgment.
Please refer to the enclosed Publication 892 for additional information. 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,

Maria Hooke
Director, EO Examinations

Enclosures:
Publication 892

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
Exempt Organizations Examinations

Date: May 28, 2019
Taxpayer Identification Number: [redacted]
Form: [redacted]
Tax Year(s) Ended: [redacted]
Person to Contact: [redacted]
Employee ID: [redacted]
Telephone: [redacted]
Fax: [redacted]
Manager's Contact Information:
Employee ID: [redacted]
Telephone: [redacted]
Response Due Date: [redacted]

CERTIFIED MAIL - Return Receipt Requested

Dear [redacted]:

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).

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 501(a) 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.

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.

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.

For 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
Administrative File
Publication 892
Publication 3498-A

Form 886-A
(May 2017)
Department of the Treasury - Internal Revenue Service
Explanations of Items

Name of taxpayer: [redacted]
Tax Identification Number (last 4 digits): [redacted]
Year/Period ended: 20XX

Date of Notice: May 28, 20XX

Issues:

Whether [redacted] (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 produce records?

Facts:

[Redacted] 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
February 2, 20XX, and was granted tax-exempt status as a 501(c)(3) on April 28, 20XX with an
effective date of January 26, 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 amateur 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-EZ for the tax year December 31, 20XX.

The organization has not filed a Form 990 series return for the tax year ending December 31, 20XX.

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

Per the State of [redacted] web-site, it lists the organization as active and contained a copy of the
Articles of Incorporation. The Articles of Incorporation contain appropriate purpose, powers, and
dissolution clauses.

Correspondence for the audit was as follows:

• Letter 3606 (Rev. 6-2012) with attachments, was mailed to the organization on March 6,
20XX with a response date of April 5, 20XX. This letter was not return by the post office as
being undeliverable.

• Letter 3844-A (Rev. 12-2015) with attachments, was mailed certified to the organization on
April 16, 20XX, with a response date of May 7, 20XX, Article Number [redacted].
A signature of receipt was received dated April 23, 20XX.

Form 886-A
(May 2017)
Department of the Treasury - Internal Revenue Service
Explanations of Items

Name of taxpayer: [redacted]
Tax Identification Number (last 4 digits): [redacted]
Year/Period ended: 20XX

Telephone contact for the audit was as follows:

• March 20, 20XX, Tax Compliance Officer (TCO) called the phone number listed on the Form
1023-EZ application for the President of [redacted] and received VMS. Left a message for
an officer to return my call.

• March 26, 20XX, TCO called the phone number listed on the Form 1023-EZ application for the
President of [redacted]. TCO spoke with the receptionist who stated President was out of
office. Receptionist stated she would have President contact TCO.

• April 5, 20XX, TCO spoke with President at [redacted]. President stated audit would be
handled by the accountant directly. TCO indicated a Form 2848 was necessary to discuss
audit with the accountant. President asked that I call and explain that to the accountant.
President provided phone number of [redacted].

• April 5, 20XX, TCO spoke with accountant at [redacted]. TCO stated the President had
asked me to contact accountant and inform her of the Form 2848. Accountant stated she
would get the form faxed to TCO and follow up within a week.

• April 12, 20XX, TCO contacted accountant to inform Form 2848, if faxed, had not been
received. Accountant stated she is in the middle of the busy tax season and had forgotten to fax
the information.

• April 16, 20XX, TCO attempted to contact accountant, as no fax had been received. TCO
received VMS but did not leave a message as the accountant was not yet authorized.

• May 5, 20XX, TCO received Form 2848 for a different EIN with a similar name. TCO contacted
accountant and informed her that the form was not acceptable, and we still could not discuss
the account in question.

• May 6, 20XX, TCO received a VM from accountant asking for a call back, provided two phone
numbers [redacted] or [redacted].

• May 7, 20XX, TCO called accountant back with no success, left VM to call back.

• May 8, 20XX, TCO left a second message for accountant to call back.

• May 10, 20XX, TCO attempted outcall to confirm receipt of Form 2848, unable to leave a VM
on either phone number provided [redacted] or [redacted].

• May 14, 20XX, TCO attempted another outcall to confirm receipt of Form 2848, unable to leave
a VM on either phone number provided [redacted] or [redacted].

• May 14, 20XX, Accountant contacted TCO and stated they are working on the items requested.
She further stated that they did not have any income or expenses to send. TCO questioned if
the organization was still in operation. Accountant stated that the non-profit side, after receiving
exemption, never did anything with it. They have never had activities or cash flow of any kind.
TCO and accountant discussed possible termination or revocation of exempt status.
Accountant would discuss the options with President.

• May 21, 20XX, TCO contacted accountant to discuss status of response. Accountant stated
they have no information to send, there is absolutely no activities, meeting minutes, financials
of any kind, and they are unable to gain access to the articles of incorporation. Accountant
asked how we would move forward with the audit. TCO discussed possible revocation and
accountant felt that would be the best option. Accountant stated the President would be
agreeable to that, as she has not done anything with the non-profit to this point.

Form 886-A
(May 2017)
Department of the Treasury - Internal Revenue Service
Explanations of Items

Name of taxpayer: [redacted]
Tax Identification Number (last 4 digits): [redacted]
Year/Period ended: 20XX

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 §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.

Form 886-A
(May 2017)
Department of the Treasury - Internal Revenue Service
Explanations of Items

Name of taxpayer: [redacted]
Tax Identification Number (last 4 digits): [redacted]
Year/Period ended: 20XX

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 has recommended that since there has not been any activity with the above-mentioned
entity, and there are no documents to provide for an audit, the exempt status be revoked.

Government's 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.

Form 886-A
(May 2017)
Department of the Treasury - Internal Revenue Service
Explanations of Items

Name of taxpayer: [redacted]
Tax Identification Number (last 4 digits): [redacted]
Year/Period ended: 20XX

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 Sections 6001 and 6033 to be recognized as exempt from federal income
tax under IRC Section 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 January 1, 20XX.

Based on the lack of income and expenses reported on the Form 990-EZ, a Form 1120, U.S.
Corporation Income Tax Return, is not required to be filed.