IRS revokes a 501(c)(3) that stopped responding to its audit and never produced records

Plain-English summary

An organization that had been recognized as a 501(c)(3) charity through the streamlined Form 1023-EZ application was selected for audit to confirm its actual activities matched its approved exempt purpose. The IRS tried to reach it over several months with certified letters and repeated phone calls, but the organization signed for the mail, gave only an incomplete response, and then went silent. It also had not filed the required Form 990-series return for the year under exam. Because the organization never produced the records needed to show it was organized and operated exclusively for exempt purposes, the IRS could not verify that it still qualified. Under sections 6001 and 6033 an exempt organization must keep and turn over such records, and Revenue Ruling 59-95 treats a failure to do so as grounds for revocation. The IRS revoked the exemption effective January 1, 20XX, and told the organization its contributions are no longer deductible under section 170 and that it must file corporate income tax returns.

Ruling snapshot

• Question: Should the organization's 501(c)(3) exemption be revoked because it failed to respond to the audit and produce records substantiating exempt operation?
• Outcome: Revocation (exempt status revoked effective January 1, 20XX; revokes the September 18, 20XX determination letter)
• Key authorities: IRC § 501(c)(3); IRC §§ 6001, 6033(a)(1); Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, 1.6033-1(h)(2); Rev. Rul. 59-95, 1959-1 C.B. 627; IRC § 170

Full text (IRS public release)

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

ic

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date. December 10, 2019 Taxpayer ID Number:
Form:

Number: 202149017 Tax Period(s) ended:
Release Date: 12/10/2021
Person to Contact:

Identification Number:

UIL: 501.03-00 Telephone Number:

Fax Number:

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

Dear

This is a final determination that you don’t qualify for exemption from federal income tax under section 501 (a) of the Internal Revenue Code (the “Code”) as an organization described in section 501(c)(3), effective January 1, 20XX. Your determination letter dated September 18, 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 section 501(c)(3) of the Code. You did not provide the documents about material matters concerning your organizing

documents and operations as required by sections 6001 and 6033(a)(1) and Rev. Rul. 59-95, 1959-1 C.B. 627

As such, you failed to meet the requirements of section 501(c)(3) of the Code and Treasury Regulation section 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.

Organizations that are not exempt under section 501 of the Code 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.

Contributions to your organization are no longer deductible under section 170 of the 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: 1) United States Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for the District of Colurnbia. 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

U.S. 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 Code.

We'll notify the appropriate state officials (as permitted by law) of our determination that you aren’t an organization described in section 501(c)(3) of the Code.

You may also 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 877-777-4778.

Taxpayer Advocate assistance can’t be used as a substitute for established IRS procedures, formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically correct tax determination, nor extend the time fixed by law that you have to file a petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling.

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

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

Enclosures:
Publication 892

Sincerely,

[signature]

Maria D. Hooke
Director, EO Examinations

Department of the Treasury .
Internal Revenue Service Date: May 16, 2019
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:

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).

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(c)(3) 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 | 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.

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

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

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
Director, Exempt Organizations Examinations

Enclosures:

Form 886-A

Form 6018
Publication 892
Publication 3498
Administrative File

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

Date of Notice: May 16, 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 September 6, 20XX and was granted tax exempt status as a 501(c)(3) on September 18, 20XX, with an effective date of October 8, 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 provide a complete response 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 organization has not filed a Form 990 series return for the December 31, 20XX tax year.

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

e Correspondence for the audit was as follows:

o Letter 3606 (Rev. 6-2012) with attachments, was mailed to the organization on February 14, 20XX with a response date of March 16, 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 March 21, 20XX, with a response date of April 5, 20XX Article Number . Organization signed for the certified letter on March 27, 20XX.

o Incomplete response received March 27, 20XX. TCO attempted outcalls to

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the organization without success.

o Letter 3844-B (11-2015), with attachments, Explanation of Items, was mailed to the organization with a response date of April 10, 20XX

o Letter 5077-B (1-2017), TE/GE IDR Delinquency Notice, was mailed certified to the organization on April 23, 20XX with a response date of May 7, 20XX,

Article Number . This letter was not return by the
post office as being undeliverable, nor was the certified signature received back.

e Telephone contact for the audit was as follows

o February 28, 20XX, Tax Compliance Officer (TCO) called the phone number listed on the Form 1023-EZ application for the President of and received VMS indicating president's name. Left a message for an officer of the organization to return my phone call.

o March 5, 20XX, Tax Compliance Officer (TCO) called the phone number listed on the Form 1023-EZ application for the President of

o March 6, 20XX, organization president, left a VM for TCO to
contact her back, confirming correct phone number of . TCO
attempted phone call at 5:40 PM MST, straight to VMS. TCO left message for a call back.

o March 7, 20XX, TCO left VM attempting to return president’s phone call.

o March 12, 20XX, TCO called the phone number provided by the president
, lefl VM.

o March 21, 20XX, TCO called the phone number listed on the Form 1023-EZ application for the President of . Each time the phone would not ring, goes straight to VMS.

o March 22, 20XX, TCO called the phone number and left VM that the partial response had been received.

o April 15, 20XX, left voicemail for Tax Compliance Office to contact her back, as she was unsure what to provide in response.

o April 16, 20XX, Tax Compliance Officer (TCO) attempted outcall, phone does

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not ring, goes straight to VMS. TCO research Accurint for additional phone numbers. Found two potentials, & , however, no answer on either phone numbers. TCO did not leave a VM.

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 ils net earnings inures lo the benefil of any private shareholder or individual.

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 §1.6001-1(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.

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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.

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

Section 1.501(c)(3)-1(b)(1)(i)(a) states an organization is organized exclusively for one or more exempt purposes only if its articles of organization limit the purposes of such organization to one or more exempt purposes.

Section 1.501(c)(3)-1(b)(4) states an organization is not organized exclusively for one or more exempt purposes unless its assets are dedicated to an exempt purpose.

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 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 termination of exempt status.

Conclusion:

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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 January 1, 20XX

Form 1120, U.S. Corporation Income Tax Return, should be filed for the tax periods

after January 1, 20XX.

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