The Internal Revenue Service last month published a memorandum for its exempt organizations specialists regarding the treatment of exempt organizations still awaiting their determination letters that have failed to file an annual information return (e.g., the Form 990) for three consecutive years – a failure which typically causes an automatic revocation of exemption.
Under the Internal Revenue Code, exempt organizations must file an annual information return such as the Form 990, 990-N, 990-EZ or 990-PF. Those that fail to file the information return for three consecutive years automatically lose exemption from federal taxation, and donations lose deductibility status. Recently, the IRS has maintained a steady backlog of exemption applications due to an increase in applications and recent IRS misbehavior in the exempt organizations department after which the IRS delayed processing of all applications.
In the guidance, the IRS explains that if the organization filed its application for exemption before the due date of filing its Form 990 for the third tax year after its formation date and it has failed to submit an information return for three consecutive years, and if the IRS would normally issue a favorable determination ruling, then the IRS will take the following steps:
- Add the organization to the automatic revocation list, effective as of the due date of the third annual information return;
- Grant exemption to the organization effective as of the date the IRS otherwise would have, i.e., the date of formation;
- Treat the exemption application as if it were a reinstatement application; and
- Reinstate the organization as of the revocation date.
If the organization has filed an information return at least once during the previous three years, the IRS will grant exemption effective as of the formation date or whichever date should apply.
Accordingly, we remind all organizations with pending exemption applications to file information returns annually.