OUR THOUGHTS ON:

IRS Provides Transitional Rules for Retroactive Reinstatement of Exempt Status

Not-for-Profit

By Martin DiGiovine

The Pension Protection Act of 1996 ("PDA") requires tax-exempt organizations with average annual receipts of less than $25,000 to submit a new form with the IRS, known as the 990-N or e-postcard. The penalty for non-filing is draconian. In the event that small tax-exempt organizations failed to submit their 2007, 2008 and 2009 annual returns their tax-exempt status was automatically revoked.

In spite of the Internal Revenue Service's (IRS) education outreach, many small tax-exempt organizations had no knowledge of the new filing requirements, and approximately 275,000 organizations had their tax exempt status revoked by the IRS. Organization’s whose tax-exempt status has been automatically revoked, are listed on the IRS's website. The list will be updated monthly.

To minimize the impact of automatic revocation, the IRS issued transitional relief in Notice 2011-43 to provide allow for retroactive reinstatement of the organization's tax-exempt status.

To obtain reinstatement of its tax-exempt status, an organization must apply for reinstatement with the IRS, even if it was not originally required to apply for tax-exempt status.

Under Notice 2011-43, the IRS will treat an organization as having established reasonable cause for failure to file Form 990-N for taxable years 2007, 2008 and 2009 if:

  • The organization was not required to file annual information returns (e.g., Form 990, Form 990-EZ, Form 990-PF) for taxable years beginning before 2007;
  • The organization was eligible in each of its taxable years beginning in 2007, 2008 and 2009 to submit a Form 990-N e-postcard. This generally means organizations with annual gross receipts that are normally less than $25,000; and,
  • On or before December 31, 2012, the organization submits to the IRS a properly completed and executed application for reinstatement of tax-exempt status.

The tax-exempt status of organizations that meet the above requirements will be reinstated retroactively to the date of revocation. An organization seeking reinstatement of tax exempt status pursuant to this method must write “Notice 2011-43” on the top of the form it uses to apply for reinstatement of tax-exempt status (e.g., IRS Form 1023 or IRS Form 1024) and on the envelope. The organization must also attach the following statement:

[Name of Organization] was not required to file annual information returns for taxable years beginning before 2007; was eligible in each of its taxable years beginning in 2007, 2008 and 2009 to file a Form 990-N e-Postcard; and had annual gross receipts of normally not more than $25,000 in each of its taxable years beginning in 2007, 2008 and 2009.

The transitional relief in Notice 2011-43 pertains only to certain small tax-exempt organizations. The IRS is soliciting comments (Notice 2011-44) pertaining to regulations it plans to issue offering relief to larger tax-exempt organizations that had their tax-exempt status revoked due to the provisions of the PPA.

Schneider Downs is hosting its biennial Nonprofit Symposium in Pittsburgh on July 28 and in Columbus on August 17. We invite you to join us for the day. Learn more about the Nonprofit Symposium.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

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