Chapter 14 - § 14.3 • IRS EXAMINATIONS AND REVOCATION OR RECLASSIFICATION OF § 501(C)(3) STATUS

• Jurisdiction: Colorado

§ 14.3 • IRS EXAMINATIONS AND REVOCATION OR RECLASSIFICATION OF § 501(c)(3) STATUS

§ 14.3.1—Revocation of I.R.C. § 501(c)(3) Status

Once issued, favorable exemption determination letters are generally effective unless and until later revoked or modified by the IRS. Rev. Proc. 2018-5, 2018-1 I.R.B. 233, § 12. However, an exempt organization may not rely on its determination letter if there is a "material change, inconsistent with exemption, in the character, the purpose, or the method of operation of the organization." Rev. Proc. 2018-5, 2018-1 I.R.B. 233, § 11.02. Furthermore, I.R.C. § 501(c)(3) exempt organizations are obligated to comply with the litany of applicable tax rules and restrictions. Examinations by the IRS present the possibility that an organization's determination letter may be revoked, potentially retroactively (see § 14.3.7 of this chapter), based upon a prior "material change" in the organization that has not been disclosed to the IRS or upon a tax compliance failure.

An "automatic revocation" of exemption — i.e., a revocation without an IRS examination and the associated procedures — will occur if an organization fails to file the required Form 990 or 990-EZ annual returns or 990-N annual notices for three consecutive years, pursuant to I.R.C. § 6033(j). Pub. L. No. 109-280, § 1223(b). The "automatic revocation" provisions of I.R.C. § 6033(j) apply to returns and notices for annual periods beginning in 2007. Thus, beginning in 2010, organizations that have failed to file required annual returns or notices for three consecutive years have lost their exemption by operation of law. The IRS publishes the names of organizations whose exemptions have been revoked under I.R.C. § 6033(j) on its website, www.irs.gov/charities-non-profits/exempt-organizations-select-check, and also in the Internal Revenue Bulletin. I.R.C. § 6033(j)(1); see www.irs.gov/charities-non-profits/automatic-revocation-of-exemption-list; see also IRS Chief Couns. Mem., dated Aug. 19, 2009 (setting forth publication requirements with respect to organizations whose exemptions are revoked under I.R.C. § 6033(j)), and IRS Announcement 2011-35, 2011-25 I.R.B. 916. An automatic revocation under I.R.C. § 6033(j) may only be remedied by the filing of a new application for exemption, which the IRS may grant retroactively if the organization can show reasonable cause for the failure to file annual returns or notices. I.R.C. § 6033(j)(3); see also Rev. Proc. 2014-11, 2014-3 I.R.B. 411 (procedures for reinstating tax-exempt status of organizations that have had their exempt status automatically revoked under I.R.C. § 6033(j)).

§ 14.3.2—Examination

The IRS's examination efforts through its compliance check and associated letter audit programs have increased the likelihood that exempt...