1. What is automatic revocation?

Automatic revocation occurs when an exempt organization that is required to file an annual return (e.g., Form 990, 990-EZ, or 990-PF) or submit an annual electronic notice (Form 990-N, or e-Postcard) does not do so for three consecutive years. The organization automatically loses its federal tax exemption, by operation of law.

2. What is the effect of my organization’s losing its tax-exempt status?

If your organization’s tax-exempt status is automatically revoked, it is no longer tax-exempt under federal law, and may be required to file one of the following federal income tax returns and pay any applicable income taxes:

• Form 1120, U.S. Corporation Income Tax Return, due by the 15th day of the 3rd month after the end of your organization’s tax year; or
• Form 1041, U.S. Income Tax Return for Estates and Trusts, due by the 15th day of the 4th month after the end of your organization’s tax year.

In addition, a section 501(c)(3) organization that loses its tax-exempt status cannot receive tax-deductible charitable contributions and will not be listed in Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986.

3.  What organizations are subject to automatic revocation?

All exempt organizations required to file an annual return or submit an annual electronic notice are subject to automatic revocation for failure to file for three consecutive years. Exempt organizations not required to file an annual return or notice are not subject to automatic revocation. For a list of organizations (e.g., churches, conventions or associations of churches, and integrated auxiliaries of churches) that are not required to file a return or notice, see Annual Exempt Organization Return: Who Must File.

4.  How do I know which annual return or notice my organization is required to file?

First, determine whether your organization is required to file an annual return or notice. See Annual Exempt Organization Return: Who Must File.

If your organization is required to file an annual return or notice, then use our annual return filing chart to determine what your organization’s filing requirement is, which will depend on the type of organization (e.g., public charity or private foundation, etc.) and the level of financial activity (i.e., gross receipts and total assets).

5.  On what date is automatic revocation effective?

The exempt status of an organization that does not file a required annual return or notice for three consecutive years is automatically revoked, effective as of the filing due date of the third year.

The filing due date for an annual return or electronic notice is the 15th day of the 5th month after an organization’s tax year ends. For more information about how to determine the filing due date for an organization, see Return Due Dates for Exempt Organizations: Annual Returns.

Note: Small organizations at risk of losing their tax-exempt status because they failed to file for three consecutive years should review IRS guidance to help them come back into compliance.

6.  Can I request an extension of time to file my organization’s annual return?

Yes, an exempt organization is entitled to an automatic three-month extension of time to file its annual return, and may request an additional (not automatic) three-month extension. Use Form 8868, Application for Extension of Time To File an Exempt Organization Return, to request an automatic three-month extension. The request must be filed by the original due date of the return. To receive the additional three-month extension, the organization must file another Form 8868 and describe in detail the reasons causing the additional delay in filing the return.

7.  My organization filed for and received an extension to file its annual return. Will the organization’s tax exempt status still be revoked?

No, as long as the organization timely filed Form 8868 by its filing due date to extend the time for filing a Form 990, 990-EZ, or 990-PF, and then files the required return by the extended due date, the organization’s exempt status will not be automatically revoked during the extension period.

Note that Form 8868 cannot be filed to extend the due date for Form 990-N.

8.  How will I know if my organization’s tax-exempt status has been automatically revoked?

A list of revoked organizations will be available to the public, including state charity and tax officials, on the IRS website. In addition, if the organization was recognized as exempt under section 501(c)(3) of the Internal Revenue Code, it will be removed from Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986.

The Internal Revenue Service will send letters to organizations that, according to our records, have not filed a required annual return or notice for three consecutive years, informing them that the organization’s exempt status has been automatically revoked for failure to file.

9.  My organization’s exempt status has been automatically revoked. What can I do to have its tax-exempt status reinstated?

Your organization must apply to have its tax-exempt status reinstated, even if the organization was not originally required to file an application for exemption. It must:

1. Apply for recognition of tax exemption by filing Form 1023 (if applying under section 501(c)(3)), or by Form 1024 or by letter (if applying under a different Code section), regardless of whether the organization was originally required to apply for exemption; and

2. Pay the appropriate user fee.

10.  Can the IRS “undo” my organization’s automatic revocation?

No. If an organization does not file an annual return or notice for three consecutive years, the organization is automatically revoked by operation of law, and not by a determination made by the IRS. To have its tax-exempt status reinstated, the organization must file an application for exemption.

11.  My organization, after being automatically revoked, applied for and had its tax-exempt status reinstated by the IRS. What is the effective date of the reinstated tax-exempt status?

If your organization successfully applies for reinstatement, the effective date of its reinstated tax-exempt status usually will be the date the organization filed its application.

An organization may request to have its tax-exempt status reinstated as of the effective date it was automatically revoked.

12.  How do I ask that my organization’s tax-exempt status be reinstated effective as of the date its status was automatically revoked?

If an organization’s exempt status is automatically revoked, it may request, in a letter attached to its application for exemption, to have its date of reinstatement effective retroactive to the date of revocation. Its request will be granted only if the IRS determines that the organization had reasonable cause for not filing an annual return or notice for three consecutive years and approves the organization’s exemption application.

13.  I think my organization’s status was automatically revoked in error. What do I do?

If you believe your organization is listed on the IRS records as automatically revoked due to an administrative or similar-type error, you may call Customer Account Services.

Citation: Bahman Ahmadian et ux. v. Commissioner; T.C. Summ. Op. 2010-126; No. 14476-09S

This one-time relief benefits Form 990-N (e-Postcard) and Form 990-EZ filers only. Organizations required to file Form 990 or Form 990-PF are not eligible and are automatically revoked if they fail to file for three consecutive years.

List of organizations at risk of automatic revocation: The IRS website has a list of organizations at risk of losing their tax-exempt status because, according to IRS records, they have not filed for 2007, 2008 and 2009. The list contains the name of the organization and its last-known address. Check this list to see whether your organization is at risk of automatic revocation and can avoid this consequence by following IRS guidance.

The IRS points out that the list may be incomplete, as certain organizations may be at risk even though their names do not appear. In addition, the list may include organizations that were required to file Form 990 or Form 990-PF and are not eligible for the relief program, and organizations whose filing dates have not yet occurred.

According to the letter ruling, the revocation of the organization’s exempt status was made for the following reason(s):

“Organizations described in IRC 501(c)(3) and exempt under section 501(a) must be both organized and operated exclusively for exempt purposes. You loaned an amount constituting 84% to 91% of your total assets back to the substantial contributor who has contributed most of your assets. Thus, this person has effectively used you as a private source of loan credit into which he could transfer excess personal funds, claimed tax deductions, while he still retained complete control of the funds and used them for purposes unrelated to your exempt purpose. Thus, your earnings inured to the benefit of this person, an insider of you, and you did not disclose any information regarding this transaction that resulted in such inurement on your Form 1023. Contributions to your organization are no longer deductible under IRC § 170 after January 1, 20XX.”

INFO 2010-0153

Full Text:

UIL: 170.00-00
Release Date: 6/25/2010

Dear * * *:

I am responding to your letter, dated September 8, 2009, which you had addressed to another division of the IRS. You had inquired about the rules of deductibility of charitable contributions made by credit cards.

Section 170(a) of the Internal Revenue Code (”Code”) provides that a deduction is allowed for any charitable contribution made during that taxable year. Section 170(c) of the Code defines a charitable contribution as a gift or donation to a recognized charitable entity.

Rev. Rul. 78-38, 1978-1 C.B. 67, provides that when a contribution is made to a qualified charity by credit card, it is deductible in the year the charge is made, regardless of when the creditor is paid. See also Granan v. Commissioner, 55 T.C. 753 (1971).

In order to substantiate your contribution, you must maintain adequate records to show that you made the contribution. For contributions by credit cards, which are considered similar to a cash contribution, you must keep the credit card statement that shows the name of the charitable organization, the amount of the contribution and the date of the contribution.

I hope this information is helpful. If you have any additional questions, please contact * * * at * * *.

Sincerely,

Christopher F. Kane
Branch Chief, Branch 3
(Income Tax & Accounting)

1. Can a business become a corporation by just completing a Master Business Application?

No. Articles of Incorporation [or a Certificate of Formation for an LLC] must first be completed and filed with the Secretary of State’s Corporations Division.

2. If an MBA is filed in another agency first, is the customer guaranteed that their chosen corporate name will be available?

No. Only the Corporations Division can determine if any entity name is available by checking that name with other names and name reservations on file. Please file first with the Corporations Division.

3. How is the filing date determined?

The filing date is the date the filing is received in the Corporation Division with 1) legal requirements met and 2) the applicable fees.

4. What is the difference between the UBI number and the FEIN number?

The UBI or Unified Business Identifier Number is a state issued number and identifies your business for all state agencies. The FEIN or Federal Employer Identification Number is issued by the Internal Revenue Service and identifies your federal tax account.

5. What is a foreign corporation? Do they register with the Corporations Division?

It is a corporation formed in a jurisdiction (state or country) other than Washington. A foreign corporation files, with the Corporations Division, an application for “Certificate of Authority” to do business in Washington State. There are exceptions, however. Please contact the Corporations Division if you have questions or concerns.

CEO and CFO Strict Liability for tax debts. 2ESSB 6143 (Section 801) imposes strict liability on a CEO and CFO for collected but unremitted sales tax regardless of fault or whether or not they were aware of the unpaid tax liability. Effective May 1, 2010.

Economic Nexus. 2ESSB 6143 (Section 101) defines economic nexus standards. Out-of-state businesses that currently do not pay any Washington taxes may have nexus with the State of Washington and therefore have a tax reporting obligation. Effective June 1, 2010.

Director Fees. 2ESSB 6143 (Section 701) clarifies that amounts received by an individual from a corporation as director fees are subject to B&O tax. The bill also provides limited relief against the retroactive assessment of B&O tax on director’s fees.  Effective July 1, 2010.

To see a comprehensive list of changes to the state tax law, with links to each bill, visit the Department of Revenue’s website at dor.wa.gov/newlegislation.

• Annual returns are made available to the public;
• Donor lists generally are not public information;
• How to find tax-exempt organizations;
• Which organizations may accept charitable contributions;
• How to find tax-exempt organizations;
• Which organizations may accept charitable contributions;
• Requirements for organizations not able to accept deductible contributions;

and

• How to report inappropriate activities by an exempt organization.

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For more information, click here to review IRS Tax Tip 2010-59

“Taxpayers should be wary of anyone peddling scams that seem too good to be true,” IRS Commissioner Doug Shulman said. “The IRS fights fraud by pursuing taxpayers who hide income abroad and by ensuring taxpayers get competent, ethical service from qualified professionals at home in the U.S.”

Tax schemes are illegal and can lead to imprisonment and fines for both scam artists and taxpayers. Taxpayers pulled into these schemes must repay unpaid taxes plus interest and penalties. The IRS pursues and shuts down promoters of these and numerous other scams.

The IRS urges taxpayers to avoid these common schemes:

Return Preparer Fraud

Dishonest return preparers can cause trouble for taxpayers who fall victim to their ploys. Such preparers derive financial gain by skimming a portion of their clients’ refunds, charging inflated fees for return preparation services and attracting new clients by promising refunds that are too good to be true. Taxpayers should choose carefully when hiring a tax preparer. Federal courts have issued injunctions ordering hundreds of individuals to cease preparing returns and promoting fraud, and the Department of Justice has filed complaints against dozens of others, which are pending in court.

To increase confidence in the tax system and improve compliance with the tax law, the IRS is implementing a number of steps for future filing seasons. These include a requirement that all paid tax return preparers register with the IRS and obtain a preparer tax identification number (PTIN), as well as both competency tests and ongoing continuing professional education for all paid tax return preparers except attorneys, certified public accountants (CPAs) and enrolled agents.

Setting higher standards for the tax preparer community will significantly enhance protections and services for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term. Other measures the IRS anticipates taking are highlighted in the IRS Return Preparer Review issued in December 2009.

Hiding Income Offshore

The IRS aggressively pursues taxpayers involved in abusive offshore transactions as well as the promoters, professionals and others who facilitate or enable these schemes. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through the use of nominee entities. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or insurance plans.

IRS agents continue to develop their investigations of these offshore tax avoidance transactions using information gained from over 14,700 voluntary disclosures received last year. While special civil-penalty provisions for those with undisclosed offshore accounts expired in 2009, the IRS continues to urge taxpayers with offshore accounts or entities to voluntarily come forward and resolve their tax matters. By making a voluntary disclosure, taxpayers may mitigate their risk of criminal prosecution.

Phishing

Phishing is a tactic used by scam artists to trick unsuspecting victims into revealing personal or financial information online. IRS impersonation schemes flourish during the filing season and can take the form of e-mails, tweets or phony Web sites. Scammers may also use phones and faxes to reach their victims.

Scam artists will try to mislead consumers by telling them they are entitled to a tax refund from the IRS and that they must reveal personal information to claim it. Criminals use the information they get to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name.

Taxpayers who receive suspicious e-mails claiming to come from the IRS should not open any attachments or click on any of the links in the e-mail. Suspicious e-mails claiming to be from the IRS or Web addresses that do not begin with http://www.irs.gov should be forwarded to the IRS mailbox: phishing@irs.gov.

Filing False or Misleading Forms

The IRS is seeing various instances where scam artists file false or misleading returns to claim refunds that they are not entitled to. Under the scheme, taxpayers fabricate an information return and falsely claim the corresponding amount as withholding as a way to seek a tax refund. Phony information returns, such as a Form 1099-Original Issue Discount (OID), claiming false withholding credits usually are used to legitimize erroneous refund claims. One version of the scheme is based on a false theory that the federal government maintains secret accounts for its citizens, and that taxpayers can gain access to funds in those accounts by issuing 1099-OID forms to their creditors, including the IRS.

Nontaxable Social Security Benefits with Exaggerated Withholding Credit

The IRS has identified returns where taxpayers report nontaxable Social Security Benefits with excessive withholding. This tactic results in no income reported to the IRS on the tax return. Often both the withholding amount and the reported income are incorrect. Taxpayers should avoid making these mistakes. Filings of this type of return may result in a $5,000 penalty.

Abuse of Charitable Organizations and Deductions

The IRS continues to observe the misuse of tax-exempt organizations. Abuse includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. The IRS also continues to investigate various schemes involving the donation of non-cash assets including situations where several organizations claim the full value for both the receipt and distribution of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.

Frivolous Arguments

Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe. If a scheme seems too good to be true, it probably is. The IRS has a list of frivolous legal positions that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or IRS guidance.

Abusive Retirement Plans

The IRS continues to find abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers use to avoid the limits on contributions to IRAs, as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets at less than fair market value into IRAs or companies owned by their IRAs to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity that is considered prohibited.

Disguised Corporate Ownership

Corporations and other entities are formed and operated in certain states for the purpose of disguising the ownership of the business or financial activity by means such as improperly using a third party to request an employer identification number.

Such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance with the law.

Zero Wages

Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme. Filings of this type of return may result in a $5,000 penalty.

Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are many legitimate, valid uses of trusts in tax and estate planning, some promoted transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means to avoid income tax liability and to hide assets from creditors, including the IRS.

The IRS has recently seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust arrangement.

Fuel Tax Credit Scams

The IRS receives claims for the fuel tax credit that are excessive. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But other individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim and potentially subjects those who improperly claim the credit to a $5,000 penalty.