When the Internal Revenue Service announced in June 2011
that approximately 275,000 exempt organizations had lost their exempt status
under a provision of the Pension Protection Act of 2006 for a failure to file
three consecutive annual information returns, it also provided guidance for
organizations seeking to obtain reinstatement and retroactive reinstatement of
its tax-exempt status. As explained below, certain small organizations have
until December 31, 2012 to apply for
retroactive reinstatement under a much easier procedure than the standard
retroactive request process they will be subject to starting January 1, 2013.
To obtain retroactive reinstatement (i.e., reinstatement
from the date exempt status was revoked for failure to file), an organization
- File an application for reinstatement via an exemption
application (i.e., Form 1023, 1024) regardless of whether the organization was
originally required to submit such application (e.g., organizations that
normally have annual gross receipts of not more than $5,000); and
- Show reasonable cause for its failure to file
the required annual information returns.
In order to show reasonable cause, the applicant
organization must provide information such as:
- A written statement setting forth all of the
facts that support its claim for reasonable
cause for failing to file, including steps taken to avoid or mitigate such
- A written statement describing the safeguards
the organization has put into place to a prevent a failure to file in the
- Evidence substantiating the material aspects of such
- An original declaration, dated and signed under
penalty of perjury by an officer, director, trustee, or other authorized
official that such statements are true, correct, and complete.
The IRS will determine whether reasonable cause has been shown based on all relevant facts and
circumstances. Generally, forgetting to file or failing to keep up with
organizational requirements would not alone constitute reasonable cause. The
IRS is looking for something more substantial. Favorable factors may include:
- A reasonable, good faith reliance on erroneous
written information from the IRS, stating the organization is not required to
file an annual information return;
- An event beyond the organization’s control that
made it impossible for the organization to file the annual information returns;
- Steps taken by the organization to avoid or
mitigate the failure to file such as acting promptly and implementing
safeguards for future compliance when a failure to file was discovered; and/or
- A history of organizational compliance with its
If reasonable cause is not shown but the application for
reinstatement is approved, reinstatement will only be granted from the date the
application was filed. Such a lapse in exempt status can have consequences such
as creating corporate income tax liability and adversely affecting the deductibility
of contributions for donors.
For small organizations, the IRS articulated a transitional
relief procedure that allows them to obtain retroactive reinstatement without
showing reasonable cause and to apply with a reduced user fee of $100. This
transitional relief is offered to small organizations that (i) failed to file
an annual information return for taxable years beginning in 2007, 2008, and
2009 and (ii) apply for reinstatement of tax-exempt status by December 31, 2012. Small organizations are defined as
organizations that normally have annual gross receipts of not more than $50,000
in its most recently completed taxable year.
This transitional relief is greatly advantageous for a small
organization that may otherwise have difficulty showing reasonable cause. For
example, prior to 2006, organizations that normally had not more than $25,000
in gross receipts were not required to file an annual information return.
Therefore, when the Pension Protection Act included a new requirement that such
organizations must file an annual information return (e.g., Form 990-EZ) for
taxable years starting after 2006 (and made them subject to automatic
revocation penalties for failure to file), it was not surprising that many small
organizations were simply unaware that the law had changed. Even if a small
organization believes it has a good chance to show reasonable cause, it can
still benefit from the less demanding application and reduced user fee
available under the transitional relief procedure. Accordingly, small
organizations that have yet to take advantage of the transitional relief
procedure would be wise to do so before the end of the year.
The IRS Revocation List is available online and updated
Please view the IRS annual information return forms and
More information about retroactive reinstatement is
available in IRS Notice 2011-44.
More information about the transitional relief for small
organization is available in the IRS Notice 2011-43.
More background information on IRS Reinstatements is made
available by Sandy Deja in her article, The Comback Kids: A Look at IRS Reinstatements.