IRS tries to decrease errors in automatic revocations for tax exempt organizations

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Every year the exempt organization (EO) branch of the IRS send out a Work Plan for the upcoming year and reviews what it accomplished in the past year.

IRS Exempt Organization 2017 Work Plan (24 pages)

Here’s something interesting I found:

In FY 2016, EO Determinations focused on its objectives to improve processing of applications and enhance customer satisfaction. We implemented several programs to accomplish these goals.
Erroneous Revocation Prevention: On May 3, 2016, EO Rulings and Agreements formalized procedures to identify and prevent erroneous automatic revocation before the organizations are notified and before the revocations are posted to EO Select Check. Preventing these erroneous revocations eliminates adverse impact to organizations and removes the burden from organizations to identify and notify the IRS of the error. Since March 2015, we have reviewed 13,933 potential auto-revocations and prevented 3,202 erroneous revocations (through June 2016).

In plain English, thousands of nonprofits found their tax exempt status was revoked automatically before the organizations were told (!) and before the revocations were posted to EO Select Check (that’s the IRS online database of tax exempt organizations).

Over 3,000 revocations that were an error! What a mess!

The IRS didn’t get specific about why these organizations had their tax exemption revoked or how they fixed the problem, but I have some ideas:

1. It takes 6-8 weeks (yes, that’s WEEKS, not DAYS) for the IRS to update their exempt organization database so that small organizations can file their annual Form 990-N Information Return. If the organization is granted tax exempt status close to their due date for filing the 990-N, they may be unable to timely file a 990-N because the¬† IRS takes 6-8 weeks¬† to update their exempt organization database!

This happened to one of my small nonprofit clients. They had failed to file their 990-N for two years (they didn’t know about the requirement) and the deadline for the third year was quickly approaching. Failure to file your 990/990-EZ/990-N for three consecutive years means automatic revocation of tax exempt status. We were sweating bullets that they could file the 990-N on time. The board president was checking the IRS database daily as the deadline drew nearer. She managed to file the 990-N just days before the deadline! Whew!

If the IRS database of Exempt Organizations were updated in a more timely manner, then there could be fewer erroneous automatic revocations.

 

2. Another small nonprofit told me that they received an automatic revocation letter, but had never received a “You’re late in filing the Form 990-N” type of letter or a warning! This nonprofit had not changed their address, either.

So another thing the IRS could do to reduce erroneous automatic revocation is to mail organizations a reminder and a warning letter for failure to file a 990/990-EZ or 990-N.

I hope my suggestions are what the IRS has put in place.

Carol Topp, CPA

 

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