Return to Good Graces After Temporary Loss of 501(c)(3) Status
In 2008, the IRS introduced a new form just for small nonprofits: Form 990-N (called the Electronic Notice [e-Postcard] for Tax-Exempt Organizations Not Required To File Form 990 or 990-EZ). Many smaller nonprofits (and idle subsidiaries of larger nonprofits which subsidiaries were themselves 501(c)(3) entities) failed to realize their obligations to file. Failure to file Form 990 for three consecutive years results in the automatic revocation of 501(c)(3) status. In 2011, the IRS started notifying 501(c)(3) entities that were delinquent in filing their Forms 990 that their tax-exempt status would be revoked if the proper forms were not filed. Shortly thereafter the IRS notified many 501(c)(3) organizations that their status had been revoked. Many of those organizations were religious or charter schools, or simply small charities with very small annual budgets.
Upon learning of the revocation, many of the affected organizations sought to have their 501(c)(3) status reinstated. That status was reinstated prospectively such that for some period of time, the organization was not a 501(c)(3) organization.
Tax-exempt bonds can be issued for the benefit of 501(c)(3) organizations, but Section 145 of the Internal Revenue Code of 1986, as amended, requires that all property financed with the proceeds of a qualified 501(c)(3) bond be owned by a 501(c)(3) organization or a governmental unit at all times that the bonds are outstanding. Thus, for example, a charter school that was required to file but did not, and which financed its school building with tax-exempt bonds, would have caused the bonds to cease being tax-exempt because it owned tax-exempt, bond-financed property while it was not a 501(c)(3) entity.
The IRS has announced a Voluntary Closing Agreement Program (“VCAP”) for these circumstances that provides for a simplified process of maintaining the tax-exempt status of the applicable bonds. Announcement 2015-2 provides that the organization pay $500 per month or partial month for the period commencing in the month that the 501(c)(3) status was revoked and ending in the month of reinstatement.
The request for VCAP must be filed within 12 months of the date of reinstatement or within 12 months of December 31, 2014, if the reinstatement letter is dated before December 31, 2014, and the affected bonds must not be under audit. In addition, the organization can only have had its status revoked and reinstated once since the affected bonds were issued (or in the case of refunding bonds, since the refunding bonds were issued).
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This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.