In 2006 Congress passed the Pension Protection Act (“PPA”), mandating that most tax-exempt organizations file an annual information return with the IRS. The PPA imposed upon small organizations a filing requirement for the first time in 2007. More importantly, the PPA automatically revokes an entity’s tax-exempt status if it fails to file required returns for three consecutive years.
Recently, the IRS announced that approximately 275,000 organizations had automatically lost their tax-exempt status under the PPA because they failed to file the required annual reports for three consecutive years. While the IRS believes a vast majority of these organizations are defunct, a large portion is likely active organizations that just failed to file their annual returns, or were unaware of the requirement. A list of the organizations that have lost their tax exempt status may be found on the IRS’s website (www.IRS.gov). Being on the list should have no impact on donors who previously made deductible contributions to the auto-revoked organizations. However, going forward organizations that are on the auto-revocation list that do not receive reinstatement are no longer eligible to receive tax-deductible contributions, and any income they receive may be taxable.
Recognizing the impact of a loss in tax exempt status, and the fact that many small organizations are managed by volunteers, the IRS issued guidance on how organizations can apply for reinstatement of their tax-exempt status, including retroactive reinstatement. In addition, the IRS announced transition relief for certain small tax-exempt organizations – those with annual gross receipts of $50,000 or less for 2010 – that were made subject to the new filing under the PPA. The relief allows eligible small organizations to regain their tax-exempt status retroactive to the date of revocation and pay a reduced application fee of $100 rather than the typical $400 or $850 fee. Full details of the IRS’s guidance are available in Notice 2011-43, Notice 2011-44 and Revenue Procedure 2011-36.
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