On January 2, 2014, the IRS released Revenue Procedure 2014-11 which removes some of the hurdles previously faced by organizations seeking retroactive reinstatement of their exempt status. For organizations whose exempt status was revoked for failure to File Form 990, 990-EZ, or 990-N for three consecutive years, regaining exempt status has often been a difficult and drawn out process. As a practical matter, regaining exempt status retroactive to the date of revocation proved to be nearly impossible. This created a “gap” in exempt status for many organizations and resulted in complex compliance issues for these organizations and the IRS.
Revenue Procedure 2014-11 provides a streamlined procedure for small exempt organizations (those that file Form 990-EZ or 990-N) to get retroactive reinstatement and also provides an easier way for large organizations to get retroactive reinstatement. It may also provide benefits to organizations that have been previously granted reinstatement, but not retroactively.
Under the previous procedures for reinstatement, an organization would have to prove that it met the “reasonable cause” standard, something that, in practice, the IRS made it very difficult to do. Under the new Revenue Procedure, if an organization was eligible to file either Form 990-EZ or 990-N for each of three consecutive years it failed to file, it can qualify for a streamlined retroactive reinstatement of exempt status. To do so, the organization must file an application for exemption (Form 1023 or Form 1024) within 15 months from the later of: 1) the date of the Revocation Letter; or 2) the date the IRS posted the organization’s name on the Revocation List maintained on the IRS website.
If, based upon income activity for each year in question, the organization should have filed Form 990-EZ for any of these years, the IRS will not impose failure-to-file or late-filing penalties if the organization files the Form 990-EZ for the outstanding years. For those years in which the organization was eligible to file a Form 990-N, the organization is not required to file any return. If the application is approved, the organization will be deemed to have reasonable cause for failure to file and will be reinstated retroactively to the date of revocation.
Comment: Based on our reading of the revenue procedure and conversations with IRS personnel, the filing of a previously unfiled Form 990-EZ under the streamlined procedures is not a precondition to getting retroactive reinstatement. However, filing the returns for these years would protect the organization from any future assessment of penalties for the failure to file.
Organizations not eligible to use the streamlined procedures outlined above (those organizations that were required to file Form 990 for at least one of the three years it failed to file) may still get relief under this Revenue Procedure. If such an organization files an application within 15 months from the later of: 1) the date of the Revocation Letter; or 2) the date the IRS posted organization’s name on the Revocation List on the IRS website, it can get retroactive reinstatement if the application is accepted.
However, under this procedure, the organization must establish “reasonable cause” for at least one of the three years it failed to file (rather than all three years as required under the previous procedures for reinstatement). The Revenue Procedure provides details on what factors may constitute reasonable cause. The organization must also file Form 990 or Form 990-EZ for each year of the three-year period and any subsequent periods before the date it applies for reinstatement. The IRS will not impose penalties for failure to file, if the organization properly files for and is granted retroactive reinstatement.
Organizations that apply for retroactive reinstatement beyond the 15-month window can receive it if, among other things, they establish reasonable cause for all three years.
The rules in the Revenue Procedure will be applicable to pending applications to the extent they benefit the organization applying for reinstatement.
A small organization that was already reinstated prospectively from the date of its application (not retroactively to the date of revocation) that could have met the streamlined retroactive procedures will be reinstated retroactively to the date of revocation. A large organization that was reinstated from the date of its application for reinstatement that could have met the retroactive reinstatement requirements under the new Revenue Procedure may reapply for retroactive reinstatement by submitting a copy of its previously filed application and complying with the requirements set forth in the Revenue Procedure. The user fee is waived for this reapplication.
Overall, Revenue Procedure 2014-11 makes is easier for small and large organizations to get retroactive reinstatement of their exempt status. Under the previous procedures for reinstatement, the IRS made it extremely difficult to show reasonable cause, especially for three straight years. Without reasonable cause, reinstatement could only be obtained from the date of the filing of the application for exemption. Now, small organizations are deemed to have reasonable cause and large organizations only need to show it for one of the three years. What remains to be seen is if the IRS, in practice, “relaxes” the reasonable cause standard in applying the new revenue procedure.