15 Years As A Non-Profit Without IRS Determination Letter

Has anyone dealt with a non-profit that has been acting as a 501(c)(3) accepting donations but not recognized as such by the IRS?

I have been hired by a non-profit that has new management. They have learned that the founder filed Form 1023 but never responded to the inevitable follow letter from the IRS. Also no returns were filed from 2003 (year incorporated) until 2016. They filed a 990 for 2017.

I knew it would be futile, but I called the IRS and received the expected response: file a new 1023 with the user fee and file 1120's for all prior years. Two problems with that (1) don't have the records for the early years, (2) not enough money to pay all the late filing penalties and interest, if not abated.

Am considering starting a new organization, but that doesn't make the old problems go away.

If the normal annual receipts of the org are $5,000 or less, they don't need formal recognition and may operate as a 501(c)(3) without a letter of determination. If not, you may still be able to get recognition all the way back to the date the entity was created. File 1023 with Schedule E.

Receipts are greater than $50,000/year

II. Revised exemption application forms.

Other organizations applying for exemption should be sure to file the latest versions of the applications, since obsolete versions of forms are rejected by the IRS as incomplete. For charitable organizations, the new Form 1023 has been updated to reflect IRS procedures concerning public charity status and retroactive recognition of exempt status. And, the new Form 1024 has been updated to remove questions that were applicable to section 501(c)(4) organizations.

. http://www.capdale.com/new-irs-procedur ... nonprofits

See pages 20 and 21 of revised Form 1023. https://www.irs.gov/pub/irs-pdf/f1023.pdf. And its instructions, which include this.

If you don’t file Form 1023 within 27 months of formation, the effective date of your exempt status will be the date you filed Form 1023 (submission date). The date considered to be the date we receive Form 1023 is generally the postmark date. For exceptions and special rules, including automatic extensions, see Schedule E of Form 1023.

. https://www.irs.gov/pub/irs-pdf/i1023.pdf

I've filed a lot Forms 1023 including a few with Schd E. In this situation that is the easy part. It is the exposure of 15 years of operating without the IRS recognizing them as a 501(c)(3) that has me worried.

Without the determination letter, they are a taxable entity. That means 15 years of federal and state income tax returns that haven't been filed. Perhaps an even bigger issue is the state attorney general may have issues with them soliciting funds. At least the client was smart enough to stop accepting donations.

I'm inclined to start a new organization so that future donations are not exposed to penalties on the sins of the past. I'll just deal with the disclosures on Sch G of the 1023.

[See pages 20 and 21 of revised Form 1023. https://www.irs.gov/pub/irs-pdf/f1023.pdf. And its instructions, which include this.

If you don’t file Form 1023 within 27 months of formation, the effective date of your exempt status will be the date you filed Form 1023 (submission date). The date considered to be the date we receive Form 1023 is generally the postmark date. For exceptions and special rules, including automatic extensions, see Schedule E of Form 1023.

. https://www.irs.gov/pub/irs-pdf/i1023.pdf

Yes, and there are exceptions to the 27 month rule including a big one where you just 'splain why you're late. Since the big brouhaha where Lois Lerner and the IRS got nailed for doing her job with a little too much aggressiveness, they're now pretty much letting anything sail right through.

A request will be approved if the organization acted reasonably and in good faith, and granting relief will not prejudice the interests of the government.

https://www.irs.gov/charities-non-profits/charitable-organizations/application-filed-late

Yes, and there are exceptions to the 27 month rule including a big one where you just 'splain why you're late. Since the big brouhaha where Lois Lerner and the IRS got nailed for doing her job with a little too much aggressiveness, they're now pretty much letting anything sail right through.

While I have many times seen the IRS forgive many things I wouldn't, I'm not sure ignoring a follow up letter after filing a Form 1023 is going to sail through on even the most windy day. I'll have to work on my creative writing!

In post #4, the first link is to a memo by a law firm that, in my personal experience, is high quality, very experienced in 501(c) matters, and extremely well connected. The inference I draw from their memo is that exemption back to day one has become much more difficult. In addition to the excerpt I posted, here is more from their memo.

V. No more flexibility on timing of certain rulings/decisions.

The IRS has eliminated the use of terms like “generally” and “usually” to clarify areas where it no longer makes exceptions for special circumstances. For example, in prior guidance there appeared to be flexibility in ruling dates for organizations seeking exemption more than 27 months after formation. The new guidance makes clear that for those organizations, the effective date of exemption will be the date their application is post-marked and not their date of incorporation.

Forming a new entity and applying for charitable recognition has its own set of hurdles and legalities. It does nothing to rectify the status of the prior years with the possibility of 1120s tax, penalties, and interest hanging overhead. In fact, the 1023 application for the new entity will require Schedule G which asks all about the history of the old org from which the new org is spawned.

What does that 2017 990 show for closing assets, and has a lot of money flowed through it since 2003? Is there any whiff of excess benefit transactions, self-dealing, etc?

If a lot flowed through it, but the current assets aren't much, and it's really all-new management, seems much easier to step clear and start a new entity that is sufficiently detached that it's not a successor, to avoid disclosure of the old mess on 1023. And the old directors have a problem to mop up, dissolving the entity and perhaps donating the use of the name eventually to the new one, if the name means something. Maybe that should remain their problem.

Did the 2017 990 trigger some kind of correspondence? It's an odd one, a 2003 org would have lost its status in 2009 by not filing for three consecutive years. Then it files a 990.

Occured to me that there are multiple potential conflicts of interest here. If I was a new director I'd be thinking of potential liability for prior actions of the entity, old-director liability, etc. If the entity is preserved, how does it address a dozen years of noncompliance by the prior directors and officers, especially if that results in unabated penalties?

The Capdale attorney link referenced by Nilodop speaks of revised administrative procedures for exempt orgs and warns that it may not be as easy as before.

Still, the IRS web guidance seems to encourage a retroactive application:

“In general, an organization must file its exemption application within 27 months from the end of the month in which it was formed. If it does so, it may be recognized as exempt back to the date of formation. If an organization files its exemption application after the 27-month deadline, exempt status may only be recognized from the filing date forward.
Exceptions to this general rule apply. If an organization answers yes to Line 2, Part VII, indicating that it filed late, it is directed to Schedule E, which asks questions to establish if it is excepted from the general rule." https://www.irs.gov/charities-non-profi ... -formation

From the current the current (April 2018) IRS website:
“An organization that files an application after the 27-month deadline may be recognized as tax-exempt from the date of the application. It may also request exemption effective back to the date of creation by completing Schedule E, Form 1023, and checking the Yes box in Question 5 of that schedule. A request will be approved if the organization acted reasonably and in good faith, and granting relief will not prejudice the interests of the government. These standards are usually met if the organization files its application before the failure to file is discovered by the IRS.” https://www.irs.gov/charities-non-profi ... filed-late

From the 1023 application:

“Do you wish to request an extension of time to apply to be recognized as exempt from the date you were formed? If “Yes,” attach a statement explaining why you did not file this application within the 27-month period.”

Forming a new entity and applying for charitable recognition has its own set of hurdles and legalities. It does nothing to rectify the status of the prior years with the possibility of 1120s tax, penalties, and interest hanging overhead. In fact, the 1023 application for the new entity will require Schedule G which asks all about the history of the old org from which the new org is spawned.

Agreed, but a new entity would not have future donations used to pay for the sins of the past.

What does that 2017 990 show for closing assets, and has a lot of money flowed through it since 2003? Is there any whiff of excess benefit transactions, self-dealing, etc?

The only asset is cash. I haven't seen anything that raises any concerns about excess benefits, etc.

Did the 2017 990 trigger some kind of correspondence? It's an odd one

That was one of my first question. They have not received anything yet.

Never heard that under $5,000 of receipts may operate as a 501(c)(3), where is that authority?

Maybe 508(c)(1)(B). ("Maybe" is just my hedge.)

Page 1 of Instructions for Form 1023 - paragraph under "Form 1023 Not Necessary".

The only asset is cash. I haven't seen anything that raises any concerns about excess benefits, etc.

I was thinking dollar amount...if there's $50k sitting there it can't be left behind, needs resolution, etc. And would be hard to transfer to a new entity down the line (less-valid argument that new entity is independent; public support test). Not much in assets favors starting fresh.

My comment about conflicts is relevant though - if it's my individual client who just became a director I might say step clear of that dog slick and just start fresh if you want to help out in that area. But if the entity is the client that wouldn't be an option. If the director is the client they are wearing two hats.

As you said the state could be the bigger issue after years of soliciting donations. Here I might back channel the question somehow to see if they are enforcing strictly in these scenarios. I recall a case where there was no "sorry, we're catching up" option and it even went to personal liability for missing tax over many years. Because if it isn't tax-exempt, you're effectively the director of a tax-evading corporation that is soliciting fraudulent donations.