Due Diligence in Grantmaking - Tax-Exempt Status of Grantees

As you may know, the Pension Protection Act of 2006 revokes the tax-exempt status of any organization that fails to file an annual return for three consecutive years. Earlier this summer, the IRS published the list of organizations that have lost tax-exempt status due to their failure to file annual returns. This list is available at www.irs.gov/autorevocationlist. 

Why does this matter for fraternity foundations?

If an organization loses its tax-exempt status as a result of automatic revocation, contributions made to such an organization by donors unaware of the change will usually be considered allowable if the contribution was made on or before the date of publication of the revocation list. The safe harbor has limited application as the IRS has published the initial list of revocations. Before making a grant, foundation managers should check the updated Publication 78, found on the IRS website, which lists all tax-exempt organizations. Publication 78 can be found at https://www.irs.gov/charities-non-profits/search-for-charities. Foundation managers also should note that the IRS now only updates the electronic version of Publication 78 and no longer publishes a paper version. Paper versions cannot be relied on for accurate information. Foundation managers also cannot rely on an IRS determination letter issued to an organization prior to the automatic revocation date.

How to apply for reinstatement of tax-exempt status

Organizations that appear on the automatic revocation list can apply for reinstatement with the IRS. All organizations must file an application in order to have their tax-exempt status reinstated, even if they were not originally required to do so. Organizations must submit a Form 1023 or Form 1024, along with a user fee, and “automatically revoked” written at the top of the application and the envelope.

In order to have the reinstatement of tax-exempt status be effective retroactive to the date of revocation, organizations must submit a specific request with their applications. The request should include a written statement showing that the organization had reasonable cause for not filing its returns. It must also describe the steps the organization has taken to avoid future failures, as well as attaching evidence to support the written statements. Additionally, organizations must complete and submit the annual returns from the three consecutive years they initially failed to submit.

Small organizations with less than $50,000 annual gross receipts

Small organizations that have annual gross receipts of less than $50,000 can qualify for transitional relief. If such organizations file for reinstatement of tax-exempt status by Dec. 31, 2012, they will receive automatic retroactive revocation and a presumption of reasonable cause. Thus these organizations will not need to submit a specific request for retroactive reinstatement nor an explanation for failing to submit returns. In order to qualify for transitional relief, an organization must meet the following criteria: it was not required to file annual returns for taxable years before 2007; it was eligible to file a Form 990-N e-Postcard for the taxable years of 2007, 2008 and 2009; and it applies for reinstatement by Dec. 31, 2012. Applications for reinstatement for small organizations must include a Form 1023 or Form 1024, “Notice 2011-43” written at the top of the application and envelope, and a reduced fee of $100.