Q&A #174 – Are past due Forms 990-N required to be filed for retroactive reinstatement of tax-exempt status?
Question: My organization’s 501(c)(3) status was revoked a few years ago for failure to file annual tax forms for three consecutive years. The organization is very small and has never had more than $50,000 in annual revenue. Are we required to submit 990-N for prior years to have tax-exempt status reinstated retroactively?
Answer: Internal Revenue Service (IRS) Revenue Procedure 2014-11 describes the process for reinstatement of tax-exempt status that has been automatically revoked for failure to file annual tax filings. Under this guidance, it is not entirely clear whether the Section 5 and Section 6 retroactive reinstatement processes require filing past due Forms 990-N. However, there are strong arguments that filing Forms 990-N for prior years should not be required under any of the retroactive reinstatement processes.
As we previously discussed in Q&A #128, Rev. Proc. 2014-11 provides generally provides four different reinstatement processes (these options are summarized on the IRS website):
Section 4 (Streamlined Retroactive Reinstatement): This is the most favorable reinstatement process, and is generally available to small organizations that were eligible to file Form 990-N or Form 990-EZ for each of the 3 missed years, have not been automatically revoked before, and which file the applicable reinstatement application (Form 1023, Form 1023-EZ, Form 1024, or Form 1024-A) no later than 15 months after the date of the IRS letter notifying the organization that it is revoked, or if later, the date the organization is placed on the automatic revocation list on the IRS website.
Section 5 (Retroactive Reinstatement - within 15 months): this process is generally available to organizations that file for reinstatement within the 15-month window but otherwise do not qualify for the Streamlined Retroactive Reinstatement Process (usually because they are not eligible to file Form 990-EZ due to having annual revenue of $200,000 or more and/or total assets of $500,000 or more).
Section 6 (Retroactive Reinstatement - after 15 months): This process is generally available to organizations that fail to file for reinstatement within the 15-month window.
Section 7 (Post-Mark Date Reinstatement): This is the least favorable reinstatement process because tax-exempt status only restored from the date the organization files for reinstatement rather than retroactively back to the date of revocation. Thus, this process is typically used only when the organization is not able to satisfy the requirements of any of the three retroactive reinstatement processes described above.
It is clear that organizations that properly use the Section 4 (Streamlined Retroactive Reinstatement) or Section 7 (Post-Mark Date Reinstatement) processes are not required to file Forms 990-N for prior years, provided they were eligible to file the Form 990-N for the years at issue.
This is explicitly stated in Rev. Proc. 2014-11 with regard to the Section 4 process: “For any year for which the organization was eligible to file a Form 990-N, the organization is not required to file a prior year Form 990-N or Form 990-EZ for such year.” See Section 4.03.
The Section 7 process does not require the filing of any missed filings for prior years, though this process has drawbacks since it does not provide clarity or monetary penalty relief with regard to any years prior to the date the reinstatement application is submitted. However, these drawbacks are mitigated somewhat by the fact that the IRS does not apply monetary penalties for failure to file Forms 990-N during years in which an organization was eligible to file this form. See Internal Revenue Code § 6652(c)(1)(E) (stating that the failure to file penalties “shall not apply with respect to any notice required under section 6033(i),” which describes the Form 990-N).
The question is less clear with regard to the Section 5 and Section 6 reinstatement processes under Rev. Proc. 2014-11, which both require organizations to file “completed and executed paper Annual Returns for all taxable years in the consecutive three-year period for which the organization was required, and failed, to file Annual Returns (and for any other taxable years after such period and before the Post-Mark Date for which required returns were due and not filed).”
However, there are strong arguments that organizations should not need to file Forms 990-N for prior years even under these processes.
Section 5.01(5) (and by reference, Section 6.01) refers to “Annual Returns,” a term Rev. Proc. 2014-11 defines as “the return that the organization must file annually under section 6033(a)” See Section 2.01(2). This same definition lists Form 990, Form 990-EZ, and Form 990-PF as examples of “Annual Returns,” but does not list Form 990-N.
This important distinction is supported by Treas. Reg. § 1.6033-6, which distinguishes between “annual information return” and the 990-N, which is an “annual electronic notification” that organizations file if they are not required to file a return. This distinction is further emphasized by Internal Revenue Code § 6652(c)(1)(E) as described above, which creates an exception from late filing penalties for Form 990-N but not for other annual returns tax-exempt organizations are required to file.
Further, Section 5.01(5) (and by reference, Section 6.01) refers to years in which the organization was “required” to file an Annual Return, which would not be the case for an organization that was eligible to file Form 990-N.
And since the Section 5 and Section 6 reinstatement processes require organizations to file required returns on paper to the specified Internal Revenue Service Center in Ogden, Utah, it is not even clear how an exclusively electronic form 990-N would even be filed.
Planning Tip – The first step to seeking reinstatement of tax-exempt status that has been automatically revoked due to failure to file annual tax filings (e.g., Form 990, 990-EZ, or 990-N) for three consecutive years should be to examine the circumstances that led to missing these important filings. Putting in place appropriate corrective measures to prevent repeating this mistake is important not only to avoid the cost and disruption of future revocations, but also as a key factor to highlight in any “reasonable cause” statements that may be required as part of the reinstatement process.
Despite these compelling arguments that filing missed Forms 990-N for prior years should not be required for any of the reinstatement processes in Rev. Proc. 2014-11, there are risks to taking this position since the IRS has not provided clear guidance on the issue. Consequently, organizations should seek individualized guidance from their attorney or tax advisor before proceeding.
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