Think You Lost Your Tax Exempt Status? The IRS May Not Know.

The IRS identified 279,500 tax free associations that did not file a return or notice for three consecutive years. Nonetheless it potentially didn’t identify more than fifteen thousand businesses that failed to file for 3 consecutive years, according to a new government report. Thanks to a programming gaffe, the IRS did not notify them that their tax-free standing had been automatically revoked.

The report, from the Treasury Inspector General for Tax Administration, noted the Pension Protection Act of 2006 requires the IRS to maintain an inventory of organizations whose tax-exempt status has been immediately revoked for failing to file a return or notice for three uninterrupted years. In a review that was requested by the IRS, TIGTA reviewed the IRS Exempt Associations function’s readiness for and implementation of the provisions of the Pension Protection Act of 2006 related to the automatic revocation of an organization’s tax-free status.

In the review, TIGTA confirmed that the IRS performed intensive outreach and took actions to make preparations for automated revocations and, on June 8, 2011, informed more than 279,500 organizations that their tax-exempt standing had been instantly revoked. In most situations, the IRS reasonably identified affiliations that did not file a return or notice for 3 consecutive years.

Nonetheless TIGTA auditors also determined that programming changes were incomplete and did not possibly identify more than 15,000 associations that failed to file for 3 consecutive years. As a result, these businesses weren’t informed that their tax-free standing had been automatically revoked.

Additionally, the revocation notice used to inform affiliations that their tax 8209 exempt status had been instantly revoked did not include complete guidance on how organizations could regain their tax 8209 exempt status if they wished to reapply for tax exemption. TIGTA also identified roughly 5 hundred tax free organizations whose addresses were inaccurately updated on the IRS’s taxpayer database and 1 or 2 organizations whose needs to file were not removed after informing the IRS they had ceased operations.

TIGTA determined that improvements were needed to provide better options to companies when their tax-free standing is automatically revoked if they think they were revoked incorrectly or are on the lookout for how to reapply for retroactive reinstatement. TIGTA also stated that the IRS needed to guarantee accurate info is posted to their taxpayer database.

Throughout the review, TIGTA raised issues and the IRS took actions to address them. In particular, computer programming issues were corrected; directions provided on the IRS website was updated; and changes were made to an electronic filing website to reduce inaccurate address updates. Additionally, TIGTA made 3 suggestions concerning programming changes and better steerage in the revocation notice.

“The tax-exempt status of an organization is very important to its existence,” recounted TIGTA Inspector General J. Russell George in an announcement. “The IRS must guarantee it makes the correct call. It is nice that, generally, the IRS is meticulously identifying organizations whose tax-free status has been revoked. While we have identified some areas for improvement, the IRS is overall getting the job done.”