IRS Remains On Hunt For Revocations

May 9, 2012       Mark Hrywna      

The Internal Revenue Service (IRS) revoked the tax-exempt status of almost 280,000 organizations last year but potentially missed more than 15,000 others, according to a report by the Treasury Inspector General for Tax Administration (TIGTA).

The IRS made extensive outreach efforts but almost 25,000 organizations did not receive reminders to file, according to the report. More than 9,580 of approximately 24,450 organizations that did not receive a delinquency notice also might have been excluded from the At-Risk Listing published in July 2010.

Another 3,700 organizations that did not receive delinquency notices due to lack of filing requirements had the status revoked, according to the review, which was requested by the IRS.

The Pension Protection Act of 2006 required nonprofits as small as $25,000 in gross receipts to file some form of tax return, even something as simple as an E-postcard. Exempt status would be revoked if organizations failed to file for three consecutive years, starting in 2007. The legislation requires the IRS to maintain a list of organizations where the status had been automatically revoked.

Initial notices were issued in 2007 to hundreds of thousands of organizations while the IRS Tax Exempt/Government Entities Division (TE/GE) began issuing news releases, training and other information on its public website. Computer programming changes implemented to systematically identify organizations where status was automatically revoked were incomplete and potentially missed the 15,000 organizations.

IRS management agreed with the report’s recommendations and implemented corrective actions, including addressing the computer programming issues, updating guidance on the IRS website and changes its electronic filing website to reduce inaccurate address updates.

Some newer organizations that were not created until 2008 were erroneously informed that their exempt status was automatically revoked, even though they were not in existence or not required to file a return or notice for 2007, according to the TIGTA report. The TE/GE Division identified more than 2,270 tax-exempt organizations that were erroneously informed about automatic revocations.

The IRS informed organizations in June 2011 that their status had been automatically revoked. The report estimated there were 1.6 million tax-exempt organizations (not including churches) in 2006, holding more than $2.4 trillion in assets and collecting $1.2 trillion in annual revenue. The IRS Data Book for 2011 indicated a 15-percent decline in 501c3 organizations to 1.49 million, down from almost 1.82 million in 2010.

The IRS mailed some 650,000 letters to charities in 2007, twice published a list of at-risk groups and also extended the filing period. There were about 341,000 nonprofits classified as at-risk in 2010, and about 50,000 organizations filed during the extension period, according to the IRS.

“In general, the IRS is accurately identifying organizations whose tax-exempt status has been revoked. While we have identified some areas for improvement, the IRS is overall, getting the job done,” said J. Russell George, Treasury Inspector General for Tax Administration.