by Gregory S. Dowell

March 8, 2018

A recent IRS private letter ruling (PLR 201809009) indicates that an organization’s 501(c)(3) status can be revoked for failing to file an employment tax return, and for failing to respond to various IRS inquiries about the failure to file. In this particular case, the organization filed W-2 forms for its employees and withheld federal employment taxes from the wages, but federal employment tax returns were not filed. Upon inquiry, the CEO advised an IRS agent that the organization had no employees for the year. The organization received additional correspondence from the IRS and requests for documents, to which the organization did not respond.  The organization did not show reasonable cause for its actions or inactions. The organization will ultimately need to file the proper forms and pay the employment taxes, as well as interest and penalties.

What pushed the revocation of the nonprofit status was that the IRS determined that, due to the failure to properly report wages and produce documents, the IRS could not determine that the organization was operated exclusively for its exempt purposes. Further, due to the lack of records and cooperation, the IRS could not determine that the earnings of the nonprofit were not used improperly, say for improper payments to private individuals.

The reminder in this ruling is that organization’s have the same duty to follow wage reporting rules as any other wage-paying organization, and that a lack of good recordkeeping and fundamental bookkeeping can be fatal to the nonprofit status of the entity. Further, failure to respond to the IRS, or any other taxing body, is never a good option. While it did not appear to be an issue in this instant case, nonprofits should be sure that the mail is reviewed and handled appropriately and with proper care. Too often, a part-time volunteer or staff member can compound the problem by not forwarding critical mail to the right person within the organization. In some cases, the mail can hit the right desk but, if the officer or staff member is disorganized, situations like the above can quickly escalate. Boards, too, should make inquiries of the officers to protect themselves from basic failures of the entity. If the organization does not have the requisite skill internally to handle accounting and tax matters, the failure to budget for professionals to assist the entity can similarly be fatal.