07 March 2018 IRS revokes organization's exempt status following failure to reply to employment tax inquiries In PLR 201809009, the IRS has revoked an organization's Section 501(c)(3) tax-exempt status following the organization's failure to file an employment tax return or respond to IRS inquiries for more information with respect to the failure to file. For the year at issue, "Organization" filed Forms W-2 reporting that it paid wages to its employees and withheld federal employment taxes from those wages. However, Organization did not file a federal employment tax return for the year at issue. An IRS revenue agent spoke with Organization's CEO, who told the agent that Organization did not have any employees during the year. The revenue agent issued an Information Document Request, advising Organization to file Forms W-2C and W-3C to correct its account. Organization did not respond to the agent or file the Forms W-2C and W-3C (despite repeated requests from the agent), and Organization presented no evidence to prove it did not have any employees during the year at issue. The IRS concluded that Organization is liable for employment taxes on wages paid to its employees for the years at issue. In addition, unless Organization could show reasonable cause for its failure to timely file federal employment tax returns, the IRS determined that a delinquency penalty will apply to the amounts required to be shown on the return. With respect to the corresponding revocation of tax-exempt status, the IRS stated that Organization has failed to produce documents or otherwise establish that it is operated exclusively for exempt purposes and that no part of its earnings inure to private individuals. The IRS added that Organization has "failed to respond to repeated reasonable requests" to allow the IRS to examine its records. Accordingly, the IRS revoked Organization's tax-exempt status. While failure to respond to an IRS Information Document Request is a common reason for revocation of tax-exempt status, this ruling is also a reminder that organizations should remain compliant with all tax obligations. Although this action was not an explicit failure to operate in furtherance of exempt purposes, the organization lost its tax-exempt status because it failed to (i) comply with its employment tax obligations and (ii) establish reasonable cause for its failure to timely file these tax returns. The organization withheld federal employment taxes from employee wages and failed to provide evidence, after repeated requests from the IRS, that it actually had employees. Therefore, the organization did not sufficiently establish that it operated exclusively for exempt purposes and that no part of its net earnings inured to the benefit of private individuals. A private letter ruling is a written statement issued to a particular taxpayer that interprets and applies tax laws to the taxpayer's specific, represented set of facts, and may not be used or cited as precedent by other taxpayers or by IRS personnel. Thus, although the ruling is instructive on how the IRS might rule regarding a particular matter, organizations are cautioned not to rely on the ruling as authority, and to consult with their tax advisors to determine the tax consequences of their own facts and circumstances. More frequent employment tax-related inquiries for exempt organizations seem consistent with the IRS's priorities as outlined in the IRS Exempt Organization 2018 Work Plan (see Tax Alert 2017-1643). The Work Plan describes a compliance plan that uses compliance checks to determine whether organizations are following recordkeeping and information reporting requirements. Two of the compliance check focus areas include: (1) tax-exempt employers that had discrepancies between Form W-2 and Form 941/944; and (2) exempt organizations that are required to file Form 940 but failed to do so. Accordingly, tax-exempt organizations with employees should continue to ensure correct documentation and reporting for employment-related taxes. — For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg
Document ID: 2018-0518 | |||||||||||||||||||
