January 6, 2011
Taxpayer Advocate Calls for Limit on Retroactive Effect of Revocation
In her annual report to Congress, National Taxpayer Advocate Nina E. Olson including one item of particular interest to nonprofit organizations - creating a statute of limitations to limit the retroactive effect of revocation of an organization's tax-exempt status. Here is the relevant section from her report:
No statute of limitation governs the revocation of tax-exempt status for charities and non-profit organizations. This situation creates a procedural loophole through which the IRS can revoke exempt status even for past years when assessment of tax is already timebarred. Potentially, an organization could face revocation and assessment in current years based on audited activities in closed years.
Under initial and annual filing requirements, the IRS receives timely notice of a charity’s claim to exempt status and honors deductions claimed by donors until announcement of a revocation, so it is unclear whose interests could be protected by an indefinite period for revocation. Meanwhile, exempt status generates numerous consequences, such as qualification for certain bond financing or participation in certain programs, which potentially could affect third parties. Given the far-reaching impact of revocation, procedural safeguards should apply.
The National Taxpayer Advocate recommends that Congress enact a statute of limitation on revocation of a charity’s tax-exempt status, to run concurrently with the existing period of limitation on assessment in general. Thus, revocation may occur for up to three or, in case of substantial omission of items from a return, up to six years after the filing of the return. In case of fraud, tax evasion, or non-filing, no period of limitation on revocation would apply. The time-bar would apply not only to the effective date but also to past facts as a reason for revocation.
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