The Internal Revenue Service identified 279,500 tax-exempt organizations that did not file a return or notice for three consecutive years, but it potentially did not identify more than 15,000 organizations that failed to file for three consecutive years, according to a new government report. Due to a programming error the IRS did not notify them that their tax-exempt status had been automatically revoked.

J. Russell George

The report, from the Treasury Inspector General for Tax Administration, noted that the Pension Protection Act of 2006 requires the IRS to maintain a list of organizations whose tax-exempt status has been automatically revoked for failing to file a return or notice for three consecutive years. In a review that was requested by the IRS, TIGTA reviewed the IRS Exempt Organizations 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-exempt status.

In the review, TIGTA confirmed that the IRS performed extensive outreach and took actions to prepare for automatic revocations and, on June 8, 2011, informed more than 279,500 organizations that their tax-exempt status had been automatically revoked.  In most cases, the IRS appropriately identified organizations that did not file a return or notice for three consecutive years.

However, TIGTA auditors also determined that programming changes were incomplete and did not potentially identify more than 15,000 organizations that failed to file for three consecutive years. As a result, these organizations were not informed that their tax-exempt status had been automatically revoked.

In addition, the revocation notice used to inform organizations that their tax‑exempt status had been automatically revoked did not include complete guidance on how organizations could regain their tax‑exempt status if they wanted to reapply for tax exemption. TIGTA also identified approximately 500 tax-exempt organizations whose addresses were inaccurately updated on the IRS’s taxpayer database and several organizations whose requirements to file were not removed after informing the IRS that they had ceased operations.

TIGTA determined that improvements were needed to provide better guidance to organizations when their tax-exempt status is automatically revoked if they believe they were revoked in error or are looking for how to reapply for retroactive reinstatement, and ensure accurate information is posted to the IRS’s taxpayer database.

Throughout the review, TIGTA raised issues and the IRS took actions to address them.  Specifically, computer programming issues were corrected; guidance provided on an IRS website was updated; and changes were made to an electronic filing Web site to reduce inaccurate address updates. In addition, TIGTA made three recommendations concerning programming changes and better guidance in the revocation notice.

“The tax-exempt status of an organization is very important to its existence,” said TIGTA Inspector General J. Russell George in a statement. “The IRS must ensure it makes the correct call.  I am pleased that, 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.”

IRS management agreed with the recommendations and has already taken corrective actions. Two work requests have been submitted to change the programming to more accurately identify organizations that did not file and to ensure accuracy in the accounts of tax-exempt organizations.

"Implementing the PPA changes required an extraordinary effort by many parts of the IRS," wrote Joseph Grant, acting commissioner of the IRS's Tax Exempt and Government Entities Division. "Our first task was to identify hundreds of thousands of entities that previously had very little interaction with the IRS. Next, we needed to let them know they each had new filing requirements. These efforts required that we collaborate not only across the IRS, but with external stakeholders, as well. In addition, we conducted two special filing relief programs to help smaller exempt organizations adjust to the law's requirements. Even now our efforts are not yet concluded: currently, we are providing transitional relief to smaller revoked organizations that wish to have their tax-exempt status reinstated."