In the annual Revenue Procedure covering determination letters for tax-exempt organizations, the IRS made an interesting change this year relating to applications for recognition of exemption.

In Revenue Procedure 2013-9 the IRS outlines three requirements a 501(c)(4) homeowners association must meet in order to be sure it is recognized by the IRS as tax-exempt as of the date of formation. Exempt status for qualifying organizations that do not meet the new 27-month filing requirement will generally be recognized as of the postmark date of the application.

Tax-exemption and HOAs

This can be important to HOA’s that want a formal letter from the IRS as recognition they are tax-exempt retroactively under Internal Revenue Code § 501(c)(4) as a social welfare organization. One reason is to get a refund of prior year taxes.

The IRS has made it clear by examples in its Revenue Rulings that homeowner associations carrying on the same activities as the usual ordinary community association are qualified to receive the recognition of § 501(c)(4) status.

Getting Tax-exempt Status Recognized

Most social welfare organization § 501(c)(4) entities are not actually required to file applications. They seek the formal IRS determination because filing the Form 1024 offers a safe harbor. The HOA and its board gets the best assurance possible by getting the IRS determination letter. They can show that IRS letter and get comfort from the respect it will be given when others may second-guess the board on tax matters.

The IRS Revenue Procedure 2013-9 effective in January, 2013 makes the effective date of tax exempt status dependent upon the mailing date of the tax exemption application.

This is a completely new position that revokes IRS policy dating back to the year 1962.

Prior to this Revenue Procedure, IRS determination letters would typically recognize these organizations that otherwise met the requirements for exemption as tax-exempt from the date of formation, regardless of how much time had passed between the date of formation and the date of application for tax-exempt status

New Requirements Generally

In the new Revenue Procedure, IRS determination letters will recognize tax exemption from the date of formation generally if:

-           Its purposes and activities prior to the date of the determination letter or ruling have been consistent with the requirements for exemption;

-          The organization has not failed to file its required Form 990 returns or notice for three consecutive years; and

-          The organization has filed an application for recognition of exemption within 27 months from the end of the month in which it was organized.

Discussions with the IRS personnel inform the view that the new Revenue Procedure does not mean that you cannot be self-described for the pre-postmark period; it just means that they do not want to rule on that. You could still ask for the ruling, but perhaps wait a long time for final action.

Perspective about the Change

The effect of this change is to encourage such entities to file their application for recognition of exemption (IRS Form 1024) within 27 months of formation or face the risk that the IRS will not grant such recognition retroactively and may seek to collect taxes owed for the period before the application is filed. This change is a tightening up of the rules relating to non-501(c)(3) tax-exempt organizations, although a relatively mild one.

IRS Questionnaires and Audits Coming

The IRS stated in its 2012 work plan that it is reviewing 501(c)(4), (5), and (6) organizations that have not applied for an IRS determination letter to determine their level of compliance with applicable tax laws. The IRS stated that it will send a comprehensive questionnaire to organizations based on Form 990 filings to assess compliance in this area. Note, the IRS is sending out a questionnaire about this to self-declared organizations already in their system. See:  http://www.irs.gov/Charities-&;-Non-Profits/Other-Non-Profits/Self-declarers-questionnaire-for-section-501-c-4-5-and-6-organizations

And these questionnaires give reason to expect a future increase in audit activity for self-declared entities of all § 501(c) sub-section types. That is a clear signal they are getting ready to allocate resources to the area.