Colorado Tax Attorney: Denver Tax Lawyer

The IRS can sometimes take a hardline with taxpayers. For example, the IRS often takes a hard line with taxpayers in instances where the taxpayer is a non-profit and it fails to timely file a tax return. In these cases the IRS will has the power to revoke the taxpayer’s non-profit status, but in many cases the IRS does not have to exercise this power.

The IRS often cites to the US v. Boyles case, which the IRS interprets as saying that there is no excuse (ever) for filing a late tax return. The case doesn’t actually say that, rather, it says that absent “reasonable cause,” there is no excuse for missing a tax filing deadline. There have been cases that interpret the Boyles opinion that watter it down even more — cases which are ignored by the IRS.

Code Section 6652(c) makes this issue much more extreme for non-profits. This section sets out a $20 per day fine for non-profits for each day that any one tax return is not filed, with a $10,000 maximum fine. The section goes on to specify that the $20 fine is $100 per day and the cap is $50,000 for non-profits that have gross receipts of $1,000,000 or more. The use of the term gross receipts is unfortunate, because many non-profits have gross receipts of more than $1,000,000 but they may only have a few dollars of income after distributions and expenses are accounted for.

Think about it. A non-profit — which is probably staffed by volunteers — misses a filing deadline. The non-profit doesn’t notice that the filing deadline was missed. The non-profit did have gross revenues in excess of $1,000,000 for the year, but it only had $10 of net income for the particular year.

The IRS does not notify the non-profit of the missed deadline for, say, two, five, ten, or more years (usually becuase the IRS is slow or it mails notices to the wrong address or taxpayer or the mail is not delivered to the taxpayer). The non-profit could now be subject to a $50,000 tax penalty and the IRS can revoke the non-profit’s tax exempt status.

The IRS will then use the threat of taking away the non-profit’s tax exempt status as leverage to politely “encourage” the non-profit to pay the $50,000 fine. This is a very common scenario (see, e.g., IRS Ruling 200720027 for an instance when it appears that the IRS actually sent some notice to the non-profit).

And what can the non-profit do to contest the penalty? They can hire a tax attorney to contest the penalty via the Appeals Office. What is the taxpayer to do when the Appeals Office misinterprets the Boyles case to uphold the penalty? Well, they will have to pursue the claim in Federal District Court — but wait, it’s a non-profit with only $10 of net income. It can’t even afford the court filing fee, so it has lost its case before the case has even started.

And if the non-profit cannot pay the $50,000 fine to the IRS, then the IRS usually doesn’t have to bother taking away the non-profits tax exmpt status — becuase it simply uses its tax collection powers to take the non-profit’s assets — shutting down the non-profit outright.