CU Exempt Status Revocations

 

In the category of “What can go wrong,” the IRS has notified at least 20 federal credit unions and 239 state-chartered credit unions that their tax-exempt status has been revoked.  The reason:  the credit unions failed to file their Form 990 for three years in a row.  Under the Pension Protection Act of 2006, failure to file for three consecutive years results in automatic revocation.

The revocation notices ignore the law or absurdly apply the law:

  • Federal credit unions –  The IRS concluded in a 1988 letter to the NCUA that federal credit unions are exempt from the Form 990 filing requirement.  The exemption is based on federal credit unions qualifying as “federal instrumentalities” under Section 501(c)(1) of the tax code.
  • The IRS announced in 2005 that it is reconsidering whether federal instrumentality status continues for credit unions for deferred compensation planning purposes.  We continue to await a final determination.  Revoking exempt status for failing to file Form 990 would be an odd way for the IRS to announce that it no longer considers federal credit unions to be federal instrumentalities.
  • State-chartered  credit unions –  Many states had been filing a group Form 990 for all of its state-chartered credit unions.  That practice was discontinued some time ago, and state credit unions now file individual Form 990s.  However, the IRS concluded that the individual returns did not meet the filing requirement – the credit unions are technically still part of a group, and therefore the group’s failure to file causes all members of the group to lose exempt status.

We have learned that the revocations are being sent from the Cincinnati IRS office.  We are reaching out to them to understand how they plan to deal with these revocations.  In the meantime, we recommend that any credit union receiving a notice of revocation respond immediately to the IRS in writing explaining the basis for its exemption from (federal), or compliance with (state), the reporting requirements.  If you hit a road block, we can provide additional IRS contact information that may be helpful.  Hopefully, the IRS will in short order realize the errors in its approach and rescind all of the revocations.