Strategic Considerations for Tax-Exempt Status Revocation: Appeals and Litigation

I previously wrote about IRS tax-exempt organization examinations, where tax-exempt status is on the line. Now, in this post, I will focus on what happens if you cannot resolve the matter favorably with the IRS examination team.

Upon receiving a proposed adverse determination (commonly known as a “30-day letter”), organizations have two immediate options: request a conference with the examining agent's manager or file a formal protest within 30 days. I previously discussed the managerial conference option and will focus here on the protest option. First, the 30-day deadline is generally a hard deadline with even harder consequences; if you fail to meet the deadline, the organization can continue its defenses only after the IRS has already revoked the organization’s tax-exempt status. IRS Publication 892 is a good reference point for the applicable requirements.

Much like other IRS administrative appeals, the protest document must include specific elements: the organization's identifying information, a clear statement of disagreement, a copy of the 30-day letter, detailed explanations of the organization's position with supporting documentation, and applicable legal authorities. The protest must be signed under penalty of perjury by an authorized officer or representative.

The Appeals Office operates as an independent function within the IRS, separate from the IRS’ Exempt Organizations division that conducted the original examination. Although Appeals conferences are technically informal proceedings, they should be treated with the utmost care and preparation to maximize the chances for a favorable outcome. Favorable outcomes with Appeals are often considered an organizational necessity. There are no other proceedings available to tax-exempt organizations to challenge a status revocation prior to revocation.

The informal nature of Appeals is designed to facilitate frank discussions between the organization and the Appeals Officer. Appeals Officers possess broad settlement authority and can negotiate settlements that resolve disputes without full revocation. If the proposed revocation is upheld, the organization receives a final adverse determination letter, at which point its tax-exempt status is officially revoked.

Many revocation disputes can be resolved through negotiated settlements that address IRS concerns while preserving exempt status. Appeals Officers have authority to approve closing agreements that may include operational changes, governance reforms, or compliance monitoring without full revocation. Organizations should carefully evaluate settlement proposals against the costs and risks of continued litigation.

If an organization receives a final adverse determination letter, it can seek a declaratory judgment as to its qualification for tax-exempt status in three different federal courts: the U.S. Tax Court, the U.S. Court of Federal Claims, and the U.S. District Court for the District of Columbia. Courts cannot issue declaratory judgments unless organizations have exhausted all administrative remedies—for example, trying to resolve the issue with IRS Appeals. Organizations must also meet specific procedural requirements for each court, including proper petition formatting and filing deadlines.

The complexity of tax-exempt law makes qualified representation essential. Organizations should engage attorneys experienced in exempt organization disputes who can navigate both administrative proceedings and potential litigation.

Notably, donors may still be able to receive charitable deductions for contributions made during the pendency of the declaratory judgment action—which can be an important source of funds towards the organization’s defense. Another potential remedy to challenge the tax effects of the tax-exempt status revocation could be to attack the revocation collaterally in a traditional Tax Court deficiency proceeding or refund litigation, but those avenues do not protect donors’ ability to receive a charitable contribution deduction.

Challenging tax-exempt status revocation requires strategic planning, meticulous preparation, and skilled advocacy throughout multiple procedural stages. Organizations facing revocation proceedings should act quickly to preserve their appeal rights while building comprehensive defenses based on factual documentation and legal precedent. With proper representation, many organizations can successfully defend their exempt status or negotiate favorable resolutions that preserve their charitable missions.

The stakes in these disputes extend far beyond tax liability—revocation can fundamentally alter an organization's ability to attract donations, qualify for grants, and fulfill its charitable purposes. Understanding the available defense strategies and procedural requirements is essential for any tax-exempt organization facing IRS scrutiny.

If you have any questions regarding IRS tax-exempt status proceedings, or any other civil or criminal tax issues, please contact me at 214-749-2417 or jglassman@meadowscollier.com.