Credit Unions Still Receiving IRS Threats to Tax Status

Despite being exempt from filing IRS Form 990, at least two more Federal credit unions based in the Northwest have received warning letters stating that their failure to file the form for three consecutive years has jeopardized their tax status.

“Not only is the letter itself confusing, but it’s confusing why the letters are still being sent because all Federal credit unions are exempt,” said Northwest Credit Union Association (NWCUA) Director of Compliance Services David Curtis, pointing out that these letters have been sent by the agency for more than a year now. “Nonetheless, the letters shouldn’t be ignored.”

Only state charters are required to file an annual 990. Two types of credit unions are exempt from Federal income tax:

  1. Federal credit unions that are under the supervision of the National Credit Union Association (NCUA). Federal credit unions are tax exempt under section 501(c)(1) and are not required to file an annual information return.
  2. State credit unions that are chartered under state credit union laws and operate without profit and for the mutual benefit of their members. State credit unions are exempt under section 501(c)(14)(A) and are required to file an annual information return.

Curtis advised that credit unions receiving notification from the IRS should contact the Association’s Compliance Hotline by phone at 1.800.546.4465 or e-mail at compliance@nwcua.org. Credit unions can also visit the IRS “Correction” page for details and follow-up steps.

Because of their cooperative, not-for-profit structure, Federal tax code for nearly 80 years has exempted and reaffirmed the federal income tax exemption to credit unions—a result not of the products and services they provide, but how those products and services are provided. Recently, however, the IRS has gone so far as actually revoke—in many cases erroneously—the exempt tax status of some federal and state chartered credit unions.

IRS Director of Exempt Organizations Lois Lerner said in a recent letter that the agency was wrong to revoke the beneficial tax status of some state-chartered credit unions it had contacted because their group filings had ceased.

“Individual state credit unions in each state may continue to hold themselves out as a tax exempt under section 501(c)(14), as long as they continue to file required Forms 990 and otherwise comply with the applicable requirements for tax exemption under the Internal Revenue Code,” Lerner said.

An IRS webpage set up due to the high volume of calls it received on this issue lays out three situations and the steps that credit unions whose tax exemptions have been wrongly revoked should take to regain them. They include:

  1. Situation One: A federal credit union appears on the Auto-Revocation List, even though federal credit unions are not required to file an annual return.
  2. Situation Two: A state credit union appears on the Auto-Revocation List.
  3. Situation Three: A credit union received one or two letters from the IRS stating its parent organization was no longer tax exempt.

Visit the NWCUA’s compliance pages or the IRS website for more information.

 

Questions? Contact the Compliance Hotline: 1.800.546.4465, compliance@nwcua.org.

Posted in Compliance, Federal, NCUA.