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Michigan Credit Union League Home » Information Services » Publications » News Articles  

IRS Issues Correction on CUs' Tax-exempt Status   (Misc News: February 8, 2012)

The IRS has admitted that it wrongly informed some credit unions that they had lost their tax-exempt status last summer.

According to CUNA News Now, the federal taxing agency sent a letter of correction to the credit unions saying that a filing error was the reason behind a letter last August informing them that the credit unions' "central organization" - for Michigan credit unions, that means OFIR - had caused them to lose their tax exemption.

CUNA and the Unrelated Business Income Tax Steering Committee (CUNA, American Association of State Credit Union Leagues, CUNA Mutual Group, National Association of State Credit Union Supervisors) worked with the affected credit unions to get a clarification from the IRS when the original notices went out.

Those notices told an unknown number of credit union that because their central organization failed to meet its annual filing requirements for 3 consecutive years, the credit unions' tax-exempt status was automatically revoked.

The notice, the IRS said in its correction,  also contained the following erroneous statement:

"Your organization is a subordinate in this revoked group ruling, so your organization ceased to be tax exempt on the date of your central organization's automatic revocation, even though your organization may have met its annual filing requirements."

The clarification stated:

"Revenue Ruling 60-364,1960-2 C.B. 382, held that a state agency may file a group information return on behalf of all the exempt state-chartered credit unions under its control and supervision, in lieu of each individual state-chartered credit union filing a separate information return. You received the letter containing the erroneous information because of the way state credit unions that filed group returns were maintained on our systems.

"If you continue to meet your annual filing requirements, you may hold yourself out as tax exempt as long as you meet all other applicable requirements for tax exemption under the Internal Revenue Code."

The IRS apologized for the confusion the original  Letter 4777 caused and noted that if a credit union wants a determination letter recognizing its tax-exempt status, it must apply using Form 1024, Application for Recognition of Exemption Under Section 501(a) or for Determination Under Section 120, and pay the applicable user fee.

Various state credit union regulators – including OFIR in Michigan – at one time filed Form 990 tax returns for all state-chartered credit unions under their jurisdiction, but that practice was stopped years ago. OFIR laid out its filing directive in a Letter to Credit Unions (2006-CU-01). Federally chartered credit unions never were required to file the form, but some of them received the IRS letter anyway.

Cheney told CUNA News Now in September that the association hoped the IRS issue "is simply a paperwork error." 

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