What To Do When You Lose Tax Exempt Status
The IRS will often revoke the tax-exempt status of nonprofits, mainly for not filing annual returns. Losing this status can be harmful, making donations non-deductible, disqualifying grant applications, and possibly incurring retroactive taxes. Regaining your status quickly is crucial.
This article explains what you can expect to encounter along your journey toward regaining your nonprofit’s tax-exempt status.
File For Exemption Recognition
If a nonprofit organization is required to file an annual Form 990, 990-EZ, or 990-N (e-postcard) and fails to do so for three consecutive years, its exempt status will be automatically revoked. The good news, however, is that it’s possible to regain the status.
First, ensure that the organization is registered with pay.gov. You may need to submit one of these electronic forms:
- Form 1023, “Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code,” or
- Form 1024, “Application for Recognition of Exemption Under Section 501(a) or Section 521 of the Internal Revenue Code.”
Smaller organizations may be able to have their status reinstated retroactively from the revocation date. To qualify, the nonprofit must have been eligible to file either Form 990-EZ or 990-N for three consecutive years and not have previously had its tax-exempt status automatically revoked. To apply for retroactive reinstatement, file the applicable form within 15 months of the later date of either the IRS revocation letter or when the IRS posted the nonprofit’s name on its website.
If you’re not eligible for retroactive reinstatement, your organization’s activities and donor contributions between the revocation and reinstatement dates will be taxable.
Support Your Request For Tax Exemption
When filing for recognition of exemption, attach a detailed statement explaining why you failed to file required returns for three consecutive years. Include facts about each failure, ongoing issues, and discovery, as well as steps taken to prevent or mitigate them.
In addition, it’s necessary to include the following:
- Statements that outline the safeguards implemented and the steps taken to prevent future failures,
- Evidence supporting all material aspects of these statements,
- Properly completed and executed tax returns for all taxable years during and subsequent to the three-year period in which your organization failed to file, and
- An original declaration, dated and signed by an authorized individual within your organization, such as an officer or director.
Lastly, a filing fee will be required.
Achieving Nonprofit Re-Qualification
If you file correctly and submit the necessary paperwork, your organization will likely regain its tax-exempt status. The IRS will then issue a new determination letter and update its records to confirm your eligibility for tax-deductible contributions.
If you’re not eligible for retroactive reinstatement, your reinstatement date will usually be when you submitted your exemption application. If reinstated retroactively, you might request an abatement of any penalties from the IRS.
Professional Nonprofit Assistance
If your tax-exempt status is revoked, contact the nonprofit services team at GBQ. We’ll help you file for reinstatement and set up proper compliance procedures to help ensure that you won’t lose your tax-exempt status again.
Looking For Additional Nonprofit Insight? Check Out These Resources:
How To Build Up Your Nonprofit’s Operating Reserves Amid Uncertainty
Should Your Nonprofit Compete, Collaborate, Or Both?
The Benefits Of Branding Your Nonprofit
