It happens to plenty of organizations each year. Life got in the way, or maybe your operations grew faster than expected, and you were not properly equipped. Whatever the reason, losing your exempt status does not need to be the end of the charitable aspirations that inspired the organization from the beginning.
Why Tax-Exempt Status is Revoked
In most cases, a tax-exempt status is lost because the entity has not filed a tax return reporting their activity for three full tax years – this could be any version of the Form 990 series. Once the third year has lapsed, the Internal Revenue Service (IRS) will issue a letter to the entity notifying them their tax-exempt status has been lost. This letter details the next proper steps, but at times it can be quite confusing on how to actually proceed, and the steps can depend on how much time has lapsed since the revocation date.
Fortunately, there are a few next steps and best practices for organizations that have lost their tax-exempt status. We’ve provided a high-level list below for you to discuss at your next meeting with your tax advisor.
Within 15 Months of Revocation
If you are applying for reinstatement within 15 months of the revocation date, the steps are as follows:
- Complete and file all past due tax returns.
a. The most typical return types are Form 990-N, Form 990-EZ, Form 990 and Form 990-PF. - Complete and submit the appropriate application for exempt status based on the specifics of your organization (e.g., Form 1023, Form 1024, etc.), along with the corresponding fee.
a. This can be done through the IRS website. - With your application, include a reasonable cause statement that details why the organization failed to meet the filing requirements for at least one of the three consecutive tax years.
After 15 Months of Revocation
- Must complete all steps listed above.
- The reasonable cause statement must detail a reasonable cause for all years that have not been filed.
What Application Form is Used to File for Reinstatement for 501(c)(3) Organizations?
Form 1023-EZ – This form is available to organizations that do not have gross receipts exceeding $50,000 for any given tax year and the fair market value of assets do not exceed $250,000.
Form 1023: This form is available to those that exceed the thresholds for Form 1023-EZ.
Exposure to Penalties and Interest
The IRS should not impose failure to file penalties under Section 6652(c) if the organization is retroactively reinstated. There is exposure to late payment interest and penalty for any unpaid unrelated business income tax or net investment excise tax.
The IRS reviews each application as it is received – however, expect some delay regarding the Form 1023 and Form 1024. You can use the IRS website to either check the status of your application or check the exempt status of your organization.
Windham Brannon Can Help You with Reinstatement
Receiving a letter from the IRS is never ideal, especially when the letter informs you that you’ve lost your tax-exempt status. Even though the reinstatement can feel arduous and detailed, Windham Brannon’s Not-for-Profit Practice has successfully assisted clients with reinstatement. You can prepare for the reporting requirement with the help of a trusted advisor. If you are seeking advice on addressing a tax-exempt status revocation or simply have questions, our team of experts stands ready to support your organization and its needs. For more information, contact your Windham Brannon advisor today, or reach out to Carlye Dooley.
