Over the past year, federal government officials have threatened to revoke the tax-exempt status of various nonprofits, including universities and charities, claiming they’re politically biased. But as the American Bar Association asserts, it’s not that easy to revoke an organization’s exempt status: “With a few exceptions, IRS procedures require individual, case-by-case IRS audits of each [tax-exempt] organization, with ample opportunity for the entity to defend itself and multiple routes of appeal.”
And, in fact, most nonprofits that lose their exempt status do so not because they violate political activity or similar rules, but because they fail to file Form 990s for three consecutive years. Such automatic revocations are common, particularly with newer nonprofits. Fortunately, it’s possible to regain your status.
Regular and retroactive reinstatement
If your organization is a 501(c)(3) charity and you lose your exempt status due to an automatic revocation, you’ll need to complete Form 1023, “Application for Recognition of Exemption Under Section 501(c)(3)” to regain it. Smaller nonprofits (typically organizations with $50,000 or less in annual gross receipts and $250,000 or less in assets) can use the streamlined Form 1023-EZ.
Note that unless you apply for retroactive reinstatement, your organization’s activities between the revocation and reinstatement dates will be considered taxable activities. Thus, any contributions given during that period won’t be deductible by their donors — and all income to your organization will be taxable. For this reason, you probably will want to apply for retroactive reinstatement, effective on the date of the automatic revocation. Just file the applicable form within 15 months of the date of the IRS revocation letter or the date the IRS posted your organization’s name on its website, whichever is later.
Statements and fees
When you file one of the longer forms, your organization will be required to attach a detailed statement that provides a reasonable cause for failing to file Form 990s in each of the three consecutive years. For example, perhaps your organization’s activities are substantially performed by an all-volunteer staff that isn’t knowledgeable about IRS compliance.
The statement should also describe:
- The facts that led to each individual failure,
- The facts that led to continuous failures,
- How the failures were discovered, and
- Any steps you’ve taken to avoid or mitigate them.
In addition, attach to your form: a statement that describes the safeguards and procedures put in place to avoid future failures; properly completed and executed paper tax returns for all taxable years during and after the consecutive three-year period your organization failed to file; and an original declaration dated and signed under penalties of perjury by an authorized person such as one of your nonprofit’s officers or directors. You’ll need to provide evidence to support all material aspects of the claims you make in your statements.
All organizations seeking reinstatement must pay a specified application fee. For Form 1023, it’s $600, and for Form 1023-EZ, it’s $275.
How long?
Most nonprofits that lose their tax-exempt status are anxious to restore it as soon as possible to avoid negative effects on their eligibility for donations and grants. In general, reinstatements take between three and six months when submitting Form 1023 and one to three months when using Form 1023-EZ. However, recent IRS staffing cuts and temporary government shutdowns may increase application processing times. If the IRS asks you for additional documentation, it could further delay your reinstatement date. Contact us if you’re having trouble regaining your tax-exempt status.