The loss of tax-exempt status can be a significant setback for any nonprofit organization. When a nonprofit fails to comply with federal regulations, the IRS may issue a revocation of tax exempt status, jeopardizing the organization’s ability to receive tax-deductible donations and other critical benefits. However, this situation can often be rectified by taking the proper steps to reinstate tax exempt status. In this blog, we’ll look at the causes of revocation, how to handle the reinstatement process, and tips to avoid future compliance issues.
Why Tax-Exempt Status May Be Revoked
The IRS grants tax-exempt status to nonprofits under specific conditions. Failure to meet these obligations can lead to a revocation of tax exempt status. Common reasons include:
- Failure to File Form 990: Nonprofits must file an annual informational return (Form 990, 990-EZ, or 990-N). Failing to file for three consecutive years automatically triggers revocation.
- Engaging in Prohibited Activities: Participating in substantial lobbying or political campaigning, generating excessive unrelated business income, or benefiting private individuals can violate tax-exempt requirements.
- Noncompliance with Operational Rules: Deviating from the organization’s stated purpose or mismanaging funds can result in revocation.
- Failure to Meet State Filing Obligations: While this alone may not lead to federal revocation, it can result in penalties and operational restrictions that indirectly affect compliance.
If your nonprofit’s tax-exempt status has been revoked, it’s crucial to act swiftly to restore it and rebuild trust with donors and stakeholders.
Steps to Reinstate Tax Exempt Status
1. Determine the Cause of Revocation
Understanding why the IRS revoked your tax-exempt status is the first step. Review the IRS revocation notice or use the Tax Exempt Organization Search (TEOS) tool on the IRS website to check your status. This will help you address the specific compliance issues that led to the revocation.
2. Choose the Correct Reinstatement Process
The IRS offers several options for nonprofits seeking reinstatement. The path you choose depends on the circumstances surrounding the revocation:
a. Streamlined Retroactive Reinstatement
- Eligibility: Available to organizations revoked for failing to file Form 990 for three consecutive years.
- Criteria: The organization must not have previously had its status revoked.
- Steps: File all missing Form 990s for the years leading up to the revocation and submit Form 1023 or 1023-EZ (the nonprofit tax exempt application) with a user fee.
b. Retroactive Reinstatement
- Eligibility: Applies to organizations revoked for reasons other than failing to file Form 990 or those not eligible for streamlined reinstatement.
- Steps: File all overdue returns, submit Form 1023 or Form 1024, and provide a reasonable cause statement explaining why the organization failed to comply.
c. Post-Mark Date Reinstatement
- Eligibility: Organizations that do not wish to request retroactive reinstatement.
- Steps: File Form 1023 or Form 1024 and pay the required user fee. The reinstatement will be effective from the date of the application.
d. Reinstatement Within 15 Months
- Eligibility: Available to organizations applying for retroactive reinstatement within 15 months of the revocation date.
- Steps: Submit Form 1023, Form 1023-EZ, or Form 1024, along with a reasonable cause statement and proof of filing missing returns.
3. File the Nonprofit Tax Exempt Application
Depending on your chosen reinstatement method, you’ll need to complete either:
- Form 1023: For organizations seeking reinstatement under Section 501(c)(3).
- Form 1024: For other types of nonprofits, such as 501(c)(4) organizations.
Ensure all sections are accurately completed, including: - A detailed description of the organization’s purpose and activities.
- Financial statements for the past few years.
- A reasonable cause statement if required.
4. Pay the User Fee
The IRS charges a user fee for processing reinstatement applications. The fee varies based on the organization’s annual gross receipts and the form used. Be sure to include payment with your application to avoid delays.
5. Await IRS Determination
After submitting your application, the IRS will review it and issue a determination letter. This letter confirms whether your tax-exempt status has been reinstated and indicates its effective date.
How Long Does the Reinstatement Process Take?
The IRS typically processes applications within 90 days, though it may take longer if additional documentation is required. You can check the status of your application by contacting the IRS Exempt Organizations division.
Why Reinstating Tax-Exempt Status Is Essential
The loss of tax-exempt status can harm a nonprofit’s credibility, hinder fundraising efforts, and disrupt operations. Restoring this status allows your organization to:
- Resume accepting tax-deductible donations.
- Regain eligibility for grants and other funding opportunities.
- Restore trust and confidence among donors, stakeholders, and the public.
Conclusion
The revocation of tax exempt status can be a daunting challenge, but with the right approach, nonprofits can recover and rebuild stronger than ever. By following the steps outlined above, your organization can successfully reinstate tax exempt status and continue fulfilling its mission.
Submitting a well-prepared nonprofit tax exempt application, addressing the root causes of revocation, and implementing best practices for future compliance will ensure your nonprofit stays in good standing with the IRS. With diligence and the right resources, your nonprofit can overcome this hurdle and continue making a positive impact. At the same time, simplify your articles of incorporation filing with us’ expert assistance; fast, reliable, and stress-free service.
