IRS Guidance on Regaining Your Exempt Status - Applying for Reinstatement
Generally the effective date of revocation is "the original filing due date, without regard to extensions, of the third annual required return or notice that was not filed." (Source: IRS Exempt Organization Update, February 24, 2011) but in some cases the effective date of reinstated exemption will be retroactive to the effective date of revocation.
How will we know if our organization’s tax-exempt status has been revoked?
Check the automatic revocation of exemption list on the IRS website. The nonfiler revocation list is updated periodically by the IRS.
- Instructions for applying for a streamlined retroactive reinstatement are included in IRS Publication 4991
What does it mean that a nonprofit’s tax-exempt status has been revoked?
- It means that your nonprofit is no longer exempt from federal income tax and will have to pay corporate income tax on annual revenue.
- The organization may also be subject to back taxes and penalties for failure to pay corporate income taxes as of the effective date of revocation.
- It may also mean that any state tax exemptions that your nonprofit received – such as exemptions for income tax, property tax, and sales/use tax -- that are dependent on federal tax-exempt status, may also be revoked now.
- And it means that your organization will not be listed in IRS Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986, which is the official list of organizations eligible to receive tax-deductible charitable contributions.
- Additionally, this means that donors will not be able to receive a tax deduction for their gifts to the organization after the revocation date.
- Finally, most private foundations are unlikely to give a grant directly to nonprofits that are not tax-exempt because their guidelines normally require grantees to be recognized as tax-exempt public charities, since federal tax law imposes an excise tax on the foundation for grants made to organizations that are not tax-exempt.
What should you do now?
- Read this guidance from the IRS
- Governance: Convene the board of directors to determine what the organization will do.
- Staff: Make sure that all staff (and volunteers, as applicable) understand what has happened and the significance of the revocation of tax-exempt status.
- Messaging: Make sure that the nonprofit’s website, and all other communications, are transparent about the fact that the organization is not tax-exempt. For example, remove any messages that state that donations to the organization are tax-deductible to the donor, or that describe the organization as tax-exempt.
- Donor relations: Be proactive about communicating with your donors and transparent in explaining that while donations given before the effective date of revocation are still deductible, future gifts are not, until such time as the nonprofit receives recognition from the IRS that is it once again tax-exempt. If your donors need more information on the deductibility of their gifts, refer them to IRS Publication 557. Donors to section 501(c)(3) organizations may rely on the organization’s determination letter or listing in Publication 78 to deduct contributions until the IRS publishes a notice on IRS.gov that the organization’s 501(c)(3) exempt status has been revoked.
- Recordkeeping and tax compliance: Make sure records are kept on revenue sources so that the nonprofit will be well positioned to file the appropriate tax return and pay the income taxes for the period of time that the nonprofit is not tax-exempt.
- Research the options, which may include:
- Applying for reinstatement of tax-exemption (if regaining tax-exempt status is important).
- Note that this will require a lot of time (the IRS estimates that it takes well over 100 hours to fill out the Form 1023 Application for Tax-Exemption).
- Money for filing fees: Filing fees are generally $400 or $850, depending on the organization's annual gross receipts during the preceding four years. Read about exempt organization user fees.
- Fees paid to a lawyer or accountant to help you file the forms.
- Patience and time: The review process at the IRS takes between 15-18 months on average. Be sure to follow the special instructions for nonprofits applying for reinstatement using the streamlined reinstatement process.
- Know the impact on state tax exemption: Your organization’s tax-exempt status at the state level is most likely dependent upon the IRS determination of tax-exemption. Consequently, once you learn that the organization is no longer recognized as tax-exempt by the IRS you should contact the state agency responsible for issuing determinations of tax-exemption for state taxes, such as sales/use tax and property tax (as applicable to your organization) and be transparent about the IRS revocation with that agency.
- Nonprofits that re-apply may request in a letter to the IRS that the reinstatement of their tax-exempt status be retroactive to the date of their original tax-exempt recognition, but the IRS will grant that request only if it determines that there was “reasonable cause” for the nonprofit to have missed the filing deadlines. Make sure to carefully follow the instructions on the IRS website for requesting “retroactive reinstatement” of your organization’s tax-exempt status.
Nonprofits may also want to explore partnering with another nonprofit to serve as a “fiscal sponsor” until such time as the nonprofit is recognized as tax-exempt once again. Fiscal sponsorship can offer the nonprofit that is no longer tax-exempt a way to maintain relations with donors and continue to attract deductible gifts, although they are donated to the fiscal sponsor to fund the organization’s programs/activities. Read about fiscal sponsorship.
Revoked in error?
If you think that your tax-exempt status was revoked in error, contact IRS Consumer Account Services by calling (877) 829-5500. Before calling the IRS, be sure to obtain copies of all documentation you have showing a real mistake was made (such as copies of correspondence from the IRS or you proving that you had submitted a 990 in the last three years).
Read FAQs about revocation from the IRS website.
One of the compelling reasons for a nonprofit to join its State Association is so that it will be alerted to critical information such as IRS filing deadlines, and other significant events or policies that impact its tax-exempt status. If you haven’t already, connect with your State Association.
Disclaimer: The information on this website is intended as educational background only, not legal advice. The National Council of Nonprofits encourages nonprofits that have had their tax-exempt status revoked to seek (i) professional guidance about specific situations from lawyers and accountants well-versed in the IRS Code and the law of tax-exempt organizations, and (ii) join their State Association of nonprofits so that they can be informed about such matters as filing deadlines and changes to IRS regulations that might impact their operations.