For a nonprofit organization, losing tax-exempt status can be troubling. It means exposure to the federal income tax, as well as, tax-deductible donor contributions. However, the IRS allows the organization to reinstate tax-exempt status back, but it takes full documentation, keeping to time, as well as, following the relevant laws.
Why is Tax-Exempt Status Revoked
Revocation can happen for a number of reasons, the most common being the failure to timely submit the annual information returns for three consecutive years. The returns consist of Form 990, 990-EZ, and 990-N. When this occurs, the status is auto revoked, and the organization’s details are put on the IRS Revocation List. Other reasons include operating for private benefit, political activities, and illegal acts at the state and federal levels.
Steps To Reinstate Tax-Exempt Status
Determine If Eligible for Reinstatement
Go to the IRS site and check if your organization is on the Automatic Revocation List. Before starting the reinstatement application, check your organization’s EIN and previous exemption classification (either 501(c)(3) or 501(c)(6)).
Filing the Correct Application
Most organizations must file a new Form 1023 (Application for Recognition of Exemption) or Form 1024 (for other exempt types) to reapply. Smaller organizations that qualify for simplified reporting can use Form 1023-EZ or Form 1024-A. Remember to include all required documentation and the applicable user fee.
Choosing the Right Reinstatement Option
The IRS has four reinstatement options:
- Streamlined Retroactive Reinstatement: organizations that qualify to file Form 990-EZ or 990-N and apply within 15 months of the revocation.
- Retroactive Reinstatement (with Reasonable Cause): explains a valid reason for failing to file.
- Retroactive Reinstatement (after 15 months): involves more detailed paperwork and justification.
- Post-Mark Date Reinstatement: the status is effective starting the date the new application is filed.
Compliance After Reinstatement
Once reinstated, the organization must file annual returns within the required timeframe to avoid future revocation. Establishing internal controls, employing a certified public accountant, or implementing compliance software may help ensure future compliance.
For those who care about their nonprofit mission and credibility, remaining compliant from the onset will always be the best way to avoid having to reinstate tax-exempt status. If you are not sure, contact us today. Dimov Tax presents expert support to nonprofit organizations.