How To Regain Your Nonprofit’s Tax-Exempt Status

Nonprofit Tax-Exempt Status

For countless nonprofits, the recognition given by the IRS as a tax-exempt organization provides them with the status as legally compliant and credible, proof with which to gather and maintain funding, and free access to cash grants. When that exemption status is lost, the consequences set in and may include losing the ability to offer tax-deductible donations to supporters, losing lucrative grants, and even having to pay tax on previously untaxed income and funds contributed.

Tax exemption revocation is most frequently automatic and happens after a nonprofit organization has failed to submit the necessary annual compliance Form 990, Form 990-EZ, or Form 990-N for three years in a row. Additional causes may include politically motivated activities, unrelated income comprising substantial business activities, or failure to operate within the declared defined charitable purpose.

However, the IRS has made it easy to follow understandable steps for getting your nonprofit back to tax-exempt status. This guide covers the steps on restoring lost status, the options for getting reinstatement, and offers advice for keeping compliance issues from ever recurring in the future.

What Happens When a Nonprofit Loses Tax-Exempt Status

For nonprofits, losing tax-exempt status results in a change in treatment nationally for taxes and a loss of credibility in the public arena.

• As for donors, the contributions are no longer tax-deductible. They will start viewing the contributions as less valuable and may stop making contributions altogether, which will disrespect the organization and lower their trust in the organization.
• As for the organization, they will now have to file taxes. It will have to file tax Form 1120 on a yearly basis as a taxable corporation and pay federal and state income taxes.
• Exemptions for state level taxes may also be revoked. Property tax, sales tax, state income taxes, and state property taxes may all be revoked and the organization will have to pay to the state.
• Lastly, the organization will also lose all current and future tax-exempt status grants. Most grants for taxes do require IRS 501(c)(3) status. Without that status, grants will be revoked.

Once revoked, the organization remains taxable until it applies for and receives reinstatement from the IRS.

Reasons for Revocation

Understanding why revocation occurs is the first step toward preventing it in the future. Common reasons include:

• Failure to file Form 990 series for three consecutive years. This is by far the most frequent cause. The IRS automatically revokes status without additional warning.
• Engaging in prohibited political activities. 501(c)(3) organizations cannot support or oppose candidates for public office.
• Operating outside the exempt purpose. Funds must be used for charitable, educational, or religious objectives, not for personal or commercial gain.
• Excessive unrelated business income. Running activities unrelated to your mission without paying unrelated business income tax (UBIT) can raise red flags.

Reapply for Tax-Exempt Status

To obtain exempt status again, the organization must file an application and submit the appropriate form to the IRS.

• Form 1023 (Application for Recognition of Exemption) – for charitable organizations under 501(c)(3).
• Form 1023-EZ – offered to small nonprofits who meet certain qualifications (gross receipts under $50,000 and assets under $250,000).
• Form 1024 or 1024-A – for other types of exempt organizations (social welfare or business leagues)

Requests for retroactive reinstatement must be submitted with:

• A written explanation of “reasonable cause” for not filing a certain tax return.
• All the outstanding Form 990, 990-EZ or 990-N copies.
• Necessary paper fee.

The IRS will decide if the reinstatement of exempt status can be restored based on the information submitted.

Reinstatement Options

Reinstatement with the IRS can be done in one of three ways depending on the size and the history of your organization.

1. Streamlined Retroactive Reinstatement

• Streamlined Retroactive Reinstatement applies to nonprofits with gross receipts normally $50,000 or less and eligible to file Form 990-N. 
• The nonprofit has 15 months to file the missing returns and Form 1023 or 1023-EZ, and is not required to submit a reasonable cause statement. 
• Once approved, the reinstatement will then be retroactive to the date of revocation.

2. Retroactive Reinstatement with Reasonable Cause

• Larger organizations can still apply for Retroactive Reinstatement, but they must demonstrate reasonable cause for their defaults on filing returns, citing causes such as turnover in leadership, illness, or a misunderstanding of the filing requirements. 
• This option will require considerable documentation, and the reinstatement will be retroactive to the date of revocation once approved.

3. Postmark Date Reinstatement

• This is the simplest option, should you not need retroactive reinstatement. Tax-exempt status will begin on the date the new exemption application is postmarked.

Selecting the reinstatement method is key in minimizing exposure to taxes, and restoring the trust of your donors.

Cost of Reinstatement

The IRS requires a user fee with each reinstatement application:

• $275 for Form 1023-EZ.
• $600 for the standard Form 1023 or 1024.

Additional expenses may include:

• Professional preparation fees if hiring a CPA, tax attorney, or compliance consultant.
• Late penalties and interest for any taxes owed while operating without exemption.
• State filing fees for reinstating state-level recognition or corporate good standing.

While the process can be time-consuming and costly, prompt action helps reduce penalties and reputational damage.

How Long Does Reinstatement Take?

Waiting time differs due to the intricacies of the application and the current workload of the IRS.

• Some, more simplified, applications may be accepted in less than 90 days.
• On the other hand, when a full 1023 application is sent in, it could take 3 to 6 months.

You can check the status of your application using the IRS Exempt Organizations Select Check tool and, once the IRS is done, they will provide a letter and reinstate your organization’s tax-exempt status.

After Reinstatement: Staying Compliant

After reinstating your 501(c)(3) or other exempt status, the best approach is to mitigate your chances of another revocation.

• You can do so by reporting and paying each year your Form 990 returns (990, 990-EZ, or 990-N) on time.
• Any structural changes like a new address or officers of the organization must be reported with Form 8822-B.
• Remember to keep governance documents like board meeting minutes, bylaws, and financial statements, alongside policies, and held accountable by state laws.
• Be in line with state laws by sending annual reports and renewing charitable solicitation registrations.
• Train your board and staff on IRS compliance duties, and keep a check on all documents and deadlines.

Creating a compliance calendar, designating responsibilities, and working with a qualified tax expert will facilitate best practice for long-term sustainability.

Final Thoughts

Losing tax-exempt status can feel like a major setback, but it doesn’t have to mean the end of your mission. With the right strategy, documentation, and professional guidance, your nonprofit can successfully regain 501(c)(3) status and rebuild donor trust.

Dimov Tax has experience helping nonprofits with IRS reinstatement, compliance filings, and long-term exemption maintenance. Our team will guide you every step of the way, including choosing the right reinstatement path and completing the Form 1023 application, so your organization can concentrate on what really matters: making a difference. Reach out to us today for financial clarity.

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