A lot of nonprofit leaders ask: does tax-exempt status expire? The answer is ‘no,’ but it could be revoked if a nonprofit does not comply with the IRS requirements. One of the biggest benefits of being a nonprofit organization is the tax-exempt status. It allows nonprofits to not pay federal income tax and allows the donors to make tax-deductible donations.
Tax-Exempt Status Does Not Automatically Expire
Tax-exempt status does not expire as long as the nonprofit continues to operate and meet the requirements. Unlike licenses and permits, tax-exempt status does not have to be renewed. However, it does require care and caution to retain it, as there is no removal provision.
Automatic Revocation for Failure to File Form 990
The most common reason a nonprofit loses its tax-exempt status is the failure to file annual information returns. Form 990, 990-EZ, and 990-N is for nonprofits with no exempt income and are used to keep track of nonprofit organization activities. After a nonprofit does not file for 3 consecutive years, the IRS will automatically revoke tax-exempt status. Tax amounts revert back to the nonprofit for the 3 years of default filings, and the organization must file a new Form 1023 or Form 1024 and pay the fees to get the exemption back.
Compliance Requirements to Maintain Status
Tax-exempt status does not expire; however, to retain it, nonprofits must remain compliant under the following conditions:
- Continue to operate solely for charitable, educational, or religious purposes.
- Avoid private insurance, which means no dividends or earnings may benefit individuals or insiders.
- Limit lobbying, and do not participate in a political campaign.
- Submit annual reports and financial statements to the IRS and the state.
- Not meeting any of the requirements may lead to penalties and tax-exempt status suspension, or revocation.
Reinstating Lost Status
Once a nonprofit tax-exempt status is revoked, it must wait to receive reinstatement. There may be circumstances when the IRS allows retroactive reinstatement, but the organization must provide reasonable cause and act quickly for any filing failures. However, reinstatement may be complicated—even for the donors, who act in good faith, tax-deductible donations may remain unresolved.
In Summary: Tax-Exempt Status Expire?
Tax-exempt status does not expire, but it must be actively maintained through compliance, transparency, and IRS custodial adherence. Nonprofits remain diligent in the exempt status for as long as they operate, and as long as reporting and compliance procedures remain in place, it may be retained indefinitely. If you are not sure about the status and tax obligations, reach out to us today. Dimov Tax is ready to offer expert support.