Many entities structure themselves as nonprofit organizations in order to benefit from advantages such as grant eligibility and limited liability for founders, directors, employees, and members. However, just like entities of other types, many nonprofit organizations must adhere to IRS tax reporting regulations or face the risk of being assessed significant penalties. If a nonprofit organization fails to file three years in a row, its tax-exempt status will be automatically revoked by the IRS.
If you are concerned that your nonprofit organization is at risk of having its tax-exempt status revoked, or if your status has already been revoked and you are interested in reinstatement, Los Angeles tax attorney Robert Hoffman can help you explore your options and come back into compliance with state and federal laws. To arrange for a private legal consultation, call our law offices at (800) 897-3915 today.
What Will Cause an IRS Automatic Revocation?
A majority of tax-exempt organizations must file a yearly tax return with the IRS (Internal Revenue Service). Any organization that does not meet this reporting requirement for three consecutive years will see its nonprofit status automatically revoked, under Section 6033(j) of the Internal Revenue Code (IRC), effective beginning with third required non-filed return’s due date. If an organization which was formerly deemed exempt under IRC Section 501(c)(3) is placed on this IRS Auto-Revocation List, it will lose its eligibility for receiving tax-deductible charitable contributions under IRC Section 170.
When an organization’s name is published on the IRS’ Auto-Revocation List, donors and contributors will be notified of the status change. In turn, donors will also become aware of the fact that they may no longer rely on an IRS determination letter (dated before the effective date of revocation, or on a prior listing in either Exempt Organizations Select Check or the IRS Business Master File extract) for purposes of claiming tax-deductible contributions.
How to Reinstate Your Nonprofit’s Revoked Tax-Exempt Status
Even if your nonprofit has already lost its tax benefits, there may be good news: organizations that have had their tax-exempt status automatically revoked due to a failure to file for three consecutive years the mandatory 990 series notices or returns can apply for tax-exempt status reinstatement.
There are four procedures for accomplishing reinstatement:
- Post-Mark Date Reinstatement
- Retroactive Reinstatement Process for within 15 months of revocation
- Retroactive Reinstatement Process for after 15 months have elapsed from the status revocation
- Streamlined Retroactive Reinstatement
If your organization is using the streamlined process, these forms must be submitted within 15 months after the date the latter occurring of the following: organization’s listing on the IRS website’s revocation list or the date of the Revocation Letter (CP-120A).
The retroactive reinstatement process changes slightly depending on how much time has passed since your status was revoked, as we will discuss next.
Retroactive Reinstatement Process for Within 15 Months of Non Profit Revocation
Organizations that are ineligible for the alternative methods may still have their tax-exempt status reinstated if they:
- Submit a statement that establishes reasonable cause for the failure to file a required annual tax return for at least a single year during the three years in which it failed to satisfy its filing obligation.
- Submit a statement confirming that the organization did file the required returns for those three years (as well as any other taxable years, after such period but prior to the application’s post-mark date.
- File accurate returns for the three consecutive years that motivated the revocation, as well as for any following years.
As with the aforementioned post-mark and streamlined procedures, nonprofit organizations using the retroactive reinstatement process must also file Form 1023 or Form 1024, along with the correct user fee, within 15 months of status revocation.
What if 15 Months Have Already Passed?
Organizations which apply more than 15 months after the revocation date for for reinstatement may be retroactively reinstated if they are able to satisfy all of the requirements pertaining to retroactive reinstatement within 15 months. However, there is one major difference: reasonable cause must be established for the failure to file the required annual return for all three consecutive non-filed years, rather than only one out of the three.
If the nonprofit is retroactively reinstated using this procedure, the IRS refrains from imposing penalties under Section 6652(c) (failure to file) which could otherwise be applied. However the burden for proving all three tax years is a significant hurdle to obtaining this form of relief. But, an experienced tax professional can provide the insight and guidance necessary to formulate a legal strategy that is likely to achieve this result.
If you represent an organization that has had its nonprofit status revoked, consult with Los Angeles tax lawyer Robert Hoffman to get started on the road back toward compliance and reinstatement. To set up a confidential legal consultation, call our law offices at (800) 897-3915 today.