Uh-oh. You received a letter from the IRS informing you that your nonprofit has lost its 501(c)(3) tax-exempt status, and you need to regain it ASAP.
Most likely, this happened because your organization failed to file its annual return for three consecutive years. Alternatively, your organization may have participated in some unallowed political activity or made improper payments to individuals, shareholders, or groups.
In any case, your organization can no longer receive tax-deductible donations, which is an emergency for both you and your donors.
There is no appeals process to contest your organization’s revocation. You’ll need to apply to have your status reinstated, even if your organization didn’t need to file an exemption application in the first place.
Firstly, you may have to pay taxes through the U.S. Corporation Income Tax Return (Form 1120) or the U.S. Income Tax Return for Estates and Trusts (Form 1041).
If your organization has never had its 501(c)(3) status revoked before now, you’re in luck. You may be eligible to fast track your reinstatement.
You’ll need to complete and submit one of the Forms of Exemption Recognition—Form 1023, Form 1023-EZ, or Forms 1024 and 1024-A—within 15 months of the date of your status revocation letter, along with the appropriate user fee. These fees amount to $400 if your organization earns less than $10,000 in gross revenue, and $850 if your organization earns more.
Form 1024 and Form 1024-A (and the user fee) must be physically mailed to the IRS.
If approved, your organization will suffer no gap in its status. The IRS will honor your exempt status back to the date of revocation. You’ll also need to file your Form 990-EZ for the years you did not file in order to avoid the IRS Section 6652(c) penalty.
Which Form is Right for Your Organization?
501(c)(3) Organizations use Form 1023 or Form 1023-EZ.
Organizations who serve a charitable purpose are categorized as 501(c)(3) organizations, e.g., the American Red Cross, the Salvation Army. These organizations care for the poor, advance civil rights, improve education, and so forth. Organizations designated as such are prohibited from paying net earnings to individuals or shareholders.
Donations to 501(c)(3) organizations are tax-exempt, but these organizations are not allowed to participate in political lobbying or activities.
Form 1023-EZ is less in-depth than Form 1023. Form 1023 requires 12 pages of information, while Form 1023-EZ only requires three pages or information and may only be completed online. Form 1023 must be physically mailed to the IRS, and the approval process can take up to 180 days, while Form 1023-EZ must be completed online and the approval time runs around 90 days.
The downside to the 1023-EZ is that you won’t have as much room to explain the circumstances that lead to your organization’s failure to file. Form 1023-EZ allows less room for error. Simply checking the wrong box can result in your organization’s application for reinstatement to be denied.
501(c)(4) organizations use Form 1024 and Form 1024-A.
Organizations who seek to promote public wellbeing are designated as 501(c)(4) organizations, e.g., the American Association of Retired Persons, or the National Rifle Association. These organizations must use their net earnings for charitable, educational, or recreational purposes.
Donations to 501(c)(4) organizations are not tax-exempt, but these organizations are allowed to engage in political activities and lobbying.
Form 1024-A is not the EZ version of Form 1024-A. Form 1024-A is a partner document that must be completed and submitted in conjunction with Form 1024. Depending on what state your organization files taxes in, you may be required to submit Form 1024-A in addition to Form 1024 to receive acknowledgement as a 501(c)(4). Other states may only require Form 1024.
Reinstatement 15 Months After Revocation
The procedure for reapplying for your organization’s 501(c)3 status more than 15 months after its revocation date is the same, except your organization must also explain why it failed to file for three consecutive years.
This reasonable cause statement is your chance to plead your case to the IRS by telling them how your failure to file is not indicative of negligence on behalf of your organization. You’ll need to include a detailed description of why your organization failed to file for each year it didn’t file, as well as the steps your organization is taking to ensure it files appropriately in the future.
If your organization’s reinstatement application is approved, the IRS will retroactively honor the status back to the date of your revocation letter.
As a nonprofit, honesty and transparency should be part of your organization’s culture. If your organization loses its tax-exempt status, by all means, share it with your organization’s board of directors, staff, and communications.
When communicating with donors, let them know that donations made before the revocation date retain their exempt status, and ensure that your organization will notify them as soon as your 501(c) 3 status is reinstated.
You’ll also need to inform the appropriate agency at the state level of the loss of your organization’s tax exempt status. The more detailed and accurate revenue reports you keep, the easier it will be to file the right tax return and pay income taxes for your organization’s non-exempt period.
The IRS will issue your organization a new determination letter if it reinstates your tax-exempt status, and it will include your organization on its lists and databases of exempt organizations.
However, even if your organization regains its 501(c)3 status, it will remain on the IRS’ Automatic Revocation List indefinitely.
Once your organization’s status has been reinstated, making sure you file your taxes properly and on time is crucial to keeping your status. That’s where we come in.
At File 990, we make tax filing easy. Fill out our easy online application, and we’ll handle the rest, so you can focus on what really matters—your mission. Between tax seasons, we’ll keep you updated on tax laws and how they affect your organization, and we’ll remind you when your filing time is coming up.
Let us help protect your organization’s tax-exempt status. Get started today or contact us at firstname.lastname@example.org.