This article about revocation of tax-exempt status was originally published on 06/20/2011 and has been updated each year.

Millions of Nonprofits Have Lost Their IRS Tax-Exempt Status – Is Your Organization at Risk?

Since 2011, over a million 501(c) organizations have automatically lost their tax-exempt status because they didn’t file required IRS tax returns for three years in a row.

This started after a 2006 law required most tax-exempt groups to file annual 990 returns (Form 990, 990EZ, 990N, 990PF) to improve accountability in the nonprofit sector.

When the rule took effect, nearly 20% of tax-exempt organizations automatically lost their status, and the IRS has continued revoking status for those who fail to file for three years in a row.

What does it mean that a nonprofit’s tax-exempt status has been revoked?

1. It means that your nonprofit is no longer exempt from federal income tax and may have to pay income tax on its revenue (like a for-profit business does).

Your organization may be required to file one of the following federal income tax returns and pay any applicable income taxes:

  • Form 1120, U.S. Corporation Income Tax Return, due by the 15th day of the 3rd month after the end of your organization’s tax year, or
  • Form 1041, U.S. Income Tax Return for Estates and Trusts, due by the 15th day of the 4th month after the end of your organization’s tax year.

2. State tax exemptions might also be in jeopardy.

If your nonprofit organization loses IRS 501(c) status, any state exemptions that depend on it might also be taken away.

3. It means that your nonprofit will not be listed on the IRS’s exempt organizations – the list of charities eligible to receive tax-deductible charitable contributions.

4. Possible loss of foundation funding.

It means that private foundations are unlikely to give grants directly to your nonprofit that has lost its tax-exempt status, because federal tax law imposes an excise tax on grants made to organizations that are not tax-exempt.

 

What is our nonprofit organization called now? If we lost tax-exempt status, are we still a nonprofit corporation?

Many nonprofits are organized and operated as both nonprofit corporations and tax-exempt entities. “Nonprofit corporate” status and “tax-exempt” status are two different things.

  • Nonprofit status refers to incorporation status under state law.
  • Tax-exemption refers to federal income tax exemption under the Internal Revenue Code and state tax law.

You may have lost tax-exempt status with the IRS, but you may still be a nonprofit corporation in good standing with your state. Check with your state’s Secretary of State. If your group hasn’t filed the proper forms with the IRS, you may have also missed the required filings due to the Secretary of State.

Learn more about the difference between a “nonprofit corporation” and a “tax-exempt entity” here.

 

What should you do if you lost 501c status?

  • Confirm that your tax-exemption was revoked and find out why. The IRS keeps a list of organizations that have automatically lost their 501(c) tax-exemption.
  • Stop telling to the public that your nonprofit has tax-exempt status.
  • Reapply for tax-exempt status.
    • If your nonprofit organization wants to be reinstated, it must file a new exemption application and pay the appropriate fees.
    • 501(c)(3) entities will file IRS Form 1023. Other organizations will file IRS Form 1024 or another application.

Need Help Getting Your Tax-Exempt Status Back In Place?

Navigating IRS requirements and reinstatement can be complicated – but you don’t have to do it alone. Our team specializes in helping nonprofits regain their 501(c) status quickly and efficiently.

Contact us today to schedule a consultation and get your nonprofit back on track. Don’t risk losing critical funding and tax benefits any longer! We look forward to helping you.