Since 2011, the IRS has automatically revoked the tax exempt status of hundreds of thousands of nonprofit nonprofit organizations because they failed to file IRS Form 990s for three consecutive years. If you are one of the groups who automatically lost your tax-exempt status, what do you do now?
How do I know if our nonprofit has lost its tax-exemption?
You may have received a notice from the IRS in the form of a letter, Notice CP120A. A copy of this notice is posted on the IRS web. You can search the Exempt Organizations Select Check to check your organization’s status at any time.
If you don’t find your nonprofit’s name on the list, it does not necessarily mean that it does not have its 501(c)(3). Sometimes the IRS list is not comprehensive. Call the IRS Customer Service for nonprofit organizations at 1.877.829.5500 and provide them with your nonprofit’s name (and EIN if you have it). We have found that the best time to call the IRS is early morning.
What do we do now if we’ve lost 501(c)(3) tax-exempt status?
If your nonprofit organization has had its tax-exempt status automatically revoked, and wants to be reinstated, you must file a new exemption application and pay the appropriate fees. Your organization must use the same forms as all other applicants. 501(c)(3) entities will file IRS Form 1023 or 1024.
What about retroactive reinstatement?
Some nonprofits that re-apply may request to the IRS that the reinstatement of their tax-exempt status be retroactive to the date of their original tax-exempt recognition. The IRS will grant that request only if it determines that there was “reasonable cause” for the nonprofit to have missed the filing deadlines. Make sure to follow instructions on the IRS website for requesting “retroactive reinstatement” of your organization’s tax-exempt status. This can be difficult to get this.
What is the effect of my nonprofit losing its tax-exempt status?
1. It means that your nonprofit is no longer exempt from federal income tax and may have to pay corporate income tax on annual revenue. Your nonprofit 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. It may mean that any state tax exemption your nonprofit received that is dependent on federal tax-exempt status may also now be revoked. Check with your state.
3. It means that your nonprofit will not be listed in IRS Publication 78, which is a list of organizations eligible to receive tax-deductible charitable contributions.
4. It means that private foundations are unlikely to give a grant directly to your nonprofit that has lost its tax-exempt status.
If our nonprofit’s 501(c)(3) tax-exempt status has been revoked, may donors continue to receive a tax-deduction?
No. If your organization lost 501(c)(3) tax-exempt status, then donations received after official notification of revocation of your tax-exempt status as a 501(c)(3) are no longer tax-deductible.
Individuals can always contribute, but only upon official notification of re-instatement of your 501(c)(3) tax-exempt status may your donors receive tax-deductibility for their gifts.
People who donated to the organizations before their status was revoked can still claim the deductions, according to the IRS.
What is the cost of reinstatement?
The appropriate user fee must be paid with the application. The IRS fee differs with the type of application submitted.
Why was our nonprofit’s 501(c)(3)tax-exempt status revoked?
Why did this happen?
Until several years ago, charities with revenues of less than $25,000 were not required to file federal tax returns. Then, in 2006, Congress passed a law requiring all nonprofits with federal tax-exempt status to submit returns.
That law, the Pension Protection Act, required all organizations to file returns, but because it was embedded in 393 pages of a law that otherwise dealt with pension issues, many nonprofit groups did not pay attention to this change.
Nonprofits that didn’t comply risked losing their 501(c)(3) status, which allows donors to deduct their donations on their income tax returns. The status also plays a role in some grants and state tax breaks.
It was expected that many of the entities whose tax-exempt status were revoked no longer actually exist. They may have merged with another entity and failed to legally dissolve and/or notify the IRS of their discontinuation. But many were small to mid-size organizations who failed to comply with IRS requirements.
If we lost tax-exempt status, are we still a nonprofit corporation? What are we called now?
Many nonprofits are generally 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-exempt status 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 filings due to the Secretary of State.
Learn more about the difference between a “nonprofit corporation” and a “tax-exempt entity” here.
Resources
Nonprofit Tax Returns – the IRS Form 990
IRS: Automatic Revocation List on Exempt Organizations Select Check
If you’ve Lost 501(c)(3) Tax-Exempt Status – We’re here to help.
The Cullinane Law Group helps strong organizations get their tax-exempt status back in place.
