If your nonprofit organization lost its tax-exempt status from the IRS, what should you do now?
Most 501(c) tax-exempt organizations must file IRS Form 990s each and every year. If they aren’t filed for three years in a row, the IRS will automatically revoke its 501(c) tax-exempt status. Since 2011, hundreds of thousands of 501(c) tax-exempt organizations across the country have lost their tax-exempt status for this reason. If your nonprofit lost tax exemption, here are next steps.
How to know if a nonprofit has lost its tax exemption?
The organization may have received a notice from the IRS in the form of a letter – Notice CP120A. This means it lost tax exemption. It is no longer a 501c entity. You can search the Exempt Organizations Select Check to check an organization’s status at any time.
What to do if your nonprofit lost its 501(c)(3) tax-exempt status
1. Apply to Get Your Tax-Exempt Status Reinstated.
The IRS has no appeal process for an automatic revocation.
To get reinstated, your organization must file a new exemption application and pay the appropriate fees. Most 501(c)(3) entities will file IRS Form 1023; other exempt organizations will file other applications like the Form 1023-EZ or Form 1024.
2. Seek “Retroactive Reinstatement.”
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, but 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.
3. File Tax Returns.
The nonprofit organization must file the appropriate tax return and pay the income taxes applicable to the period of time during which the nonprofit is not tax-exempt.
4. Communicate with Donors and Stakeholders.
Tell your donors and be transparent in explaining that your nonprofit’s tax-exempt status has been revoked – and explain why. You can assure donors that while donations given before the effective date of revocation are still deductible, future gifts are not, until such time as the nonprofit receives recognition from the IRS that is it once again tax-exempt.
If your donors need more information about automatic revocation or the deductibility of their gifts, refer them to IRS Publication 526 (describes that gifts are deductible only when given to a “qualified” organization) and IRS Publication 557 (p. 20). Donors to charitable nonprofit organizations may rely on the organization’s determination letter or listing in IRS Publication 78 to determine the deductibility of contributions until the IRS publishes a notice on IRS.gov that the organization’s 501(c)(3) exempt status has been automatically revoked.
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 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. If your nonprofit lost tax exemption, it may mean that any state tax exemption may be in jeopardy. If your nonprofit received a state tax exemption based on its federal tax-exempt status, then that state exemption may be at risk.
3. It means that your nonprofit will not be listed in on the IRS 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, because federal tax law imposes an excise tax on grants made to organizations that are not tax-exempt.
If a 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 IRS application (Form 1023, Form 1023-EZ, or Form 1024). The IRS fee differs with the type of application submitted.
Why did the IRS change the rules about required Form 990s and automatic revocation?
Before 2006, 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 and suffered automatic revocation. Many lost tax exemption without being aware of the rule change.
What are we called now? If we don’t have 501(c) 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-exempt status refers to federal income tax exemption under the Internal Revenue Code.
You may have lost IRS 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.
More Information
I.R.S. List: Automatic Revocation of Exemption List
I.R.S. Information: Frequently Asked Questions about Automatic Revocation
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. We are a Texas-based law firm that helps nationwide tax-exempt organizations stay compliant with government agencies. Our firm has been in business for 20 years. We ONLY work with tax-exempt organizations, so we know the best ways to help get and keep 501(c) status.