REINSTATEMENT OF TAX-EXEMPT STATUS
This article was authored by Anne Rosenthal and Christopher Logue, Attorneys at Hurwit & Associates with extensive experience advising nonprofit organizations about reinstatement of their tax-exempt status. They can be contacted at arosenthal@hurwitassociates.com or clogue@hurwitassociates.com for further information on this subject.
Most tax-exempt organizations are required to annually file the IRS Form 990. If a tax-exempt organization is required to file a 990 but fails to do so for three consecutive years, it will have its tax-exempt status automatically revoked. (Check this IRS database to confirm whether a tax-exempt organization’s status has been revoked.) This article provides an overview of the process for an organization whose tax-exempt status has been revoked by the IRS to apply for reinstatement of that status.
In 2014, the IRS instituted the process by which an organization’s tax-exempt status will be automatically revoked for failure to file a Form 990 for three consecutive years. At about the same time, it released Revenue Procedure 2014-11, which set forth the procedure the organization must follow to apply for reinstatement of its tax-exempt status. This procedure allows the IRS to reinstate the tax exempt status of an organization retroactively (back to the date that it was automatically revoked) so that, in effect, there was no revocation. Of course, for any organization that intends to continue operating as tax-exempt, reinstatement is necessary whether it is retroactive or not. For many organizations, retroactive reinstatement of their tax-exempt status is crucial: the impact of not being reinstated retroactively, both on donors and on the organization because of potential tax liabilities and penalties, could significantly impair the organization’s continued viability.
First Step: Re-Apply for Tax-Exempt Status.
Any organization whose tax-exempt status has been automatically revoked by the IRS must file the appropriate application for recognitions of tax-exempt status, such as the Form 1023 for 501(c)(3) organizations or the Form 1024 for some other tax-exempt entities. In addition, the organization should file the appropriate 990 for their most recently completed fiscal year and continue to file timely 990s during and after the application review period. Whether the organization will be reinstated retroactively back to its "Revocation Date" (the effective date of the automatic revocation) depends upon whether it qualifies under the rules set forth in Rev. Proc. 2014-11, as explained below.
Four Categories of Automatically Revoked Organizations
The IRS has identified four categories of organizations seeking to have their tax-exempt status reinstated, each of which is described below. One of the most important factors in a request for retroactive reinstatement is the date the application for reinstatement is submitted to the IRS, called the "Post-Mark Date." Generally, if the Post-Mark Date is within 15 months from the later of the date of the IRS Revocation Letter or the date on which the IRS posted the organization's name on its Revocation List ("Notice Date"), the organization may be reinstated effective as of the Revocation Date.
- Small Organizations with First Automatic Revocation. An organization that was eligible to file the Form 990-EZ or the Form 990-N for each of the three years that it failed to file, and that has not previously had its tax-exempt status automatically revoked, may be retroactively reinstated. However, to get the benefit of retroactive reinstatement, it must apply for retroactive reinstatement to the IRS within 15 months from the Notice Date.
- Larger Organizations filing for Reinstatement Within 15 months of Notice Date. An organization that usually files Form 990 or Form 990-PF and submits the application for retroactive reinstatement not later than 15 months after Notice Date may be retroactively reinstated if it files the application, pays the appropriate filing fee, and files complete annual returns for the three years that it failed to file (and the subsequent annual returns as they become due). The application must include a “Reasonable Cause Statement” to establish that that it “exercised ordinary business care and prudence in determining and attempting to comply with its reporting requirements” for at least one of the three consecutive years in which it failed to file.
- Organizations Applying for Reinstatement More than 15 Months after the Notice Date. An organization (either small or larger) that does not file its application for reinstatement within 15 months of its Notice Date has a higher burden to obtain retroactive reinstatement. It must meet the same requirements set forth in paragraph 2 above, but it must show that it “exercised ordinary business care and prudence in determining and attempting to comply with its reporting requirements” for all three years that it failed to file.
- Organizations Not Meeting Reasonable Cause Standard. An organization that cannot meet the reasonable cause standard may apply for reinstatement of its tax-exempt status effective from the Post-Mark Date. However, this means that the organization was not tax-exempt between the Revocation Date and the Post-Mark Date. As a result, its donors would not be able to take deductions for charitable contributions made to the organization during that time frame, and the organization itself could have tax liabilities, including penalties and interest.
If you have questions about Rev. Proc. 2014-11 or your organization's specific circumstances, you should consult an attorney or accountant specializing in tax-exempt organizations, or you may call the Exempt Organizations unit of the IRS directly at 877-829-5500 or visit the IRS website.
