REINSTATEMENT OF TAX-EXEMPT STATUS
This article was authored by Anne Rosenthal, an Attorney at Hurwit & Associates with extensive experience advising nonprofit organizations about reinstatement of their tax-exempt status. She can be contacted at (617)630-6900 or firstname.lastname@example.org for further information on this subject.
The Internal Revenue Service recently released Revenue Procedure 2014-11, which sets forth new procedures for reinstating the tax-exempt status of organizations that had their tax-exempt status automatically revoked for failure to file annual returns (IRS Forms 990, 990-EZ, 990-N or 990-PF) for three consecutive years. The most important feature of this new procedure relates to retroactive reinstatement. In some cases, the IRS will 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 or not it is retroactive. For many organizations, however, 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 their continued viability.
This article is intended to provide an overview of the new procedures and more specifically, to alert those organizations that have had their tax-exempt status automatically revoked that 1) they may now have options that were not available before Rev. Proc. 2014-11 was announced; and 2) they should act immediately to take advantage of the options under these new procedures.
These new procedures will make retroactive reinstatement more easily attainable. Organizations should be aware that time is of the essence in submitting an application for retroactive reinstatement; the IRS has set a relatively short time frame to take advantage of these new procedures.
Please note that there are different rules that apply to those organizations that have already been reinstated, but not retroactively, and those with pending applications for reinstatement which were filed before the effective date of Rev. Proc. 2014-11. Both categories of organizations may apply or re-apply for retroactive reinstatement, but the filing due date to do so is May 2, 2014. See Section 10 of Rev. Proc. 2014-11.
An organization that had its tax exempt status automatically revoked by the IRS must file the Form 1023 Application for Recognitions of Tax Exempt Status ("application") and pay the appropriate user fee. In addition, the organization should file their Annual Return (the applicable Form 990) for their most recently completed fiscal year on time, and continue to file timely Annual Returns, 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 new rules set forth in Rev. Proc. 2014-11.
Four Categories of Automatically Revoked Organizations
The IRS has identified the following four categories of organizations seeking to have their tax-exempt status reinstated by the IRS. One of the most important factors in a request for retroactive reinstatement, is the date the application for reinstatement is mailed/submitted to the IRS (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. The Revocation List is available on the IRS website. The IRS provides different mailing addresses for submitting applications, depending upon which section of Rev. Proc. 2014-11 is applicable, so you should carefully review the Procedures before submitting an application for reinstatement.
- 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, includes a brief "Reasonable Cause" affirmation, and files complete annual returns for the three years that it failed to file (and the subsequent annual returns as they become due).
- Organizations Applying for Reinstatement More than 15 Months after the Notice Date. An organization that does not file its application for reinstatement within 15 months of its Notice Date, has a much higher burden to obtain retroactive reinstatement. In this case, it must meet all of the same requirements set forth in paragraph 2 above, and in addition, it must submit a more detailed Reasonable Cause Statement. The Reasonable Cause Statement must show facts to establish that, with respect to its failure to file the annual return for all three years that it failed to do so, it "exercised ordinary business care and prudence in determining and attempting to comply with its reporting requirements."
- Organizations Not Meeting Reasonable Cause Standard. An organization may choose to 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, with 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.