Understanding Automatic Revocation of Tax-Exempt Status and How to Reinstate It

Maintaining tax-exempt status is crucial for non-profit organizations, allowing them to focus on their mission without the burden of federal income tax. However, non-compliance with IRS filing requirements can lead to automatic revocation of this status. This blog post explores the reasons behind automatic revocation, its implications, and the steps necessary to regain tax-exempt status.

What is Automatic Revocation?

Automatic revocation occurs when a non-profit organization fails to file the required Form 990 series for three consecutive years. The IRS implements this measure to ensure transparency and accountability within the non-profit sector. Once revoked, the organization is no longer recognized as tax-exempt and may be subject to federal income tax.

Consequences of Automatic Revocation

Losing tax-exempt status has significant implications:

1. Tax Liability: The organization becomes liable for federal income tax.
2. Donor Impact: Contributions to the organization are no longer tax-deductible, potentially reducing donor support.
3. Public Listing: The IRS publishes a list of organizations whose tax-exempt status has been revoked, which can affect the organization's reputation.

How to Check Your Status

Organizations can verify their tax-exempt status using the IRS Tax Exempt Organization Search. This tool allows non-profits to confirm their current status and determine if they have been automatically revoked.

Reinstating Tax-Exempt Status

If your organization has lost its tax-exempt status, you can apply for reinstatement by following these steps:

1. File the Appropriate Application:

• Form 1023: For organizations applying for recognition of exemption under Section 501(c)(3).
• Form 1024-A: For organizations applying under Section 501(c)(4).

2. Include a Reasonable Cause Statement: Explain why your organization failed to file the required returns for three consecutive years. This statement should demonstrate that the failure was due to reasonable cause and not willful neglect.
3. Pay the Correct User Fee: Ensure you include the appropriate fee with your application.
4. Submit Required Documentation: Include any missing returns (Forms 990, 990-EZ, or 990-N) that were not filed during the period leading to revocation.

Streamlined Retroactive Reinstatement Process

For organizations that apply for reinstatement within 15 months of revocation, the IRS offers a streamlined process. If approved, the reinstatement will be retroactive to the date of revocation, restoring the organization’s tax-exempt status without interruption.

Reasonable Cause for Non-Filing

To qualify for reinstatement, organizations must demonstrate reasonable cause for their failure to file. This includes providing detailed explanations and supporting documentation to justify why returns were not submitted on time.

Long-Term Retroactive Reinstatement

Organizations applying for reinstatement more than 15 months after revocation can still have their status retroactively reinstated. However, they must meet additional requirements, including filing all required annual returns from the date of revocation.

Preventing Future Revocation

To avoid future revocation, non-profits should:

1. Maintain Accurate Records: Ensure timely and accurate filing of all required forms.
2. Set Reminders: Use tools and systems to remind responsible parties of upcoming filing deadlines.
3. Seek Professional Help: Consider hiring a tax professional or using a reliable e-filing service like 990.tax to manage your filings.

Conclusion

Automatic revocation of tax-exempt status can pose significant challenges for non-profits. However, understanding the reinstatement process and taking proactive steps can help organizations regain their status and continue their vital work. For more information, visit the IRS Automatic Revocation FAQs and How to Have Your Tax-Exempt Status Reinstated pages.