You’ve Automatically Lost 501(c)(3) Tax-Exempt Status – Now What?

Aug 7, 2011 by Mollie Cullinane

In the summer of 2011, the IRS announced that 275,000 nonprofit groups — about 18% of the nation’s tax-exempt organizations — lost their tax-exempt status because they failed to file IRS Form 990s for three consecutive years. Since that time, thousands more have automatically lost their tax-exempt status. 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. Also, your group likely will be listed here if it has automatically lost its tax-exemption. 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). The best time to call them is early morning.

What do we do now?

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. Most other exempt organizations will file IRS Form 1024.

To facilitate processing, write “automatically revoked” at the top of the application form and on the envelope. This will ensure that your application goes to a specialist trained to handle these applications.

What about retroactive reinstatement?

Some nonprofits that re-apply may request in a letter 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. This is 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 will 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 is also now revoked.

3. It means that your nonprofit will not be listed in IRS Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986,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, because federal tax law imposes an excise tax on grants made to organizations that are not tax-exempt.

If our nonprofit’s 501(c)(3) tax-exempt status has been revoked, may donors continue to receive a tax-deduction?

No. 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 donate, 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; current user fees are $400 or $850, depending on annual gross receipts. This amount changes; check with the IRS.

Nonprofits with average annual gross receipts over $10,000 a year for a four-year period will pay $850 if they want to be reinstated. If the organization’s gross receipts do not exceed $10,000 for that same time period, then they are only required to pay a $400 user fee.

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 ordering all nonprofits with federal tax-exempt status to submit returns for 2007, 2008 and 2009. The required forms consisted of eight questions requesting basic information such as the group’s name, website and employer identification number.

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 know that.

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 is 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 are small to mid-size organizations who failed to comply with IRS requirements.

Lois Lerner, director of the division of the Internal Revenue Service that oversees tax-exempt groups, said the agency believed most of the organizations on the list were defunct, though there was really no way to know because so many of them simply could not be reached, according to the New York Times.

“In many cases, we didn’t have a good address because the last one was many years old and they hadn’t had to file since then because they weren’t big enough,” Ms. Lerner said.

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.

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

I.R.S. Video: Tax Tips: How to Get Your Tax-Exempt Status Back

IRS: Automatic Revocation List on Exempt Organizations Select Check

Nonprofit Law Basics: What is a 990? Does a Nonprofit File Tax Returns? by Mollie Cullinane, Texas nonprofit attorney

NY Times: I.R.S Ends Exemption for 275,000 Nonprofits

I.R.S. Information: Frequently Asked Questions about Automatic Revocation

The Cullinane Law Group works exclusively with the nonprofit sector. We help set up and maintain strong and legally compliant nonprofits that have solid bases for long-term success. We provide risk management and offer practical solutions for sound nonprofit governance. We help nonprofits, foundations, religious organizations, and social entrepreneurs throughout the United States who seek to create positive change.