What To Do When You Lose Tax-Exempt Status
If your nonprofit organization is one of the 275,000 nonprofit groups that has recently lost its tax-exempt status from the IRS, what should you do now?
1. Communicate with Donors and Stakeholders.
Be proactive about communicating with your donors and transparent in explaining that your nonprofit’s tax-exempt status has been revoked – and explain why.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 on 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.
2. File Your Tax Returns.
The nonprofit will be required to file the appropriate tax return and pay the income taxes applicable to the period of time during which the nonprofit is not tax-exempt.
3. Get Your Tax-Exempt Status Reinstated.
If your nonprofit organization wants to be reinstated, you must file a new exemption application and pay the appropriate fees. 501(c)(3) entities will file IRS Form 1023. Most other exempt organizations will file IRS Form 1024. Call us to get started on the reinstatement process.
Seek “Retroactive Reinstatement.” 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.
4. Consider Fiscal Sponsorship in the Meantime.
Nonprofits may also want to explore partnering with another nonprofit to serve as their “fiscal sponsor” to receive donations on their behalf that will support the nonprofit’s activities until such time as the nonprofit is recognized as tax-exempt once again. Contact us to learn more about fiscal sponsorship.
What is the IRS Process for Reinstatement?
The IRS has adopted a special reinstatement procedure for smaller nonprofits that lost their tax-exempt status through the automatic revocation process. Eligible revoked nonprofits with revenues of less than $25,000 (less than $50,000 in certain circumstances) will be required to pay a reduced application fee of $100 rather than the typical $400 or $850 fee.
Revoked in Error?
If you think your tax-exempt status was revoked in error, contact the IRS at (877) 829-5500 or Internal Revenue Service Exempt Organizations Determinations P.O. Box 2508 Cincinnati, OH 45201.
The Cullinane Law Group works with nonprofit corporations, including those who may have lost their tax-exempt status status. While we are located in Texas, we help nonprofits nationwide.