As you’d expect, the IRS has strict rules about filing tax returns on time, and it’s no different (well, at least not completely different) for exempt organizations. Not filing these forms can have a significant impact on your organization to say the least, and not in a positive way. In fact, if you don’t file for three consecutive years the IRS will not just send you letters and levy penalties, they’ll automatically revoke your tax-exempt status. The ramifications from a revocation can be significant, including, but not limited to:
- The inability of your donors to deduct any contributions they make to your organization after you have been placed on the IRS automatic revocation list.
- A requirement to file a regular federal income tax return (normally it would be an 1120 for a corporation) and pay taxes on any taxable income during the period you aren’t tax-exempt. Failure to file those returns could also lead to penalties and interest.
The time, effort and cost of trying to get that status back is no picnic either. If your status gets revoked, there is a path forward, though. Thankfully the IRS is fairly forgiving when this happens – at least the first time. The IRS permits most organizations to apply for reinstatement retroactive to the revocation date in one of several ways, depending on the size of the organization and circumstances. You can bucket the processes into four broad categories:
Smaller Organizations with No Previous Revocations, Filing within 15 months of Revocation.
If your organization has not had its tax-exempt status revoked previously, was eligible to file IRS forms 990-N or 990-EZ (as opposed to the more detailed form 990 or 990-PF) for the three years you missed, and you can get all the necessary information to the IRS no later than 15 months after the later of 1) the date of the organization’s revocation letter (IRS form CP-120A) or 2) the date the organization appeared on the Revocation List on the IRS website (we’ll refer to this as the “15-month rule”), you can follow what the IRS calls the streamlined retroactive reinstatement process. Under this process, organizations must file another application for exemption (one of the forms 1023, 1023-EZ, 1024 or 1024-A) and pay the user fee. Organizations that were required to file a 990-EZ during that time period will also need to file those returns for each period missed. If you only needed to file a 990-N, you’re off the hook for catching up those filings. You also won’t need to provide any explanation as to why you were out of compliance – the IRS basically gives you a pass – you just need to get the IRS your new application for exemption and catch up on your filings and the IRS will take care of the rest. The IRS will also waive non-filing penalties in this situation if your reinstatement application is approved.
Larger Organizations with No Previous Revocations, Filing within 15 months of Revocation.
If your organization wasn’t eligible to file forms 990-N or 990-EZ during each of those three years and hasn’t had its tax-exempt status revoked previously, you can follow a process similar to the streamlined retroactive reinstatement, including the 15-month rule, but you’ll have to take these few additional steps as well:
- Submit a “reasonable cause statement” for at least one of the past due returns. A reasonable cause statement is essentially an explanation as to why the failure to file happened, how you figured out it happened, and what you’ve done or are going to do to prevent it from happening in the future.
- File a statement confirming that all the past due returns have been filed
- Actually file all past due returns (990 or 990-PF)
Any Organization with No Previous Revocations Filing After 15 months of Revocation.
No matter what size your organization is, if it’s been longer than 15 months there is more of a burden. You’ll have to do everything that larger organizations need to do, which is discussed under the second bullet above, except that the reasonable cause statement must address each of the three years rather than just one. The IRS will still waive non-filing penalties in this situation if your reinstatement application is approved.
Organizations not Eligible for Retroactive Reinstatement.
If your organization isn’t eligible to apply for retroactive reinstatement, most likely because it’s happened before, you may apply for reinstatement that is effective as of the date of the new exemption application, which is better than nothing. It’s important to note, though, that for the period from the original revocation date to the effective date of the new application the organization was not tax-exempt and may have tax liabilities and corporate tax filing requirements for that period. Additionally, contributions made to the organization during that period would not be tax deductible to the donor. The IRS will not waive penalties under this process.
It may take some time, but hopefully you’re successful at getting your tax-exempt status restored. Once you’ve gone through all that trouble you’ll want to make sure you stay in compliance. Here are some things that can help:
- Keep Your Address Up to Date with the IRS. This one is a must. The IRS isn’t normally going to send you an e-mail or call, particularly without sending a written notice first, so keeping your address current with the IRS will help ensure you’re getting all IRS communications. Many small nonprofits may use a board member or officer’s home address as their business address if there isn’t a physical business address. As we know, board members and officers can and do change, though, and thinking about changing an address may be an afterthought when that happens. It’s better to have a PO box set up and to make sure that when there are changes in the board and/or management that access to that PO box is part of the transition if it needs to be. When your address does change, it’s best to notify the IRS before your next 990 filing, in which case you should file the IRS change of address form 8822-B. If you don’t get to it before a filing, though, you can include the new address on your next filing and check the box indicating there is an address change and the IRS should pick it up.
- Maintain a Relationship with a CPA. Most CPAs are going to have a calendar for their clients, and will reach out to them with reminders as filings are coming due – and they won’t (or shouldn’t) only do that with snail mail so any physical address change isn’t likely to be a problem. You will want to make sure they’re aware of any address or phone number changes, though, just in case. If you have a good CPA they’ll figure out a way to get you the reminder you need.
- Establish Written Procedures for Compliance. Documenting policies and procedures and making sure that all officers, board members and key employees are aware of them and have a copy is a best practice for any organization, not just nonprofits. Of course, they’ll need to be kept up to date (the frequency of the review and update should be spelled out in the policy) in order to be effective, but establishing good policies and procedures can help mitigate the risks of board member/officer/employee turnover, and can also help the newbies get up to speed more quickly when there is turnover. You can also neatly combine articles of incorporation, bylaws, minutes and any other important documents into one handy binder.
- Create a Documented Transition Plan for Board and Officer Changes. Nonprofit organizations can change leadership relatively frequently, particularly Board positions. Make sure that you have all the key transition items addressed in a document so new officers or board members know what they need to be aware of and have what they need. You can put this in your new policies and procedures manual!
- Perform an Annual Compliance Review. An annual compliance review can be performed by the board or a committee of the board to help ensure compliance with pertinent laws and regulations. If you have all the information sources outlined in your new policies and procedures manual, something like this should take a matter of minutes to perform. At a minimum, the review should consist of:
- Confirming tax-exempt status through the IRS website (https://apps.irs.goIsv/app/eos/) and, if applicable, your state
- Confirming there is a public record of the organization’s prior year 990 series tax filing through a source of public information, such as Guidestar. This shouldn’t be a replacement for reviewing your 990 filing with your accountant and getting a filing confirmation from them, but it acts as a good back check just in case.
- Confirming the entity established to do business is in good standing with the state and that any required state filings, registration renewals, etc. have been made. Many states will require filing annual reports and annual registration renewals, which are very important to keep current.
- Ensuring that, when required, your registered agent’s information (name, address, etc.) is accurate. Frequently a single-state organization will have a board member or officer named as its registered agent, so you should make sure this is accurate to ensure you’re getting any documents that would be sent her by your state.
- If applicable, confirming that the organization’s charitable solicitation registration is current. As of the date of this article, 41 of the 50 states require some sort of registration, so if you solicit or are planning to solicit charitable contributions, you’ll need to make sure these registrations are up to date.
- Confirming that your address of record is accurate everywhere – IRS, state taxation department, state corporation commission, state charitable solicitation regulator, etc.
For more information about the IRS tax-exemption revocation process and some related topics, check out some of these links:
- IRS Tax-Exempt Organization Search tool – find out if your tax-exempt status has been revoked
- IRS help website discussing the reinstatement process
- Understanding your IRS revocation letter
- How to change your address with the IRS
- Text of Revenue Procedure 2014-11