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Nonprofit Education

Reinstatement Series 2: My Nonprofit Lost Its 501(c)(3) Status. Now What?

Let me introduce you to We Help People, Inc. While the organization is fictitious, it is based on past clients’ experience when the IRS revoked their 501(c)(3) tax-exempt status. This story may even be similar to your own.

We Help People, Inc. was formed and was granted 501(c)(3) tax-exempt status from the IRS in 2018. The organization raises enough money to provide monthly service events in the local community. There are no paid employees, and the Board of Directors manages all operations.

In October of 2021, We Help People, Inc. received a letter from the IRS. The organization’s 501(c)(3) tax-exempt status was revoked for failing to file 990 tax returns in 2018, 2019, and 2020.

The Board of Directors was shocked! They had many questions about revocation and what it meant for We Help People, Inc. After learning about tax-exempt revocation , the Board of Directors hired the nonprofit specialists at BryteBrige to help walk them through the process to reinstate 501(c)(3) tax-exempt status for We Help People, Inc.

Here is what BryteBridge recommended to We Help People, Inc.

Step One: Don’t Panic!

The Board of Directors for We Help People, Inc. was determined to maintain their nonprofit organization, so they listened to their specialist’s advice and recommendations. They understood the process would take time and cost the organization money, but operating within compliance was the ethical responsibility of the Board.

Since We Help People, Inc. had tax-exempt status, the Board of Directors admitted they thought that meant no tax returns were required. Their specialist informed this is unfortunately common among new nonprofit organizations, and it’s the number one reason the IRS revokes 501(c)(3) status.

The BryteBridge specialist assured We Help People, Inc. that reinstatement is possible. The process takes time and effort, but their organization will continue to serve the community.

Empowered with information, the Board of Directors was ready to act!

Step Two: Gather Information

Guided by their BryteBridge specialist, We Help People, Inc. gathered profit and loss statements from the three years they didn’t file tax returns. The Board of Directors needed these statements to retroactively file 990 tax returns for every year the organization failed to file.

The IRS began requiring annual 990 tax returns for nonprofit organizations in 2007. To reinstate tax-exempt status, a nonprofit must file every missed 990 going back to 2007 or the year the organization formed. Additionally, the IRS charges a filing fee and a penalty fee of $20 per day (up to $10,000 per return) the 990 is late. These fees add up quickly!

Due to past-due 990s, We Help People, Inc. estimated their late fees would cost nearly $25,000! That amount of money would be impossible to pay with the organization’s current fundraising. Thankfully, their specialist explained the IRS could review and potentially wave these fees during the reinstatement process.

We Help People, Inc. is a small organization and didn’t have very good financial records. Putting together the statements was a painstaking and time-consuming process. While going through old bank statements, the Board of Directors discovered the importance of a proper bookkeeping system to prevent this sort of hassle in the future.

With all of the information gathered, We Help People, Inc. was ready to act.

Step Three: Understand Your Options

In addition to filing past-due 990s, reinstatement requires IRS application 1023. The best option for all revoked nonprofit organizations is to apply for reinstatement within 15 months of receiving the revocation letter. While there is no deadline for reinstatement, filing within 15 months allows for the much simpler 1023-EZ application for those that qualify. The filing fee is also much less.

After 15 months, the reinstatement application requires a much longer complete 1023 application. The fee also more than doubles. Regardless of when the organization was revoked, certain types of organizations (churches, schools, and hospitals) must always file the longer application.

Since it’s only been a few months since We Help People, Inc. received notice from the IRS, they are well within the 15-month limit. Their BryteBridge specialist explained the application process and helped process everything for the organization. While there is a chance the IRS will wave the 990 penalty fees, they do not wave the reinstatement application fees.

While everything was submitted to the IRS, the reinstatement process was not finished.

Step Four: Wait for Determination From the IRS

Since the IRS uses the same application for reinstatement as it does for granting new 501(c)(3) tax-exempt status, the review process can take a considerable amount of time. Unfortunately, the only option is to wait for the IRS to respond.

While waiting, the Board of Directors for We Help People, Inc. worked with their BryteBridge specialist to put new procedures in place to prevent future compliance issues. They signed up to have BryteBridge prepare future 990 tax returns and state annual reports.

The Board of Directors was glad to find BryteBridge and was grateful for the help and knowledge shared throughout the reinstatement process.

After a few months, We Help People, Inc. received notice from the IRS that its 501(c)(3) tax-exempt status was reinstated to its original date of formation. The IRS also agreed to wave the 990 late fees under the understanding that future requests would not be granted. It was as if the revocation completely went away!

Wrap Up

We Help People, Inc. is a fictitious nonprofit origination, but its story is far too common. The IRS revokes tax-exempt status from thousands of nonprofit organizations every year. Revocation is avoidable, but reinstatement is also possible if your organization finds itself in that place. With some time, work, and a bit of money, your nonprofit can return to 501(c)(3) tax-exempt status and continue serving the community.