The IRS automatically revokes 501(c)(3) tax-exempt status from nonprofit organizations that don’t file tax returns for three years. While revocation is automatic, reinstatement is not. The IRS requires a fair amount of time and effort to bring an organization back into compliance. Like any challenging puzzle, tax-exempt reinstatement involves dedication, time, and a collection of pieces.
Step One: Collect the Pieces
Have you ever tried to put together a puzzle only to realize some of the pieces were missing? It is essential to collect all the items necessary for reinstatement before putting them together. An overlooked requirement may cause delays, additional fees, or a reinstatement rejection.
When it comes to 501(c)(3) tax-exempt reinstatement, every nonprofit’s situation is a little different. The collection of pieces depends on the type of organization, the state of incorporation, and how long ago the IRS revoked its status.
Here are the typical pieces most organizations must collect. To determine precisely what information your organization needs for reinstatement, please contact the BryteBridge reinstatement specialists.
990 Tax Returns
The IRS requires all past due Form 990 tax returns going back to the year of formation or 2007 (the first year the IRS required tax returns for nonprofit organizations). There are multiple types of Form 990 depending on the organization’s revenue and the specific classification assigned to the organization (for example, Private Foundation or Public Charity). To ensure accurate filing, collect a statement of activities or profit and loss statement showing all financial transactions for every missed year. These statements will give a tax professional the information necessary to prepare past due tax returns.
Profit and loss statements are vital components of filing accurate, reconcilable data with the IRS. These are among the essential pieces of the reinstatement puzzle. The IRS requires documentation and accountability for all years, including those with no funding. BryteBridge has customized retroactive bookkeeping services to assist your organization in compiling financial data necessary for reinstatement applications.
State Reports and Tax Returns
When an organization fails to file federal 990 tax returns, the chances are high that state filings are also past due. Ensuring the nonprofit operates within the state compliance requirements is part of the 501(c)(3) tax-exempt reinstatement process.
Each state has a different set of filing requirements for nonprofits. Most states require an annual report and charity registration renewal. Some states also require yearly tax returns. What your organization needs largely depends on the state of operation. One of the first steps in the reinstatement process is collecting all the pieces by determining what filings are necessary at both the state and federal levels.
Reinstating a revoked tax-exempt status requires filing a new Form 1023 501(c)(3) application with the IRS. Which type of Form 1023 depends on the kind of organization, what services it provides, and the amount of time passed since it received notice of revocation.
Organizations that are not churches, schools, or hospitals and received revocation notice less than 15 months ago can fill out Form 1023-EZ. All other organizations must fill out the complete Form 1023. Both versions have specific questions about reinstatement. Depending on the answers and the time that’s passed since revocation, the organization may apply for reinstatement back to the original incorporation date or the date the new application was submitted.
The choice about reinstatement date depends on multiple factors and could bring additional fines and filing requirements. It’s essential to consult the nonprofit professionals at BryteBrigde to ensure the best option for the organization.
Reasonable Cause Statement
When a nonprofit organization files the complete Form 1023 for reinstatement, it must include a letter explaining why the organization failed to file tax returns and how future compliance is assured. The IRS wants to ensure the organization will not fall out of compliance and jeopardize its tax-exempt status again in the future.
Filing and Penalty Fees
The final piece of the reinstatement puzzle is all about fees. The IRS charges an application fee for Form 1023 and, in some cases, filing fees for past due 990s. Additionally, the IRS charges $20 per day for past-due 990 tax returns up to $10,000 per return. These fees add up quickly and do not include penalties assessed by the state for missed filings. For example, California sets a minimum of $800 per tax return for any year the organization did not have tax-exempt status.
While past due penalty fees quickly add up and can seem insurmountable, the IRS may remove the fees for late 990 returns. Whether these fees are waved is at the discretion of the IRS, but ensuring all steps are taken to prevent future compliance issues goes a long way when requesting eliminating the fees.
Step Two: Put the Pieces Together
After collecting all the pieces, it’s time to put them together.
Reinstatement requires submitting many documents to the IRS and various state agencies. Some forms, like 1023 and the three most recent 990-N tax returns if the organization had revenue less than $50,000, can be submitted electronically. Others must be physically sent through the mail. Similarly, state forms all have different processes.
The time it takes to receive a response varies greatly. Some state agencies that accept documentation online may update status instantaneously. The IRS, however, may take months to review application materials. Further, while the IRS accepts documentation online, they only respond through the US Postal Service. Just as the organization waited for the original 501(c)(3) Letter of Determination, it must also wait for a reinstatement notice.
Like any complicated puzzle, putting the pieces together takes time. Patience is necessary when waiting for IRS tax-exempt reinstatement.
Step Three: Prevent Future Revocation
Reinstatement is a costly process for organizations, requiring significant time and resources. The Board of Directors must establish procedures to ensure future compliance with federal and state requirements. While these details are part of the Reasonable Cause Statement, putting them into action is essential.
Any organization’s 501(c)(3) tax-exempt status can be revoked, even nonprofits that were previously reinstated. Following the steps outlined above, a second reinstatement is possible. However, the IRS will likely review submitted documents with additional scrutiny to ensure the application and corresponding documents contain zero discrepancies.
Tax-exempt reinstatement is a time-consuming and costly process, though it is not impossible. It requires gathering and assembling all of the required puzzle pieces. Once everything is assembled, the organization regains its 501(c)(3) tax-exempt status.
If your organization’s 501(c)(3) tax-exempt status was revoked, the BryteBridge nonprofit specialists are ready to put the pieces back together. Contact BryteBridge to begin your reinstatement process today.