There are four ways to approach 501(c)(3) reinstatement. While it may appear there are multiple options, the choice is dictated mainly by certain factors. Namely, how long ago the organization’s tax-exempt status was revoked, the type of organization, and the organization’s revenue.
Let’s explore the four types of 501(c)(3) reinstatement and how and when to use each. Want dedicated help making the right choice for your nonprofit organization? Contact the reinstatement experts at BryteBridge today.
Streamlined Retroactive 501(c)(3) Reinstatement
Before getting into the specifics of this option, it’s crucial to understand how the IRS defines retroactive. This term is specific to the first three options and can have significant tax implications for reinstating nonprofit organizations.
Retroactive means that when the IRS grants 501(c)(3) tax-exempt reinstatement, it returns to the original incorporation date. This behavior mirrors how the IRS issues the original tax-exempt status in the Letter of Determination.
Essentially, when the IRS grants retroactive reinstatement, the revocation period is erased. Granted, the revocation date will forever be tied to the organization’s record at the IRS and is visible to anyone who looks the organization up in the public database.
Requirements
To qualify for Streamlined Retroactive Reinstatement, an organization must be eligible to file 990-N or 990-EZ tax returns for the three missing years. This means the organization received revenue of less than $50,000 a year (990-N) or $200,000 a year (990-EZ).
The streamlined 1023-EZ application is reserved for organizations with less than $50,000 in annual revenue. Organizations with one or more years of gross income above $50,000 must file the complete 1023 application.
The other primary requirement for Streamlined Retroactive Reinstatement is that revocation must be no longer than 15-months old. Filing outside the 15-month window limits the options available to the organization. Essentially, the IRS provides organizations that act quickly with more paths to reinstatement.
Benefits
The benefit of Streamlined Retroactive Reinstatement is that organizations that qualify for the 990-N can file the much simpler 1023-EZ application for reinstatement. This application comes at a much lower fee than the other options and is often processed quicker than the complete 1023 or 1024/1024-A applications.
One point of confusion comes with the IRS’ EZ moniker. While Streamlined Retroactive Reinstatement is available to organizations that must file 990-EZ tax returns (revenue up to $200,000), the 1023-EZ application is unavailable to these organizations. To qualify for 1023-EZ, an organization must earn less than $50,000 per year and not operate as a school, hospital/medical facility, church, private foundation, or advocacy organization (requiring 1024 or 1024-A).
Additionally, as a policy, the IRS may forgive penalty fees for missed 990 tax returns when following the Streamlined Process. This benefit alone may save the organization hundreds, if not thousands, of dollars in reinstatement fees.
Summary
- Revenue Requirements: Less than $200,000 annually
- Application: 1023-EZ (for organizations that quality), 1023, 1024, or 1024-A
- Fees: $275 (for 1023-EZ) – $600 (1023, 1024, and 1024-A) plus 990 penalty fees (if not forgiven)
- Deadline: 15 months from revocation
Retroactive Reinstatement Process (within 15 months)
Retroactive Reinstatement (within 15 months) is similar to the Streamlined Retroactive Reinstatement. However, there are a few key differences to understand.
Requirements
The critical requirement for Retroactive Reinstatement is annual revenue greater than $200,000. Organizations required to file complete form 990 tax returns or organizations classified as a private foundation (filing 990-PF) must follow this process.
In addition to filing past-due tax returns and filling out the complete 1023 or 1024 applications, organizations filing for Retroactive Reinstamtnet must include a Reasonable Cause Statement explaining how an organization failed to file tax returns for at least one of the missed years. The IRS requires these statements to include the following:
- A detailed description of why the organization failed to file tax returns
- How the organization discovered the compliance failure
- The steps the organization has taken or will take to avoid future compliance failures
The IRS wants to ensure that should revocation of 501(c)(3) tax-exempt status be granted, the organization will not again fail to file tax returns and find itself revoked in the future.
Benefits
Like the Streamlined Process, organizations that file for reinstatement within 15-months will likely have late fees waived.
Summary
- Revenue Requirements: Greater than $200,000 annually
- Application: 1023, 1024, or 1024-A plus a Reasonable Cause Statement
- Fees: $600 plus 990 penalty fees (if not forgiven)
- Deadline: 15 months from revocation
Retroactive Reinstatement (after 15 months)
The options become very limited when an organization waits longer than 15 months after revocation to file for reinstatement.
Requirements
Retroactive Reinstatement (after 15 months) is available to all organizations, regardless of income level. All organizations must file either the complete form 1023 for charitable organizations or form 1024/1024-A for advocacy-based organizations.
A Reasonable Cause Statement is also required for all organizations filing for reinstatement after 15 months. However, after 15 months, the IRS requires the Reasonable Cause Statement explains how the organization failed to file all missed 990 tax returns.
According to the IRS, if all requirements are met, they “will not impose the Section 6652(c) penalty for failure to file annual returns for the three consecutive taxable years that caused the organization to be revoked.” Granted, this is the same language used for all previous reinstatement options described. However, when filing for reinstatement after 15 months, the organization may have more than three past-due 990s. Based on the language used by the IRS, while they may waive late fees for the original three years, it’s less clear for subsequent years and depends on the Reasonable Cause Statement and the agent reviewing the case.
Benefits
Unlike the first two reinstatement options, there is no deadline for filing Retroactive Reinstatement (after 15 months). An organization revoked five years ago can still file. However, all late 990 tax returns must be filed, and the Reasonable Cause Statement must include information for all missed years.
Summary
- Revenue Requirements: Any
- Application: 1023, 1024, or 1024-A plus a Reasonable Cause Statement
- Fees: $600 plus 990 penalty fees (if not forgiven)
- Deadline: None
Post-Mark Date Reinstatement
The final option for reinstatement of tax-exempt status is Post-Mark Date Reinstatement. Unlike the first three options, there are very few requirements as this option is available to all organizations. However, the key to this option is when reinstatement becomes effective.
Whereas the retroactive options return tax-exempt status to the original date, Post-Mark Date Reinstatement issues reinstatement to the date the application is sent to the IRS. For example, suppose an organization’s tax-exempt status was revoked on May 15, 2020, and the organization files for Post-Mark Date Reinstatement on September 18, 2022. In that case, the IRS will issue tax-exempt reinstatement effective September 18, 2022, and not the original date of incorporation.
The critical distinction to understand here is that when electing for Post-Mark Date Reinstatement, there may be a gap in which the organization was not a nonprofit organization. This gap in exempt status comes with a few potential issues for the organization:
- The nonprofit may be required to file and pay federal 1120 corporate income taxes and state taxes for non-exempt periods.
- Granting Foundations may not fund organizations with a gap in tax-exempt status due to a lack of compliance procedures.
- Any donations given to the organization during a non-exempt period are not deductible for the donor.
Requirements
Retroactive Reinstatement (after 15 months) is available to all organizations, regardless of income level. All organizations must file either the complete form 1023 for charitable organizations or form 1024/1024-A for advocacy-based organizations.
A Reasonable Cause Statement is also required for all organizations filing for reinstatement after 15 months. However, after 15 months, the IRS requires the Reasonable Cause Statement explains how the organization failed to file all missed 990 tax returns.
According to the IRS, if all requirements are met, they “will not impose the Section 6652(c) penalty for failure to file annual returns for the three consecutive taxable years that caused the organization to be revoked.” Granted, this is the same language used for all previous reinstatement options described. However, when filing for reinstatement after 15 months, the organization may have more than three past-due 990s. Based on the language used by the IRS, while they may waive late fees for the original three years, it’s less clear for subsequent years and depends on the Reasonable Cause Statement and the agent reviewing the case.
Benefits
While the requirements for Post-Mark Date Reinstatement are minimal, there are also limited benefits. The lower application fee (assuming 1023-EZ eligibility) may seem appealing; however, the risk and potential expense of corporate income taxes could far outweigh the hassle of filing past-due 990 tax returns and writing a Reasonable Cause Statement.
Summary
- Revenue Requirements: Any
- Application: 1023-EZ, 1023, 1024, or 1024-A
- Fees: $275 (for 1023-EZ) – $600 (1023, 1024, and 1024-A) plus past-due taxes
- Deadline: None
Wrap Up
While there are four options for tax-exempt reinstatement, the options come down to when an organization applies for reinstatement — before 15-months since revocation or after. The process is usually smoother when filed before the 15-month deadline and requires less work to return to compliance.
The reinstatement experts at BryteBridge are ready to assist your organization in determining the best path to tax-exempt status. Contact the Nonprofit Specialists today and get your organization back on track. Be sure to check out our awesome reviews!
