by Qiva Dinuri, J.D., LL.M. Taxation
Tax exemption is a valuable privilege granted to certain organizations, such as nonprofit entities, charities, and religious institutions. Maintaining this status, however, requires compliance with specific rules and regulations set forth by the IRS and tax authorities—meaning, it is possible to lose your organization’s tax-exempt status. Here are some step-by-step directions you can take to reinstate a tax-exemption status that was revoked, avoid filing pitfalls, and eliminate future IRS notices.
Assess lost tax exemption status
The first step is to identify whether your organization’s tax exemption status has been revoked and check the IRS automatic revocation list on the IRS website. The IRS publishes the list of organizations whose tax-exempt status was automatically revoked because the organization failed to file required annual returns (Forms 990, 990-EZ, 990-N, or 990-PF) for three consecutive years. You could also risk your tax-exempt status if you generate excessive income from a source that is not completely related to the organization’s reasons for tax-exemption.
Be sure to carefully review the communication from the IRS regarding the revocation to determine the specific cause and how to resolve appropriately.
Gather required documentation
Be sure to collect all the necessary documentation to support your request for reinstatement. Some examples include financial statements, prior tax returns, board meeting minutes (if applicable), and any other record required by tax authorities. Just as it’s important to communicate any issues with the IRS by way of a letter or request, having supporting documentation will help immensely when identifying a proper solution for your organization.
Be mindful of IRS limitations
Every organization is different and there are different procedures that you may be able to use to have your tax-exempt status reinstated. Revenue Procedure 2014-11 identifies four categories of organizations and the specific procedures that each may use to apply for reinstatement. There are two main types of retroactive reinstatement processes, which are the Streamlined Retroactive Reinstatement Process and the Retroactive Reinstatement Process.
First, the Streamlined Retroactive Reinstatement process is only available for small organizations that were eligible to file Form 990-EZ or 990-N for each of the three years that it failed to file. Also, the organization may not have previously had its tax-exempt status automatically revoked. This process allows eligible organizations to have their tax exemption status restored from the date it was initially revoked, effectively voiding the exemption period. To take advantage of this process, the organization must apply for retroactive reinstatement and pay the appropriate user fee within 15 months of the Notice date or the date the organization appeared on the Revocation List.
The Retroactive Reinstatement Process applies to larger organizations (those that usually file Form 990 or Form 990-PF) that are filing for Retroactive Reinstatement. The organization must first determine if they are filing within 15 months of the Notice date or more than 15 Months after the Notice date. If the organization is submitting the application for retroactive reinstatement within 15 months after the Notice date, the organization must include a Reasonable Cause Statement establishing reasonable cause for its failure to file a required annual return for at least one of the three consecutive years it failed to file. The organization will also need to submit all outstanding annual returns for the three consecutive years that it failed to file them.
If the organization is submitting the application for retroactive reinstatement after 15 months of the Notice date or the date the organization appeared on the Revocation List, then the procedure is largely the same, but the Reasonable Cause Statement must establish reasonable cause for its failure to file a required annual return for all three consecutive years it failed to file.
Lastly, for organizations that are not able to meet the reasonable cause standard, the organization may choose to apply for reinstatement of its tax-exempt status effective from the post-mark date of their application. This means, however, that the organization will not be considered tax-exempt between the Revocation Date and the Post-Mark date. Thus, the organization could have taxable entity return filing requirements, tax liabilities, and related penalties and interest for that period that it was not considered a tax-exempt entity.
File for reinstatement
To reclaim your tax exemption status, in addition to following the steps above, you will need to file the appropriate tax-exempt application form and pay the appropriate user fee. Carefully review the instructions provided with the forms to ensure all of the information has been completed accurately. Once you have completed the appropriate form, make sure you keep a record of the submission date. It’s important to also follow up with the IRS to confirm receipt of the application and inquire about the estimated processing time.
Consult a professional
Reinstating tax-exempt status requires thorough attention to detail, preparation, documentation, and compliance with the established IRS procedure. Keeping the above strategies in mind will help your organization stay on track and maintain tax-exempt status and avoid future revocations. Consulting with a tax professional can help ensure that you address all relevant factors and increase your chances of a successful outcome.
For more information on how to reinstate tax exemption status, please contact us.
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We highly recommend you confer with your Miller Kaplan advisor to understand your specific situation and how this may impact you.
