Recognition of your organization’s tax-exempt status is one of the most important steps in the formation of an exempt organization. But, it is not the last step. Many organizations obtain their tax-exempt status and then lose it for one reason or another. The most common reason that exempt organizations lose their status is through automatic revocation for non-filing or untimely filing of Form 990s. From the middle of 2010 to the end of 2017, the IRS revoked the tax-exempt recognition of more than 760,000 nonprofit organizations for failing to file Form 990 returns. However, automatic revocation is easily preventable and even after the exempt status is lost there are relatively simple ways to have it reinstated—at least initially.
What is automatic revocation?
Automatic revocation is the revocation of an organization’s tax-exempt status for repeated non-filing or untimely filing of its Form 990 under Section 6033(j) of the Internal Revenue Code. Form 990 is the basic annual (tax) information return for tax exempt entities. If an exempt organization fails to timely file Form 990 for three consecutive years, its exempt status is automatically revoked by the Internal Revenue Service. In this case, “timely” means the Form 990 filing must be received by the IRS by the deadline; even if it was transmitted and/or mailed on time, the IRS will commonly treat the return as late if it is not received by the deadline (even though the IRS supposed to treat the postmark date as the filing date). At that point, the consequences accrue, including auto-revocation and late-filing or non-filing penalties.
When your organization is automatically revoked, the IRS sends a letter to the organization’s last known address on file. The letter states that the organization’s exempt status has been automatically revoked because it has not filed a required annual return for three consecutive years. You can also check the records for your organization through the Tax Exempt Organization Search.
It is interesting to note that the automatic revocation process was implemented as of 2011 following the passage of the Pension Protection Act of 2006 and a period of delayed implementation to allow exempt organizations the time to ensure that their Form 990s were filed. Then, once it was implemented, more than 450,000 exempt organizations were revoked that year for non-filing of their Form 990s.
Effects of Automatic Revocation
An exempt organization that is automatically revoked is no longer considered to be an exempt organization by the IRS. Therefore, it is no longer exempt from federal income tax, which may also affect various state tax exemptions, including income, sales, and property taxes. Consequently, the organization is required to file appropriate corporate or partnership tax returns based on the entity status and structure of the organization. As most exempt organizations are registered as a nonprofit, not-for-profit, or other similar corporation, they will likely be required to file Form 1120, U.S. Corporation Income Tax Return.
Additionally, an automatically revoked organization is not eligible to receive tax-deductible contributions and will be removed from the list of eligible tax-exempt organizations. However, this does not affect the deductible of donations given before the organization appears on the IRS’s revoked list, even for the years that it did not file the Form 990. It also does not affect the deductibility of donations given during the revocation period if the organization seeks and successfully obtains retroactive reinstatement.
Prevention of Automatic Revocation
Preventing automatic revocation is simple if your organization just files the appropriate Form 990 on time every year. However, many organizations struggle to file the Form 990 on time for any number of reasons, many of which could easily be prevented.
Here are some protocols to prevent this from happening. First, once you obtain your tax-exempt status from the IRS, your organization should assign responsibilities to the various people on your board of directors as well as the high-level staff. One such responsibility should be to ensure that the Form 990 is filed in a timely manner. If there is a specific person who knows that it is their job to file the Form 990, then it is more likely to get filed than if no one is made specifically responsible.
Second, assigning one person to be responsible for the Form 990 filing can be complicated by board turnover. Therefore, a position not subject to such turnover in addition to a board position should be assigned to ensuring that the Form 990 is completed. This prevents the issue of turnover causing the Form 990 to be forgotten and not filed.
Lastly, there should be general board oversight. One way to accomplish this is to add the Form 990 filing as a topic to the board’s meeting agenda at the end of each fiscal year, but there could be other ways based on how your organization operates.
One additional note on filing the Form 990s is that some organizations focus on the three-year time period and specifically intend to only file the Form 990 once every three years. While this may save some time on the administrative side of operating an exempt organization, it is not proper nor is it advised. If your organization is only filing the Form 990 once every three years and then something happens that third year that makes the Form 990 late or it is forgotten (which is more likely when only filing every three years), then your exempt status will be revoked automatically. In addition, there are penalties for non-filing that can reach into the tens of thousands of dollars, far exceeding any costs associated with preparing the Form 990. It is far better to file it every year so that if the Form 990 happens to be forgotten or is not filed timely, the organization still has that three-year buffer as a safety net, rather than as the main option.
Reinstatement after Automatic Revocation
If your exempt organization has been automatically revoked, then there are four ways to get reinstated; and if you act fast, a few of the options are relatively simple and quick. These four options include: (1) Streamlined Retroactive Reinstatement, (2) Retroactive Reinstatement Within 15 Months of Revocation, (3) Retroactive Reinstatement (more than 15 months after of revocation), and (4) Post-Mark Date Reinstatement.
The difference between the first two options is the size of the organization based on which Form 990 filing is required and whether this is the first revocation. Smaller organizations, i.e. Form 990-N or Form 990-EZ filers, that have only been revoked once can use the streamlined process, but the Form 990 filers and organizations that have been revoked before are required to use the second option. The third option is required for reinstatement applications being filed more than 15 months since the revocation date and the last option is for organizations that are not seeking reinstatement retroactive to the date of revocation, but just forward in time from the date of application for reinstatement. The fourth option is for filers that are not seeking retroactive reinstatement, but only recognition from the post mark date of the filing.
The main process in filing for reinstatement is to use one of the appropriate applications that is otherwise used for recognition of the tax-exempt status in the first place, i.e. Form 1023-EZ, Form 1023, or Form 1024. For options (2) and (3), the reinstatement process also includes a Reasonable Cause Statement for at least one of the years of non-filing or all of the years depending on which option is required. Lastly, if the required Form 990s not filed were either Form 990-EZs or Form 990s, then they are required to be filed under the first three options. If they were Form 990-Ns, then they are not required under the Streamlined Retroactive Reinstatement Process, but are required under options (2) and (3).
For the Post-Mark Date Reinstatement, the only thing that is required is the filing of the appropriate application and none of the other filings are required—notably including the Reasonable Cause Statement. However, this does not provide the organization with protection against the potential fees and penalties levied for non-filing, relieve the requirements to file the proper tax returns for the years the organization was technically not exempt, or provide retroactive exemption to donations made to the organization during the revoked period.
The reinstatement option used by an exempt organization is ultimately a business decision, but the organization should consider the organization’s need for retroactive reinstatement, whether any donors would be harmed by not obtaining retroactive reinstatement, and time/money necessary to complete each reinstatement process.
Being revoked not only harms the donors, but also hinders the organization’s ability to continue to further its mission. At the very least, being revoked causes the organization to spend time and/or money to correct the issue that could have otherwise been spent on furthering its mission. The best option is to properly file the Form 990s on time each year. However, if your organization has been revoked, then you should contact an attorney familiar with the reinstatement process that can assist in getting your exempt status back as quickly and easily as possible.