“Your organization’s tax-exempt status was automatically revoked.” When it comes to the IRS, no news is good news, and bad news can be disastrous. What if a nonprofit fails repeatedly to file IRS Form 990s as required?
Bad news: the IRS will automatically revoke a nonprofit’s tax-exempt status after it fails to file Form 990 for three consecutive years. Good news: the IRS has established a process to allow nonprofits to request reinstatement of their tax-exempt status. More good news: in most cases, the reinstatement may also apply retroactively to the effective date of revocation – that is, as if revocation never happened.
Except for churches, other houses of worship, and their closely related organizations, all tax-exempt organizations must annually file either Form 990-N, 990-EZ, 990, or 990-PF. The specific type of the Form 990 series depends on (1) the entity’s tax classification and (2) amount of revenues for the applicable fiscal year. An IRS notice of tax-exempt revocation, via “Notice CP-120-A,” will issue upon a nonprofit’s repeated failure to file its required IRS Form 990 (as may be applicable) for three consecutive years. The tax-exempt reinstatement process is set forth in the IRS’ Revenue Procedure 2014-11 (“Rev. Proc. 2014-11”), with specific protocols for seeking reinstatement of tax-exempt status.[1] The following sections address IRS Form 990 filing requirements generally, available methods for tax-exempt reinstatement following revocation, and related pitfalls and pointers.
Annual 990 Information Return Filing Requirements
Most tax-exempt organizations must file annual information returns disclosing financial and program-related information from their previous fiscal year to the IRS. See Internal Revenue Code § 6033. This annual information return is due four and a half months after the end of an organizations’ fiscal year (e.g., May 15, for a calendar fiscal year), even if the organization has not yet received its IRS Determination Letter confirming their tax-exempt status. An automatic extension is available via IRS Form 8868, but only if requested by the initial filing deadline.
If required to file an annual information return, a tax-exempt organization may always choose to file the full Form 990 for the applicable fiscal year. However, if the organization’s gross receipts are “normally $50,000 or less,” as defined by the IRS, the nonprofit may be eligible to file the Form 990-N (previously known as the e-Postcard).[2] Organizations with gross receipts of less than $200,000 and total assets less than $500,000 may be eligible to file Form 990-EZ. Notwithstanding the above, § 501(c)(3) private foundations must file Form 990-PF.[3]
These tax returns are often handled through accountants, with some legal counsel as warranted (e.g., relatively complicated IRS Form 990s). Since many nonprofits rely heavily on volunteers to carry out their work, the IRS Form 990 series filing requirement can get overlooked or otherwise neglected – especially following organizational transitions or other leadership gaps.
Late-filed Forms 990-EZ, 990, or 990-PF may be subject to hefty financial penalties under § 6652(c) of the Code, though late-filing Form 990-N does not incur any such financial penalty. Failure to file any Form 990 Series return for three consecutive years, however, will result in automatic revocation of tax-exempt status under § 6033(j) of the Code. Automatic revocations are made effective as of the due date of the last Form 990 (“Revocation Date”), though the actual revocation may not be posted by mail or to the IRS website until several months later (“Revocation Posting Date”).
Generally speaking, all Forms 990 Series returns must be filed electronically. But as set forth below, the procedures for reinstatement of tax-exempt status still mandate filing outstanding annual information returns by mail. Notably, seeking to file Forms 990 electronically after an automatic revocation has taken effect will result in the IRS summarily rejecting the attempted submission on the basis of the revoked status.
Framework for Tax-Exempt Reinstatement
The process established in Rev. Proc. 2014-11 sets forth the various paths available to a nonprofit with automatically revoked tax-exempt status. Identifying the proper path depends largely on the following key factors:
1. Whether the organization is requesting reinstatement within 15 months of the Revocation Date or the Revocation Posting Date, whichever is later;
2. Whether the organization was eligible to file Form 990-N or 990-EZ for each of the years for which the organization did not file its annual returns;
3. Whether the organization had been previously automatically revoked; and
4. Whether the organization is seeking reinstatement retroactively or as of the date of its application.
The organization may then need to submit the following information as part of its request for reinstatement, depending on the applicable path:
1. Application for Recognition of Tax-Exempt Status (Form 1023-EZ, 1023, 1024, or 1024-A);
2. Statement demonstrating reasonable cause for failure to file its annual returns (“Reasonable Cause Statement”); and
3. Certification that all outstanding Forms 990-EZ or 990 have been filed.
Streamlined Retroactive Reinstatement - Within 15 Months
If applying for reinstatement within 15 months of its Revocation Date or Revocation Posting Date, whichever was later, a nonprofit may request streamlined retroactive reinstatement under Rev. Proc. 2014-11, Section 4:
1. the organization was eligible to file Form 990-EZ or 990-N for each of the three years it failed to file; and
2. the organization has not previously had its tax-exempt status automatically revoked.
The organization will also need to have submitted all outstanding Forms 990-EZ (if applicable, depending on revenues) for the three consecutive years that it failed to file them. The organization must clearly indicate the words “Retroactive Reinstatement” on these tax returns and submit them by mail to the IRS.
The organization must then submit the appropriate Application for Recognition of Tax-Exempt Status: Form 1023-EZ, 1023, 1024, or 1024-A, depending on its tax classification and anticipated revenues, along with the applicable user fee.[4] The application form should also indicate that it is seeking retroactive reinstatement under Rev. Proc. 2014-11, Section 4.
If the request for retroactive reinstatement under the streamlined process is approved, then the Service will deem that the organization had reasonable cause for its failures to file its annual information returns under § 6033(j) and will not apply any financial penalties for late filing under § 6652(c). Note further that if the organization has been eligible for Form 990-N filings, they need not be submitted for prior years – and no financial penalty should be applicable,
Upon IRS approval, the organization should subsequently receive another determination letter recognizing its tax-exempt status with an effective date of the Revocation Date. Thus, when read together with its original determination letter, the organization’s tax-exempt status should continue uninterrupted – and, if the organization is a Section 501(c)(3) entity (other than some other type of tax-exempt organization such as a social club or trade association) correspondingly allowing for continued eligibility for tax-deductible contributions at all relevant time periods. The IRS website will still reflect that the organization has been on the “Auto-Revocation” list, however, with relevant dates of revocation, revocation posting, and reinstatement of exempt status.
Tax-Exempt Retroactive Reinstatement - Within 15 Months
If applying for reinstatement within 15 months of its Revocation Date or Revocation Posting Date, whichever was later, and does not qualify for the streamlined process outlined above, a nonprofit may request retroactive reinstatement under Rev. Proc. 2014-11, Section 5.
The organization must include a Reasonable Cause Statement establishing reasonable cause for its failure to file a required Annual Return or notice for at least one of the three consecutive years it failed to file. What suffices as “reasonable cause”? According to Revenue Procedure 2014-11, Section 8, an organization establishes reasonable cause by showing that it “exercised ordinary business care and prudence in determining and attempting to comply with its reporting requirements.” In determining whether an organization establishes reasonable cause, the IRS will consider “all pertinent facts and circumstances.” Therefore, the nonprofit’s reasonable cause statement should include a detailed description of (1) the facts and circumstances contributing to the failure to file, (2) how the nonprofit discovered the failure, and (3) the means by which the nonprofit will avoid future failures.
The organization will also need to have submitted all outstanding Form 990-EZ or Form 990 returns for the three consecutive years that it failed to file them. The organization must clearly indicate the words “Retroactive Reinstatement” on these returns and submit them by mail to the IRS. The organization must also include a statement confirming that it has filed the annual returns.
The organization must then submit the appropriate Application for Recognition of Tax-Exempt Status: Form 1023, 1024, or 1024-A, depending on their tax classification and anticipated revenues, along with the applicable user fee. On the form, the organization should also indicate that it is seeking retroactive reinstatement under Rev. Proc. 2014-11, Section 5. Under this process, organizations may not file Form 1023-EZ.
Similar to the process outlined above, if the request for retroactive reinstatement is approved, then the Service will not apply the financial penalties for Form 990 late filings under § 6652(c). The organization should also receive another determination letter recognizing its tax-exempt status with an effective date of the Revocation Date. Again, when read together with its original determination letter, the organization’s tax-exempt status and eligibility to receive tax-deductible deductions (if a Section 501(c)(3) entity) should continue unbroken. Likewise, the IRS website will still reflect that the organization was on the “Auto-Revocation” list, with related dates of revocation, revocation posting, and reinstatement of exempt status.
Tax-Exempt Retroactive Reinstatement - After 15 Months
If applying for reinstatement after 15 months of its Revocation Date or Revocation Posting Date, whichever was later, a nonprofit may request retroactive reinstatement under Rev. Proc. 2014-11, Section 6.
This process is largely the same as what is required under Rev. Proc. 2014-11, Section 5 (Retroactive Reinstatement (within 15 months)), set forth above. However, in this case, the organization must include a Reasonable Cause Statement establishing reasonable cause for its failure to file a required Annual Return or notice for all three consecutive years it failed to file. The specific requirements for this statement are set forth in Rev. Proc. 2014-11, Section 8.
Tax-Exempt Reinstatement from Post-Mark Date
An organization may also seek reinstatement of its tax-exempt status from the date of its reinstatement application postmark date, rather than seeking retroactive reinstatement. This process is set forth under Rev. Proc. 2014-11, Section 7. Under this process, the organization must submit the appropriate Application for Recognition of Tax-Exempt Status: Form 1023-EZ, 1023, 1024, or 1024-A, depending on its tax classification and anticipated revenues, along with the applicable user fee. On the form, the organization should also indicate that it is seeking reinstatement under Rev. Proc. 2014-11, Section 7.
If approved, the organization should receive another determination letter recognizing its tax-exempt status with an effective date of its reinstatement application date – not its Revocation Date. Thus, there may be a gap in time when the organization’s tax-exempt status was not recognized by the Service. And again, the IRS website will reflect revocation and reinstatement of information.
Subsequent Automatic Revocations
If an organization’s tax-exempt status is again automatically revoked following a reinstatement, then it may still seek reinstatement (possibly even retroactively) under the procedures outlined above. However, it may not request retroactive reinstatement under the streamlined approach set forth in Rev. Proc. 2014-11, Section 4.
IRS Processing Issues
Although the reinstatement protocols are fairly straightforward, some procedural hiccups can occur - mainly due to technical issues with IRS systems.
First, although Forms 990 are now required to be submitted electronically as long as the organization is recognized as tax-exempt or if such status has been reinstated, such filings may be rejected for the following reasons: (1) if the organization is not yet in the IRS system; (2) if a determination letter has not yet been issued; (3) or if the Service’s records do not yet reflect tax-exempt status (whether granted for the first time or reinstated following an automatic revocation). In such cases, the technical issues may actually prevent timely filing of Forms 990 and may result in triggering an automatic revocation – such as if the organization is close to the applicable 27-month deadline (from incorporation) for filing its Application for Recognition of Tax-Exempt Status.
Similarly, if the organization’s tax-exempt status has been automatically revoked, then the IRS system will reject electronically submitted Forms 990. The IRS system may also reject Forms 990 filed by mail, on the basis of either the revocation or that Forms 990 must be filed electronically. This result illustrates how the IRS’ new mandatory electronic filing requirements do not align with Rev. Proc. 2014-11’s required mail filing. This anomaly puts nonprofit organizations in a tough spot when seeking to comply.
Nonprofit leaders should also note that even after reinstatement is granted and a new determination letter is issued, the IRS may not timely update its internal or public records (e.g., Exempt Organizations Business Master File or IRS website). As a result, additional due diligence measures may be warranted to ensure that online tax-exempt information is updated – particularly with respect to donor communications and future IRS interactions.
Conclusion
A nonprofit may request reinstatement of tax-exempt status if such status has been automatically revoked, and often retroactively. Given the potential length of time between the Revocation Date and an IRS determination letter during which its tax-exempt status will have been revoked, an organization should move as quickly as possible to address outstanding compliance issues and request reinstatement. Of course, the best approach is always timely file Form 990 annual information returns as required. But it is indeed good news that even if tax-exempt status was automatically revoked, the Service has provided a path forward to regain recognition of that status – albeit through technical steps requiring careful attentiveness.
[1] For more information, see our law firm’s blog article on Revenue Procedure 2014-11 here.
[2] For more information on 990-N filing qualifications, see the IRS Annual Electronic Filing Requirement for Small Exempt Organizations – Form 990-N (e-Postcard), Who May File Form 990-N to Satisfy Their Annual Reporting Requirement?
[3] The IRS offers a chart available online to identify which Form 990 Series best fits an organization’s reporting options for a given fiscal year.
[4] See our law firm's blog article here.
