How to Reinstate Nonprofit Status

By Stephanie Kurose, J.D.

How to Reinstate Nonprofit Status

By Stephanie Kurose, J.D.

Nonprofit organizations are businesses that have been granted tax-exempt status by the Internal Revenue Service (IRS) and are often dedicated to furthering a particular charitable cause or promoting social welfare. They are also exempt from paying federal income taxes on the money they earn. Rather than distributing profits to shareholders or owners, nonprofit organizations use their profits to achieve their goals.

Laptop on a table with the words "Non-profit" displayed on the screen

To be eligible for such status, the business must meet the requirements set forth in section 501(c) of the Internal Revenue Code. Once the company gains tax-exempt status, it is possible for the IRS to revoke that standing for a number of different reasons. Typically once you eliminate the problem that resulted in the status loss, it is possible to have it reinstated by the IRS.

Ways to Lose Tax-Exempt Status

There are multiple reasons why the IRS may strip an organization of its tax-exempt status. One way it could have it automatically revoked is if the business fails to file the appropriate IRS forms for three consecutive years. This is the most common reason why they lose their tax-exempt status.

Another reason they may strip a nonprofit of its status is if the organization engages in any type of prohibited political campaign activity, such as endorsing or opposing a candidate running for public office.

Reinstating Your Nonprofit Status

If an organization loses its tax-exempt status, it must follow these three steps to reinstate it with the IRS.

1. Remedy the problem that caused the revocation.

Most importantly, if a company loses its tax-exempt status, it must remedy the problem that led to the revocation. Without first resolving this, there is no use applying to reinstate an organization's status.

2. File an application for reinstatement and pay the filing fee.

After resolving the issue(s), it must submit a new application with the IRS to have the entity's status reinstated. 501(c)(3) organizations must file Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code (Form 1023), while all other nonprofits must file Application for Recognition of Exemption Under Section 501(a) (Form 1024). At the top of the form and on the envelope, write "automatically revoked," before mailing it to the IRS. Enclose the required filing fee, which varies depending on the organization's yearly gross receipts, with your application.

3. Attach a request for a retroactive reinstatement, if applicable.

When a nonprofit loses its tax-exempt status, it is required to file ordinary income tax returns and pay tax on the money the business raises from the date of its revocation to the date its new application for reinstatement is approved. In order to avoid paying income taxes during this time, the company can request a retroactive reinstatement by attaching a letter to their application form that explains why it did not comply with the law and thus lost its status.

If there is a reasonable cause for noncompliance, the IRS may decide to reinstate the company's tax-exempt status retroactively and not impose the usual penalties. A reasonable cause generally means showing that the organization made every effort to file the required returns, relied on incorrect information, or events beyond its control made it impossible to comply.

Maintaining tax-exempt status is of utmost importance to nonprofit organizations. While compliance with the rules is fairly straightforward, there are still a number of entities that lose the status and must apply for reinstatement. If this happened to you or if you have general questions about the process, contact an agent with the IRS who can help answer any of your questions.

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