Even though a nonprofit organization has tax-exempt status, which relieves the organization of paying income tax on the money it earns, the IRS still requires the filing of annual returns. Except for churches and other religious organizations, nonprofit organizations must file Form 990, 990-EZ, 990-PF, or 990-N. Failure to file the appropriate form for three consecutive years is the most common reason that organizations lose their tax-exempt status with the IRS.
Applying for Reinstatement
If your organization’s tax-exempt status is automatically revoked, you must submit a new application with the IRS to have the status reinstated. However, the application form required depends on the type of nonprofit organization. Nonprofits that qualify under IRC §501(c)(3) -- which covers organizations that exclusively engage in charitable, public safety testing, scientific, literary, educational, prevention of cruelty to animals and children, and amateur sports activities -- must file Form 1023. All other nonprofit organizations that qualify for tax-exempt status under a different code section must apply using Form 1024.
When you are preparing the appropriate application form, you must write “automatically revoked” at the top of the form and on the envelope before mailing it to the IRS. To complete the application, you must also enclose the appropriate user fee for the organization. The fee varies depending on the organization’s annual gross receipts, so be sure to include the right amount; otherwise, the processing of your application will be delayed. You can always check the IRS website to obtain updated information on the appropriate user fee for each year.
The consequence of losing tax-exempt status for your organization is having to file ordinary income tax returns and paying income tax on the money the organization raises from the date of revocation until the date its new application for tax-exempt status is approved by the IRS. However, to avoid paying income tax during this period, you can request a retroactive reinstatement of the status by attaching a letter to your Form 1023 or 1024 that explains the reasons the organization didn’t comply with the annual filing requirement for three consecutive years. The IRS will only reinstate the organization’s tax-exempt status retroactively to the date of revocation if there is reasonable cause for the noncompliance. Establishing reasonable cause requires a showing that you made every effort to file the returns, relied on incorrect written information issued by the IRS, or the existence of events beyond your control that made it impossible to comply.