How Do I Reinstate My Revoked Tax Exempt Status?
The tax-exempt status for nonprofits is serious business. There is a healthy amount of paperwork beyond an articles of incorporation worksheet to complete when you start out as a nonprofit. One of the most important is related to your tax exemption status. This is ultimately a good thing since it means the system will be regularly monitored for hiccups.
Unfortunately, you may at some point have to deal with revocation of your status if you get flagged for even one important violation. This could be a discrepancy concerning your income activities or failure to adhere to an important date.
The ramifications of these situations can be quite taxing for large nonprofits and smaller organizations alike. If this is your story, we have good news, in most situations, you can get it back! Try not to get too discouraged as we are here to break each of them down in a bit of detail.
- What Happens When Your Tax-Exempt Status Is Revoked?
- Why Might Your Tax-Exempt Status Be Revoked?
- Steps To Reinstate Your Tax Exempt Status
- Use Of Fiscal Sponsorship
What Happens When Your Tax-Exempt Status Is Revoked?
If your nonprofit is no longer considered a tax-exempt organization, you will be required to pay income tax on your revenue. In addition, donors will no longer be able to claim their donations as deductions on their yearly tax returns, which could discourage some members from donating, or possibly even remaining a member.
Why Might Your Tax-Exempt Status Be Revoked?
While it is a highly uncommon occurrence, there are a handful of situations that could qualify the IRS to revoke your status. Some of the more serious offenses are easy to remember if you have been guilty of them.
Eva certainly doesn't want her nonprofit's tax-exempt status revoked!
If you fail to file your annual return (form 990) for three consecutive years, your revocation will be automatic and without exception. You also could risk your status if you generate excessive income from a source that is not completely related to the organization's reasons for exemption.
Some other reasons are as follows:
Getting involved with your local elections under your nonprofit’s name
Operating outside accordance with the charitable purpose for tax-exemption
Allowing someone in the organization to substantially benefit from your organization’s income
Being unclear or purposefully deceptive about how the funds will be used
Steps To Reinstate Your Tax Exempt Status
Your to-do list has officially gotten much longer if you find yourself in this situation, especially when it happens for a reason that is not immediately outstanding.
Inform Your Board
Since your board is highly involved with your organization, they should be notified first of the case. It is their right to know, and they may be able to guide and support you through the processes you will undertake. Help them to understand what it will mean for everyone now that your exemption status is gone. Tell any staff, team members, or volunteers about the changes.
Communicate Around The Topic
Immediately revise anything on your website, social media, email templates, or absolutely anything that speaks about your tax-exempt status, even if you are diligently pioneering to get it back. Although the loss of your status may be temporary, the last thing you need while trying to regain your status are accusations of being deceitful about your current status due to forgetting to adjust your information. Update your donors and regular members that your status has changed. It is imperative to make the facts available to those who need to know.
Pro Tip: Choosing a spokesperson with substantial communication skills can help to mitigate some of the stress with this process. Speak with them regularly to keep communication open, and make sure they understand all of the finite details they need to relay. Prepare them to answer any and all questions, so the more well-versed they are in your business, the better. Your message will stay consistent, and their degree of separation from the process will be useful.
Ensure Record Keeping Is In Order
Review any and all important files and be sure everything is accurate, up to date, and in accordance with the laws around your status. Look for typos and the dates the files were received to ensure no mistakes were made, and communicate with your team so they can look over the info as well.
Ensure that you remain within tax compliant guidelines and adapt all your recordkeeping to reflect the revocation of your status. It is important to have great communication with your team here too, especially those who may play a role in accounting.
Prepare A Cover Letter To The IRS
Include your full name, the name and any identification numbers of your organization, and a brief summary of the reason for the letter. If you think your status has been revoked in error, you can include that information here. If you have any proof of the error, outline it clearly. This is the first correspondence the IRS will receive from you, so review it with your board to be sure it is appropriate.
Check Eligibility For Retroactive Reinstatement
There are certain requirements laid out in the "retroactive reinstatement" procedure. Part of this is that you may be able to get your status reinstated if you follow procedures properly, and meet the timing requirement of 15 months from the date of revocation. Do some research on this to ensure that you are eligible before you apply. If you are deemed eligible, it is almost as if your status was never revoked. The reinstatement date goes back to the exact time it was removed, so your donors will not have to miss a beat on their taxes.
Produce A Reasonable Cause Statement
This step will only be considered necessary if you are eligible and creating an application for retroactive reinstatement. Your reasonable cause statement is intended to show that you used care and prudence in your business practices while adhering to your tax obligations. Outline any situation or specific circumstance that caused you to be unable to follow procedures to their full specifications if anything of this nature occurred. Again, it is good to review this with your team so a few more pairs of eyes can review these important documents.
Fill In Forms 990 Or 990-EZ
These forms are practically the same thing, but the 990-EZ is just a little shorter. The full version is simply Form 990. This is an important filing requirement for each taxable year that was not previously filed for. This form is the main tool the IRS uses to gather information about tax-exempt organizations and also educate them about the laws surrounding the requirements. It promotes awareness and compliance, and it is important that they have this on file for each year under fire of questionability.
Nancy is getting all the necessary tax forms in order!
Re-Apply For Tax-Exempt Status
Speak openly with your board about whether or not it is relevant, appropriate, and necessary for you to go through the process of reapplying for the tax-exempt status. The costs are $400 to $850, depending on some specifics about your organization and the filing status. If your status is about to be reinstated due to it being an automatic mistake, you would not want to skip ahead and go through the trouble of reapplication.
Use Of Fiscal Sponsorship
Fiscal sponsorship is a way of attracting donors, even when you might not yet be tax-exempt. In this process, the party entering into the sponsorship agreement with a sponsor gives up ownership and control of their organization or project directly to the sponsor. A fiscal sponsor will be responsible for the utilization of funds, and while your organization is not recognized as tax-exempt, the IRS allows this agreement to enable your organization to piggyback off of the exemption status of your sponsor.
Choose a sponsor who shares your mission and is willing to be a team player. This is a useful option for this situation since your donations are not technically going to your organization directly, they are going to the sponsor. You will still have to notify your members and donors, but you can at least tell them the good news: their donations can still qualify as deductions on their returns.
Pro Tip: If you have additional nonprofit law and nonprofit subsidiary questions, Springly can help. Our blog contains answers to many nonprofit legal and accounting issues. If you are looking for information on a specific topic and we have not covered it yet, please let us know!
💡What happens when tax-exempt status is revoked?
When your tax-exempt status gets revoked, you will be required to pay income tax on your revenue. In addition, donors will no longer be able to claim their donations as deductions on their yearly tax returns. Find out more.
🔑 How do you restore tax-exempt status?
First things first, you'll want to inform your board, and revise your website, emails, etc. to remove any mentions of your organization being tax-exempt for the time being. Then, prepare a cover letter to the IRS, check if your eligible for retroactive reinstatement, and re-fill out your 990 Form. Find out more.
📝 What is a fiscal sponsorship?
A fiscal sponsorship is a way of attracting donors, even when you might not yet be tax-exempt. In this process, the party entering into the sponsorship agreement with a sponsor gives up ownership and control of their organization or project directly to the sponsor. Find out more.
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