What can a nonprofit do when its 501(c)(3) status has been automatically revoked for failure to file a 990?

Posted by Terry Mosteller | Aug 17, 2021 | 0 Comments

What automatic revocation means, how it happens, what you can do & more!

As a nonprofit founder or executive director, we know you receive a huge number of emails and snail mail on a daily basis. Combine that with the number of guidelines and regulations you have to follow and we know that your job can very quickly become extremely overwhelming. Regardless, one piece of mail or notice that you NEVER want to receive as a nonprofit is the IRS Notice CP120A – Notice of Revocation of Tax-Exempt Status. 

What is automatic revocation?

Automatic revocation occurs when an exempt organization is required to file an annual return (e.g., Form 990, 990-EZ or 990-PF) or submit an annual electronic notice (Form 990-N, or e-Postcard) and does not do so for three consecutive years. Under the law, the organization's federal tax-exempt status is automatically revoked.

What happens when your nonprofit's tax-exempt status is revoked?

If your organization's tax-exempt status is automatically revoked, it is no longer exempt from federal income tax. Consequently, it may be required to file one of the following federal income tax returns and pay applicable income taxes:

An automatically revoked organization is not eligible to receive tax-deductible contributions and will be removed from the cumulative list of tax-exempt organizations, Publication 78. The IRS will also send a letter informing the organizations of the revocation (this is the notice we mentioned above). This means that all of your donation efforts will inevitably have to come to an extreme halt as soon as your name appears on the automatic revocation list. Always be transparent with donors about the tax status of your nonprofit. 

Donors can deduct contributions made before an organization's name appears on the Automatic Revocation List. It's also important to note that state and local laws may affect an organization that loses its tax-exempt status as well. 

For example, in Missouri and Kansas, the organization will lose its state income tax exemption, as well, meaning that you will have to file income tax returns (and pay taxes on the organization's income!) at the state level just like you do at the federal level.

What if automatic revocation happened in error?

To have your tax-exempt status reinstated, your organization must file an application for exemption. Your organization may also request retroactive reinstatement as part of its application.

If you believe that your nonprofit's tax-exempt status was automatically revoked in error, the IRS encourages you to contact its Customer Account Services (toll-free): (877) 829-5500. 

NOTE: Before calling the IRS, be sure to obtain copies of all documentation that you have showing a mistake was made (such as copies of correspondence to or from the IRS demonstrating that an annual return, IRS Form 990 was filed within the last three years). 

How to Reinstate Your Tax-Exempt Status:

The law prohibits the IRS from undoing a proper automatic revocation and does not provide for an appeal process. An automatically revoked organization must apply to have its status reinstated, even if the organization was not originally required to file an application for exemption.

There are four ways to be reinstated:

1. Streamlined retroactive reinstatement: Organizations that were eligible to file Form 990-EZ or 990-N (ePostcard) for the three years that caused their revocation may have their tax-exempt status retroactively reinstated to the date of revocation if they:

  • Have not previously had their tax-exempt status automatically revoked.

  • Complete and submit Form 1023, Form 1023-EZ, Form 1024 PDF or Form 1024-A with the appropriate user fee not later than 15 months after the later of the date of the organization's Revocation Letter (CP-120A) or the date the organization appeared on the Revocation List on the IRS website.

2. Retroactive reinstatement process (within 15 months): Organizations that cannot use the Streamlined Retroactive Reinstatement Process (such as those that were required to file Form 990 or Form 990-PF for any of the three years that caused revocation or those that were previously auto-revoked) may have their tax-exempt status retroactively reinstated to the date of revocation if they:

  • Complete and submit Form 1023, Form 1024 PDF or Form 1024-A with the appropriate user fee not later than 15 months after the later of the date on the organization's revocation letter (CP-120A) or the date the organization appeared on the Revocation List on the IRS website.

  • Include with the application a statement establishing that the organization had reasonable cause for its failure to file a required annual return for at least one of the three consecutive years in which it failed to file.

  • Include with the application a statement confirming that it has filed required returns for those three years and for any other taxable years after such period and before the post-mark date of the application for which required returns were due and not filed.

  • File properly completed and executed paper annual returns for the three consecutive years that caused the revocation and any following years. The organization should write “Retroactive Reinstatement” on these returns and mail them

3. Retroactive reinstatement (after 15 months): Organizations that apply for reinstatement more than 15 months after the later of the date on the organization's revocation letter (CP-120A) or the date the organization appeared on the Revocation List on the IRS website may have their tax-exempt status retroactively reinstated to the date of revocation if they:

  • Satisfy all of the requirements described under the “Retroactive reinstatement (within 15 months)” procedure EXCEPT that the reasonable cause statement the organization includes with its application must establish reasonable cause for its failure to file a required annual return for all three consecutive years in which it failed to file.

These organizations should check the box on Schedule E for Section 6 when submitting Form 1023 electronically. For organizations submitting 1024-A electronically, check the box for Section 6 in Part VI. For organizations submitting Form 1024, they should write on the top of Form 1024, “Revenue Procedure 2014-11, Retroactive Reinstatement,” and mail them. 

Post-mark date reinstatement: Organizations may apply for reinstatement effective from the post-mark date of their application if they:

These organizations should check the box for Section 7 on Schedule E for Form 1023  or Part V for Form 1023-EZ. For organizations submitting 1024-A electronically, check the box for Section 7 in Part VI. For organizations submitting Form 1024, they should write on the top of Form 1024, “Revenue Procedure 2014-11, Reinstatement Post-Mark Date,” and mail the application and user fee.

If the IRS determines that the organization meets the requirements for tax-exempt status, it will issue a new determination letter. The IRS also will include the reinstated organization in the next update of Tax-Exempt Organizations Select (Pub. 78 databases), and indicate in the IRS Business Master File (BMF) extract that the organization is eligible to receive tax-deductible contributions. Donors and others may rely upon the new IRS determination letter as of its stated effective date and on the updated Tax-Exempt Organizations Select and BMF extract listings.

What's a reasonable cause statement and what should you include?

A reasonable cause statement establishes that an organization exercised ordinary business care and prudence in determining and attempting to comply with its annual reporting requirement. The statement should have a detailed description of all the facts and circumstances about why the organization failed to file, how it discovered the failure, and the steps it has taken or will take to avoid or mitigate future failures. For a detailed explanation see Section 8 of Revenue Procedure 2014-11.

ADDITIONAL RESOURCES: 

How does my organization know that it has been automatically revoked?

You'll find a list of automatically revoked organizations on the Tax Exempt Organization Search page. For each organization, the Auto-Revocation List provides the name, last known address, employer identification number (EIN), subsection of exemption, the effective date of revocation, date the name is published on the Auto-Revocation List, and the exemption reinstatement date.

In addition, the IRS sends a letter to each organization, at its last known address, stating that its exempt status has been automatically revoked because it has not filed a required annual return or notice for three consecutive years.

The list gives the name, employer identification number (EIN), organization type, last known address the organization provided to the IRS, effective date of revocation, and the date the organization was added to the list. For organizations that applied for and received reinstatement, the list gives the date of reinstatement. IRS updates the list monthly.

The best way to never lose status is to always keep complete and accurate financial records and to timely file Form 990 with the IRS each and every year. This way, you'll always keep your nonprofit in good graces and you won't ever need to refer to these steps again. 

Now, if you are in the position where you've found that your nonprofit is now on the Tax Exempt Organization Search page, meaning your 501(c)(3) status has been automatically revoked...we understand this can be a highly stressful time but we hope that all of this information has been helpful so that you know what to do next. If you feel as though you want additional guidance throughout this process, Mission Counsel has worked with many nonprofits to help get them back on the ground and in good standing & compliance with the IRS.

About the Author

Terry Mosteller

Hi, I'm Terry Mosteller. I'm the founding attorney at Mission Counsel, where I help nonprofits and small and medium-sized businesses overcome obstacles so that they can focus on what they do best–accomplishing their mission. My goal is to get to know not just the legal challenges...

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