What If I Lose My Exempt Status?

Posted on Wednesday, December 19, 2012

Most tax exempt organizations, other than churches, are required to file an annual information return with the IRS.  If an exempt organization fails to file its annual return for three consecutive years, its tax exempt status will be automatically revoked.  The IRS notifies such organization of its loss of exemption in a letter, but the revocation is also noted in the Auto-Revocation List on the IRS website.  The effective date of the automatic revocation is the due date of the third year’s return, the 15th day of the 5th month after the end of the organization’s taxable year (May 15th for calendar year organizations). 

Consequences

Once the organization loses its exempt status it becomes a taxable corporation.  As a result, it may be required to file Form 1120, U.S. Corporation Income Tax Return, with the IRS and Form IT-20, Indiana Corporate Adjusted Gross Income Tax Return, with the Indiana Department of Revenue and pay any applicable federal and state income taxes.  The IRS also publishes the organization’s name on the list of automatically revoked organizations, which serves as a notice to the public that the organization is no longer eligible to receive tax deductible contributions.  In addition, the organization loses its eligibility for most grants.    If the organization applies for reinstatement, as discussed below, it needs to file the correct Form 990 while the application is pending.  Contributions made to the organization while the application is pending are not guaranteed to be tax deductible.  If the IRS grants the organization reinstatement for the period in which the contribution is made, the contribution is considered tax deductible; however, if the reinstatement is not received, the contribution is not tax deductible.

Getting the Tax Exempt Status Back

The loss of tax exempt status cannot be reversed or appealed.  In order to regain its tax exempt status, the organization must apply for exemption by filing Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, or Form 1024, Application for Recognition of Exemption Under Section 501(a), and pay the applicable user fee.  The words “Automatically Revoked” should be written at the top of the application and the envelope to ensure the application is sent to the correct individual to handle the reinstatement.  In some instances, the organization may be granted retroactive reinstatement.  To request reinstatement back to the date of automatic revocation, the organization must attach a letter to the application explaining the reason for failing to file the required information returns for three consecutive years.  Only if the IRS determines that there was a reasonable cause for failing to file, will the retroactive reinstatement be granted.

Make sure your tax exempt status is not automatically revoked.  File your required annual returns.

         *Gross receipts normally less than or equal to $50,000  = File 990-N

         *Gross receipts less than $200,000, and total assets less than $500,000 = File 990-EZ or 990

         *Gross receipts greater than or equal to $200,000, or total assets greater than or equal to $500,000 = File 990

Posted by: Carrie Minnich, CPA

Posted in Mission Minded Nonprofits

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

"Carrie does an excellent job every year presenting the audit to the Board of Directors.  She clearly communicates relevant information and action items we can take as a Board.  Through her…"

Heather Schoegler, Board Member of Ronald McDonald House