Lost your tax-exempt status? Getting it back

This guide is for board members and volunteers who have just found out, often from a funder or a returned grant application, that their charity has lost its federal tax-exempt status because annual IRS filings were missed. It's also for anyone who wants to make sure it never happens. After reading, you'll know what automatic revocation is, how to confirm it, the four ways to apply to get your status back, and how to avoid it.

What automatic revocation is

Most tax-exempt organizations, other than churches and certain church-related organizations, must file an annual return or notice with the IRS: Form 990, 990-EZ, 990-PF, or the short online Form 990-N (e-Postcard). Small organizations whose gross receipts are normally $50,000 or less can generally file the 990-N.

If an organization doesn't file for three consecutive years, it automatically loses its tax-exempt status. This comes from section 6033(j) of the tax code. The revocation takes effect on the original due date of the third missed return or notice (IRS).

There's no appeal process. The IRS says the law "prohibits the IRS from undoing a proper automatic revocation and does not provide for an appeal process." The only way back is to apply for reinstatement.

How to check

The IRS publishes the Automatic Revocation List and updates it monthly. You can search it in the IRS's Tax Exempt Organization Search tool by name or EIN (employer identification number). Each entry shows the organization's name, EIN, type, last known address, the date revocation took effect and the date it was added to the list.

The IRS also mails a revocation letter, called CP-120A, to the organization's last known address. If your address with the IRS is out of date, nobody may have seen it. Check your records and your old mailbox.

What changes when you're revoked

According to the IRS:

• You're no longer exempt from federal income tax. You may have to file a corporate income tax return (Form 1120) or a trust return (Form 1041) and pay any tax due.
• You can't receive tax-deductible donations, and you're removed from the IRS list of organizations eligible to receive them (Publication 78 data in Tax Exempt Organization Search).
• Donors can still deduct gifts made before your name appeared on the Automatic Revocation List.
• State and local laws may also be affected. A state tax exemption, charity registration or grant eligibility may depend on your federal status. Contact your state's tax agency and the office that registers charities (often the Attorney General or Secretary of State) to find out what applies to you.

The four ways to get reinstated

Every revoked organization must apply, even one that never had to apply for exemption in the first place. You file Form 1023 (or Form 1023-EZ where allowed) with the user fee, currently $600 for Form 1023 and $275 for Form 1023-EZ, paid through Pay.gov. Form 1023 includes Schedule E, where you choose which reinstatement procedure you're using. (Organizations other than 501(c)(3) charities use Form 1024 or 1024-A.)

Revenue Procedure 2014-11 sets out four procedures. The 15-month windows below count from the later of the date on your CP-120A letter or the date you appeared on the Revocation List.

1. Streamlined retroactive reinstatement

For organizations that were eligible to file Form 990-EZ or 990-N for all three missed years. You qualify if you:

• have never been automatically revoked before, and
• apply within 15 months.

If approved, your exemption is restored back to the date of revocation, as if it never lapsed. The IRS won't charge the late-filing penalty for those three years if you also file paper Forms 990-EZ for them, marked "Retroactive Reinstatement" and mailed to the IRS in Ogden, Utah. For any year you were eligible to file the 990-N, you don't need to file a past 990-N or 990-EZ to avoid penalties. You can apply on Form 1023 or 1023-EZ.

2. Retroactive reinstatement within 15 months

For organizations that can't use the streamlined process, for example because they had to file the full Form 990 in one of the missed years, or were revoked before. You must apply within 15 months and include:

• a reasonable cause statement for at least one of the three missed years,
• a statement confirming you've filed all the missing returns, and
• paper annual returns for the three missed years and any later years, marked "Retroactive Reinstatement."

3. Retroactive reinstatement after 15 months

The same as the second procedure, but because you're applying more than 15 months later, your reasonable cause statement must cover all three missed years.

4. Reinstatement from the application date

Anyone can use this. You apply with Form 1023 or 1023-EZ and the user fee, and if approved, your exemption starts from the date you submitted the application. There's a gap between revocation and reinstatement when you weren't exempt.

For the three retroactive procedures, the IRS says it won't impose the late-filing penalty for the three missed years if you're reinstated under that procedure.

Writing a reasonable cause statement

Reasonable cause means you used "ordinary business care and prudence" in trying to meet your filing duties (Rev. Proc. 2014-11). Your statement must describe in detail what led to the failure, how you discovered it, and what you've done or will do to prevent it happening again. It must be dated and signed, under penalties of perjury, by an officer, director, trustee or other official authorized to sign for the organization, using the exact declaration wording in section 8.06 of the revenue procedure.

The IRS lists factors that weigh in your favor, though none is required or decisive:

• you relied in good faith on wrong written information from the IRS saying you didn't need to file
• events beyond your control made filing impossible
• you acted responsibly: tried to prevent the problem, fixed it quickly once found, and put safeguards in place
• you have a history of filing on time

"Our treasurer left and nobody knew" is honest, but on its own it may not show reasonable cause. Describe what you've changed since, like shared logins, calendar reminders and board oversight.

After you're reinstated

• File every year from now on. You can be revoked again if you miss three consecutive years counting from the year the IRS approves reinstatement. A second revocation rules out the streamlined process.
• Update your address with the IRS so letters reach someone who'll read them.
• Tell funders, donors and your state that your status is restored, and send a copy of the determination letter where needed.

Preventing it in the first place

The simplest protection is making sure someone owns the filing. Put the annual IRS filing on your board calendar, assign one named person, and have a second person check it was filed. Our compliance calendar builds the dates for you, and the staying compliant step of the founder pathway covers every annual filing.

Reinstatement checklist

• We've confirmed our status in Tax Exempt Organization Search
• We've found the CP-120A letter date and the date we appeared on the list
• We've worked out which of the four procedures we can use, and our 15-month deadline
• We've filed any missing annual returns the procedure requires
• Our reasonable cause statement, if needed, is detailed and signed
• We've filed Form 1023 or 1023-EZ with Schedule E and the user fee
• We've checked what our state requires
• One named person, and a backup, own the annual IRS filing