The IRS allows organizations that have lost their 501(c)(3) tax-exempt status to apply for reinstatement.
If you lost your tax-exempt status due to not filing returns, you can request reinstatement online – without making any changes to your organization. However, if you lost your tax-exempt status for any other reason, you will need to make operational changes and then apply for reinstatement with the IRS.
Losing your tax-exempt status can financially devastate your organization. You’ll face tax on net income, your donors won’t be able to make tax-deductible contributions, and you may lose out on grants or even be forced to repay certain grants. To protect your organization, you should apply for reinstatement as soon as possible.
Don’t wait – contact the team at Wiggam Law to get help now.
Key takeaways
- To apply for reinstatement, make changes to your organization’s operations if needed, and then file an exemption request.
- If approved, reinstatement applies the day you postmark or file the exemption request online, unless you qualify for retroactive reinstatement.
- You may also need to file 990 returns for the last three years and prove that you had reasonable cause if you were revoked due to not filing returns.
- Organizations that file Form 990-N (postcard) don’t need to file returns until the IRS accepts their request for reinstatement.
- An experienced tax attorney can help you protect your non-profit’s exempt status.
What is reinstatement of tax-exempt status?
Reinstatement is when an organization regains its tax-exempt status after revocation. Once reinstated, the organization doesn’t have to pay tax on income generated from its exempt activities, and it can accept tax-deductible donations.
You may apply for reinstatement if you lost your tax-exempt status due to:
- Not filing tax returns – this is the most common reason for a 501(c)(3) status revocation.
- Not following the rules – applies if you break the rules related to lobbying, political campaigning, earning unrelated business income, receiving private benefit from the organization, or not operating based on your stated exempt purpose. This is known as “revocation for cause” and typically happens after an IRS audit.
If your organization doesn’t file required returns for three consecutive years, the IRS will automatically revoke its tax-exempt status. Otherwise, revocation happens after an auditor reviews your organization and decides that you no longer qualify for tax-exempt status.
How to apply for reinstatement
To apply for 501(c)(3) reinstatement after automatic revocation:
- File Form 1023 or 1023-EZ
- Pay the user fee
- File the returns for the three years
- If required, provide a statement explaining why you had reasonable cause for not filing.
If you lost tax-exempt status due to any other reason, you must make operational changes to address the reasons you lost your 501(3)(c) status and then apply for an exemption using Form 1023. The process may vary depending on why you lost your non-profit status. Talk with an attorney for guidance.
Reinstatement of tax-exempt status after automatic revocation
The IRS offers four different ways to reinstate your tax-exempt status after automatic revocation. The right option depends on which tax form you file, whether or not you’ve had your 501(c)(3) status revoked before, and how long it’s been since revocation.
Streamlined retroactive reinstatement
You qualify for streamlined reinstatement if:
- You haven’t been subject to automatic revocation previously.
- You were eligible to file Form 990-EZ or 990-N (postcard) for the three years you didn’t file.
- You complete Form 1023 or 1023-EZ within 15 months of the later of the date on the revocation letter or the date the IRS posted your organization on the revocation list.
If approved, your reinstatement will be retroactive to the date you lost your tax-exempt status. You will not incur penalties for your three years of unfiled returns.
Retroactive reinstatement within 15 months
If you don’t qualify for streamlined reinstatement, you can still apply for retroactive reinstatement – for example, you may need to apply using these rules if you’re required to file Form 990 or 990-PF or if you’ve been automatically revoked in the past.
To apply:
- File Form 1023 within 15 months of the later of the date on the revocation letter or the date the IRS posted your organization on the revocation list.
- Include a statement explaining that you had reasonable cause for not filing at least one of the three missing returns – for example, you were unable to file due to a natural disaster or loss of records.
- Add a statement saying that you filed all required returns for the three years, plus any other taxable years.
- File the 990 returns for the three years related to the revocation and note “Retroactive Reinstatement” on the returns.
If the IRS approves your request, it will backdate the reinstatement to the date you lost your tax-exempt status, and the IRS will not apply the failure-to-file informational return penalties for the three years you didn’t file.
Retroactive reinstatement after 15 months
If it’s been more than 15 months since you lost your tax-exempt status, you can still apply for retroactive reinstatement, but only if you have reasonable cause for all three years you didn’t file. Follow the steps above to apply. A tax attorney can help you draft reasonable cause responses.
Postmark reinstatement
If you don’t qualify for any of the three above options, you can still apply for reinstatement, but not retroactively. Instead, the IRS will date the reinstatement to the date you file the form online or the date you postmark it, if your request is approved.
You must file income tax returns for the years you didn’t have tax-exempt status. Additionally, your donors will not be able to claim tax deductions for donations made during this period. That’s why it’s critical to apply for reinstatement as soon as possible or leverage the reasonable cause rules to make your case.
How to file Form 1023 or 1023-EZ
You must file both of these forms online. To get started, make an account on Pay.gov. Then, search for “1023” or “1023-EZ”, complete the form, and pay the user fee.
Both forms require information about your organization, its activities, its finances, and why it should be tax-exempt. But the 1023-EZ is shorter and easier to complete.
Who can use the 1023-EZ form?
You can only use the 1023-EZ form if your tax-exempt status was automatically revoked due to unfiled returns, and you answer no to all of these questions:
- Will your annual gross receipts exceed $50,000 in any of the next three years?
- Have your annual gross receipts exceeded $50,000 in the past three years?
- Does your organization have assets with a fair market value in excess of $250,000?
- Was your organization formed in a foreign country?
- Is your mailing address in a foreign country?
- Is your organization a successor of or controlled by an organization that was suspended as a terrorist organization under 501(p)?
- Are you organized as an LLC or anything other than a corporation, unincorporated association, or a trust?
- Are you a successor to a for-profit entity?
- Are you currently or were you previously tax-exempt under another section of IRC 501(a)?
If you answer “yes” to any of the questions above, you must use Form 1023. You should also use 1023 if you lost your 501(c)(3) status for any other reason besides unfiled returns – for example, political campaigning, substantial lobbying, private benefit, etc.
Attachments to Form 1023
If you complete Form 1023, you must attach organizing documents and bylaws or rules of operation if you’ve adopted them. If you don’t have enough room to answer any questions, you can attach supplemental responses. You can also add a request to expedite the application.
You don’t have to attach anything to Form 1023-EZ, but unfortunately, you can’t request expedited processing if you use this form either.
Expediating your request for reinstatement
The IRS may expedite your request if:
- You’ve applied for a grant that has a significant impact on your ability to continue operations.
- IRS errors have delayed the review of your application.
- You’re creating a new organization to provide disaster relief.
Applying for retroactive reinstatement
If you’re filing Form 1023-EZ, mark section 4 or 7 to note why you’re applying for reinstatement. With Form 1023, you can choose section 4, 5, 6, or 7. Here’s a breakdown of the rules:
- Section 4 – You’re applying for streamlined revocation. Additionally, the failure to file wasn’t intentional, and you’ve put procedures in place to make sure you file returns in the future.
- Section 5 – You’re applying for retroactive reinstatement within 15 months, as explained above, and the failure to file was not intentional. You also must note that you had reasonable cause for not filing in at least one of the three years with unfiled returns. (Only available on Form 1023, not 1023-EZ).
- Section 6 – You’re applying for retroactive reinstatement after the 15-month deadline. Your failure to file wasn’t intentional, and you can show reasonable cause for all three years that you didn’t file returns. (Only available on Form 1023, not 1023-EZ).
- Section 7 – You don’t qualify for the reinstatement based on the other sections, and you are seeking reinstatement on the day you e-file or postmark your application.
If you’re applying for retroactive reinstatement, you may need to file the last three years of returns when you apply. However, if you file Form 990-N or if you’re not seeking retroactive reinstatement, you may not need to file right away. A tax attorney can ensure you file the required returns without doing any unnecessary paperwork.
FAQs about reinstating tax-exempt status
Do I need to file delinquent returns to get reinstated?
Yes, you must file the last three years of delinquent returns to get reinstated, unless you’re eligible to file the 990-N. Then, you don’t need to file until the IRS accepts your request for reinstatement.
Should I file returns while my reinstatement request is pending?
Yes, you should file any required information returns while your reinstatement request is pending. Write “reinstatement pending” at the top of your returns. However, if your organization files 990-N, you typically don’t need to file anything until the IRS accepts your reinstatement.
Does my organization need a new EIN when applying for reinstatement?
No, you should use your original EIN. If you don’t have your nonprofit’s EIN, check on previously filed tax returns, look for the original EIN letter from the IRS, contact your accountant, or reach out to the IRS directly.
What if I paid income tax or incurred penalties while my status was revoked, and now my organization has been reinstated?
Write a letter to the IRS explaining that you are not liable for the tax or penalty because your tax-exempt status was reinstated for part or all of the period related to the tax or penalty. Attach a copy of your new determination letter. If you have already paid the penalty, request a refund. If you already filed a taxable return, file an amended tax return to request a refund. Send everything to the IRS address where you filed or should have filed the organization’s original income tax return.
Why is my organization still on the revocation list after reinstatement?
The list shows organizations that lost their status due to not filing for three years, and even if you’re reinstated, you’ll continue to appear on the list due to missing that filing requirement. However, the list will show that your 501(c)(3) status was reinstated.
What if an organization loses tax-exempt status and it’s not a 501(c)(3)?
If you’re not a 501(c)(3) organization and the IRS revokes your tax-exempt status, file Form 1024 or 1024-A to request nonprofit tax-exempt status restoration. For example, 501(c)(4), 501(c)(5), 501(c)(6), and 501(c)(7) organizations use these forms to request reinstatement.
Contact Wiggam Law – Get Your Tax-Exempt Status Reinstated
Losing your tax-exempt status can be devastating, but with the right approach, you can get back to operations as usual. Don’t put your organization at further risk. The longer you wait, the harder it can be to reinstate your 501c)(3), and you risk facing tax and penalties in the interim.
At Wiggam Law, our experienced tax attorneys can help your organization apply for reinstatement and get back to your mission. To learn more about what to do next, contact us today.
