Some days, there are pieces of mail you really wish you didn’t receive. Bills, late notices, warranty expirations, or recalls on your car are all examples of items we’d rather not get. But one piece of mail you really don’t want to see in your mailbox is IRS Notice CP120A – Notice of Revocation of Tax-Exempt Status.
Since 2011, the IRS has been automatically revoking the 501(c)(3) tax-exempt status of any nonprofit that fails to file Form 990 for three consecutive years. This termination of status was the result of legislation passed in 2006 called the Pension Protection Act that brought a raft of new federal compliance rules for nonprofits. Each month, the IRS updates its list, searchable at www.irs.gov/eo, of all the organizations that most recently had their status revoked.
Notice CP120A is the letter the nonprofit receives that informs you that this has happened. It is important to point out that this auto-revocation of 501(c)(3) status will happen (usually) without warning, and is not appealable. Miss three consecutive years… lose your tax-exemption. No exceptions; no excuses.
The IRS has a process in place that allows a nonprofit to regain its 501(c)(3) determination. It’s critical, however, to fully understand the ramifications of auto-revocation, and the correct way to get back what you lost.
Number 1 – Stop Soliciting Donations
This is really important, and it is one of the most overlooked issues. Your nonprofit is no longer a tax-exempt charity. It doesn’t have 501(c)(3) status anymore. Donations to your organization are not tax-deductible to the donor, effective the revocation date on your CP120A notice. If you continue to solicit donations, you are either explicitly or implicitly communicating that you are still a 501(c)(3). If there is even a chance your donors could believe your nonprofit still has tax-exemption, you could be guilty of fraud, violating any number of state and federal statutes. Fortunately for your donors, the ones who can demonstrate that they gave in good faith believing their donations are tax-deductible will most likely be allowed to claim the donation. That won’t save your nonprofit from penalties and/or injunctions, however.
Number 2 – Communicate to Your Regular Contributors
I acknowledge that this one gives you heartburn. No one wants to have to admit to their donors that they have really messed up and failed to be IRS compliant not once, but three straight years. It’s terribly embarrassing. However, failure to communicate the reality of your tax-exempt status to those who are frequent or systematic givers is another version of fraudulent representation similar to Number 1 above. Do the right thing and inform your regular donors.
Number 3 – Do Not Reincorporate
I can’t tell you how many times we see nonprofits get this one wrong. The IRS has revoked your 501(c)(3) status, not torpedoed your entire organization. Assuming you have been filing your state corporate annual report each year, your nonprofit should still legally exist as a nonprofit corporation. State incorporation is what makes your nonprofit a real entity. 501(c)(3) status is just how the IRS categorizes your organization for tax purposes. So, if you receive a letter of revocation from the IRS, don’t panic. Your nonprofit still exists, so DO NOT file new articles of incorporation. Verify that your corporate status is still active at the state, then move on to number 4.
Number 4 – Do Apply to the IRS for 501(c)(3) Status Reinstatement
Once your status has been revoked, you have to apply to the IRS to get it back. You will use Form 1023 just like you did the first time, except you will need to indicate that it is an application for reinstatement, not a first time filing. Be prepared to provide the same level of detail as before, except you will be mostly reporting prior year activities rather than a forward-looking projection. Also, if any one of the three years of Form 990 filing you missed was a year where your nonprofit was required to file a Form 990-EZ or Form 990 (standard form), as opposed to Form 990-N, you will need to prepare the higher version of Form 990 for each of the three years you missed and include that with your Form 1023. It is likely the IRS will have follow-up questions for you once they receive your application. But assuming your program is still 501(c)(3)-qualifying, you should be able to have your tax-exempt determination restored.
Number 5 – Don’t Let It Happen Again
Hopefully your nonprofit never has its status revoked. But if it does, learn the lesson and don’t let it happen again. Maintaining proper compliance isn’t just a best practice recommendation. It is a legal necessity. Failure to file Form 990 not only jeopardizes your tax-exempt status, it also publicly telegraphs a disregard for transparency and accountability. Frankly, it’s not a good look for any charitable organization.
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. That way, you’ll always keep your nonprofit in good graces and not ever need to refer to our 5-step-plan above. But if you find yourself in this dilemma, you can get it back. We work with dozens of revocations every single year, so reach out if we can help you.
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