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IRS Revises Procedure for Reinstating Tax-Exempt Status

IRS Revises Procedure For Reinstating Tax-Exempt Status

The Internal Revenue Service has issued new guidance (in the form of Revenue Procedure 2014-11) for small nonprofits looking to regain lost tax-exemption.  The process outlined in the Rev. Proc. significantly changes the reinstatement process…mostly for the better.

Under the old procedure, nonprofits that had their 501(c)(3) status revoked due to failure to file Form 990 for 3 consecutive years had a difficult time establishing sufficient reasonable cause,  i.e., a good reason why they missed filing their Form 990 3 years in a row.  Reasonable cause was necessary to have their reinstatement be retroactive to when they lost their status.  If they could somehow manage to establish reasonable cause, they also had to prepare and file Form 990-EZs for each of the years missed, even if one or two of those years only required Form 990-N originally.  This proved to be a very time-consuming and expensive process.

Nonprofits could choose to forgo retroactivity, but had to settle for a new 501(c)(3) effective date that matched the postmark date of the reinstatement application.  The big problem with that scenario was the creation of a taxable “gap” period between the date the nonprofit first lost its tax exemption and when it got it restored.  For example, if a nonprofit lost its 501(c)(3) status effective May 15, 2012 and could not establish reasonable cause for retroactive reinstatement, and filed a new 501(c)(3) application on July 15, 2013, they would have a taxable gap of 14 months.  It is my belief that the nightmare of having to deal with 2 short-year for-profit returns and 2 short-year Form 990s for the same organization is what gave rise to the new procedure.  No matter the reason, it is better for the nonprofits in question.

Now, small nonprofits, defined as those whose Form 990 requirement was either Form 990-N or Form 990-EZ, can apply for retroactive reinstatement by filing a new Form 1023, along with Form 990-EZs for those years in which it was required, but missed.  If any or all of the missed years required Form 990-N, they do not have to be filed in arrears.  Reasonable cause will now be assumed and not required to be articulated in writing.  In addition, late filing penalties for the prior year Form 990-EZs will be abated.  This is no small change to the process and one that should benefit thousands of small organizations dealing with lost exemptions.

It should be noted that this Revenue Procedure does not change the requirements for larger nonprofits seeking reinstatement of tax-exemption.  They will still be required to provide definitive reasonable cause and will not have late filing penalties waived.

 

Greg McRay, EA

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

This Post Has 23 Comments
  1. We are a vary active (lots of public outreach and education) but vary small (35 members) astronomy club. Received our EIN, 2/2/2009.

    Finally had enough funds (income well below $5K) obtained nonprofit through the CA Franchise Tax Board in September 2013. March 2014 as required filed 990-N only to be notified by the IRS that our nonprofit had been revoked because we had failed to file a 990-N for three consecutive years. That even though we had been a nonprofit for only 7 months. Trying to get information from the IRS about what we must due is next to impossible!

    1. It’s a difficult situation when this happens. I cannot tell from what you wrote if you actually applied for and received federal 501c3 status or just CA status. Either way, you obviously have a problem. There are simply too many variables to figure out your best move via online comments. I recommend you call and speak with one of our representatives to sort out the particulars and to see if we can help.

  2. A few difficult members broke away from our legally registered Nonprofit incorporation and formed their own Unincorporated group. That is not the problem, the problem is the use of the Incorporation name by them ignoring our request to stop. Their use of the name is a source of much confusion not only for our members, our community causes and charities, and financial institutions. We’ve expressed our concerns asking them not to use the name, we’ve gone to mediation, and invited them back to join the INC. to no avail. How can we remedy the problem especially the name issue?

    1. If you haven’t done so already, file a state trademark application for the trade name (assuming your state allows that). Then get a lawyer…the threat of a lawsuit is likely what it will take to get their attention. Unfortunately, nonprofit law has no bearing on this, just trademark law.

  3. I inherited a memorial scholarship fund created by a parent. I know he failed to file 990 forms for at least 10 years if not longer so 501(c)(3) status has lapsed. I became president of the fund in 2013 and have let it slide and now need to 1. figure how to get reinstated status so I can distribute the remaining funds as scholarships and 2. how to file the past due 990s properly. No action was taken by the fund during the time period the 990s weren’t filed – the money just sat in an account. Without knowing the actual year 990s stopped being filed, what is the best process to follow. The remaining funds can do some good for low income students, but the IRS never answers it phones to give me the proper steps.

    1. Hi, Sandy. Depending upon how much revenue the organization took in during the years in question, a Form 990 may or may not be needed for each. You may be able to secure reinstatement without them. Revocation reinstatement processes are not one-size-fits-all. It’s best to have us look at your particular situation to best determine how to proceed. It may turn out to be less hassle than it appears. Call our office for more info.

  4. Greg, I am hopeful you can provide some guidance prior to me calling the IRS. Our small Parent Teacher Organization (PTO similar to a PTA) got a EIN Number in 2003 to open a bank account. We incorporated on 11/9/2012 and received notice of our 501(c)3 status aproval on Jan 25, 2014. Our fiscal year ends July 31 2014 so my intention was to file our first 990-N at that time.

    I thought I had a handle on this yet I received a notice last week stating that our tax-exempt status was automatically revoked because we hadn’t filed for three consecutive years.

    If I wasn’t a 501c(3) or even incorporated 3 years ago, what was supposed to have been filed that we didn’t do that caused us to lose the status we just go this year?

    Thanks.

    1. Hi, Nancy…sorry to hear about your headache. It is possible that your revocation is in error, but that depends on the effective date of your tax exemption. If the effective date is Nov 2012, then you were revoked in error. The IRS has a bug in their system that is dishing out revocations that tie back to when the original EIN was secured instead of the 501(c)(3) effective date.

      We’ve been through this dozens of times. It isn’t impossible to handle on your own, but it would probably be worth the investment to let us handle it for you. We have a team member here that works these erroneous revocation cases with 100% success.

  5. Greg, this post is so helpful! Thank you! Our organization lost its tax exempt status in 2012. We reapplied in February of 2013 and we have heard nothing to date. From reading the comments above, it appears as though this timeline is normal, however, we don’t know if we are supposed to file another 990 at this time. I have tried calling the IRS numerous times, but I just sit on hold for HOURS. Are we supposed to just wait and see what the IRS says before filing another one for this past year?

    1. This is the limbo that plagues many organizations seeking reinstatement. Technically, you should call IRS Exempt Organizations and “pre-register” in order to file Form 990 before your reinstatement is approved. This is often difficult as many EO telephone agents are poorly trained on this procedure. My advise at this point is file an extension for 2013 and maybe a second one prior to August 15 (if not yet approved) and wait it out. You’ll have until November 15 to file for 2013 and you should have more forward progress on your reinstatement by then. Good luck!

  6. I am looking for help and advice since I am completely frustrated with the IRS. We fell into the situation of having our 501c3 due to the timing and confusion of activation date of our 501c3 and filing of he 990. We filed the form 990 and got revoked because previous years were not filed but they don’t tell you how you can file past years. We then submitted our application for reinstatement with request for retro date, paid the filing fee, submitted all previous missing years 990s last year March 2013. As of today (I call at last once a month) still nothing. Our application is sitting and limbo and all the rep tells me “sorry were behind and your case has not been assigned yet”. What can we do about this. It just seemed so unfair for the little people. I want to scream! Where can we go? Who can we turn to? In the meantime we are stuck in limbo.

    1. I know it is very frustrating. Unfortunately, there is nothing you can do to speed things up. The IRS is backlogged beyond belief. If an organization’s application for 501c3 isn’t approved in pre-screening, the queue is about 12-18 months before anyone is assigned to follow-up.

  7. We are a small outreach and ministry seen as a religious organization by the IRS. We received our letter of revocation in September 2012 for not filing form 990N. We immediately reapplied using form 1023. The IRS sent a letter in November 2012 stating they had received our application and additional information was needed. We have not heard anything from them since and when I call they just read me a script and tell me someone will eventually be assigned to our case. I hope we will be reinstated back to the date of revocation but what about donations received for last year? Even if we are reinstated will donations still be tax deductible to the donor??
    It has been 14 months since the IRS received our application. How long should we have to wait?
    Thank you for your time and any help or advise you might be able to give!

    1. The delay is not unusual. If your new Form 1023 was flagged in pre-screening as needing follow-up, the assignment queue is as long as a year and a half. That doesn’t mean it will take that long, but it could…and, there is not anything you can do to speed that up. As it is, though, your donors should be grandfathered in when/if your nonprofit is granted status again.

  8. We are a church (est 2005) that came under a group exemption in 2012. Of course we wer subsequently revoked because we never filed form 990. Are we now able to get our exemption back under the group exemption? Are churches exempt from form 990? And if we were to file form 990, we fall under the standard 990 form filing requirement.

    1. What you’re saying is very odd. If you are a church, you shouldn’t be liable for Form 990 at all. Therefore, you shouldn’t have experienced a revocation. About the only way that could have happened would be for the group exemption to not be for an association of churches, but rather something else with a Form 990 requirement. There’s no way for me to know without seeing your documentation. Something is really wrong about all that.

      1. Our group exemption is with International Congress of Churches and Ministers organization. As a member we were exempt with the group exemption. The organization has one group exemption for local churches, Missions, Christian Bible Schools, Christian Counseling Centers, Evangelistic Associations. I thought each member in group exemption is treated individually regarding 990?

        1. Int’l Congress of Churches and Ministers is a DBA of Michael Chitwood’s church conference organization. I’ll refrain from giving my very low opinion of this organization and stick to what I can see. It appears ICCM has a group exemption, though I cannot tell if it is an association of churches. If it is, your 501(c)(3) should be valid through the group exemption with no Form 990 required. If the group status is not specifically for an association of churches, a Form 990 requirement is pretty likely. It is impossible for me to see that and Chitwood’s website doesn’t say. The fact that you received a revocation notice from the IRS indicates you may have been liable, though we see IRS mistakenly revoke statuses from time to time. My advice would be to seek status on your own and get away from ICCM, but that’s just me.

      2. Hi, I was going to comment on the other post but commenting is closed. Please help. If I apply for 501c3 exempt status (real simple) and then decide to give out grants to organizations in foreign countries the future (as seen in Schedule D of Form 1023), do I need to update my record with the IRS? or how does this work? Also, In part 4 (planned activities) do I have to include every single plan as seen in the articles of incorporation or can I just include 2 or 3 immediate (planned) activities?

        1. Also if project that we will not average over $10,000 in the next 4 years and then we end up going over $10,000, do I need to pay the IRS back? How is it fixed? Thanks much!

          1. Good questions. If you get IRS approval, then later add or significantly expand your programs, you can simply inform the IRS via your annual Form 990 filing. As far as the filing fee goes, it is possible that the IRS would follow up and seek the filing fee difference. That’s not a certainty, however. I do not recommend voluntarily sending them the difference. Just do your best to accurately budget out the first 4 years and then pay the right filing fee based on that projection.

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