Automatic Revocation of IRS Tax-Exempt Status for Nonprofits

 

On June 8, 2011, the Internal Revenue Service (IRS) released a list of more than 275,000 nonprofits that had their tax-exempt status automatically revoked due to failure to file annual returns. Read an overview by type and location of the organizations that lost their tax exempt status in June 2011. ...

What does it mean to have your tax exempt status revoked?

It means that your nonprofit is no longer exempt from federal income tax and will have to pay corporate income tax on annual revenue.

The organization may also be subject to back taxes and penalties for failure to pay corporate income taxes as of the effective date of revocation.

It may also mean that any state tax exemptions that your nonprofit received – such as exemptions for income tax, property tax, and sales/use tax -- that are dependent on federal tax-exempt status, may also be revoked now.

And it means that your organization will not be listed in IRS Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986, which is the official list of organizations eligible to receive tax-deductible charitable contributions.

Additionally, this means that donors will not be able to receive a tax deduction for their gifts to the organization after the revocation date.

Finally, most private foundations are unlikely to give a grant directly to nonprofits that are not tax-exempt because their guidelines normally require grantees to be recognized as tax-exempt public charities, since federal tax law imposes an excise tax on the foundation for grants made to organizations that are not tax-exempt.

What Should you do now?

Governance: Convene the board of directors to determine what the organization will do.

Staff: Make sure that all staff (and volunteers, as applicable) understand what has happened and the significance of the revocation of tax-exempt status.

Messaging: Make sure that the nonprofit’s website, and all other communications, are transparent about the fact that the organization is not tax-exempt. For example, remove any messages that state that donations to the organization are tax-deductible to the donor, or that describe the organization as tax-exempt.

Donor relations: Be proactive about communicating with your donors and transparent in explaining that while donations given before the effective date of revocation are still deductible, future gifts are not, until such time as the nonprofit receives recognition from the IRS that is it once again tax-exempt. If your donors need more information on the deductibility of their gifts, refer them to IRS Publication 557. Donors to section 501(c)(3) organizations may rely on the organization’s determination letter or listing in Publication 78 to deduct contributions until the IRS publishes a notice on IRS.gov that the organization’s 501(c)(3) exempt status has been revoked.

Recordkeeping and tax compliance: Make sure records are kept on revenue sources so that the nonprofit will be well positioned to file the appropriate tax return and pay the income taxes for the period of time that the nonprofit is not tax-exempt.

Research the options, which may include:

• Re-applying for tax-exemption (if regaining tax-exempt status is important.)
  
  • Note that this will require a lot of time (the IRS estimates that it takes well over 100 hours to fill out the Form 1023 (or 1024), Application for Tax-Exemption), and
  • Money for filing fees: While filing fees are generally $400 or $850, the IRS is offering special relief to eligible organizations (those with generally less than $50,000 in annual gross receipts) of $100, as long as the application is postmarked 12/31/2012. Other groups will have to pay an application fee of either $850 or $400 depending on their annual gross receipts during the preceding four years. Read about exempt organization user fees.
  • Fees paid to a lawyer or accountant to help you file the forms.
  • Patience and time: The review process at the IRS takes between 6-9 months on average. Nonprofits applying for reinstatement should write either "Automatically Revoked" or "Notice 2011-43" on the envelope with their forms to ensure that the application is routed to a specialist who can assist.

• Know the impact on state tax exemption: Your organization’s tax-exempt status at the state level is most likely dependent upon the IRS determination of tax-exemption. Consequently, once you learn that the organization is no longer recognized as tax-exempt by the IRS you should contact the state agency responsible for issuing determinations of tax-exemption for state taxes, such as sales/use tax and property tax (as applicable to your organization) and be transparent about the IRS revocation with that agency.

• Nonprofits that re-apply may request in a letter to the IRS that the reinstatement of their tax-exempt status be retroactive to the date of their original tax-exempt recognition, but the IRS will grant that request only if it determines that there was “reasonable cause” for the nonprofit to have missed the filing deadlines. Make sure to carefully follow the instructions on the IRS website for requesting “retroactive reinstatement” of your organization’s tax-exempt status.