New IRS Rules Help Nonprofits That File Form 990-N

Did your nonprofit lose its tax exemption for failing to file Form 990-N? The IRS has new rules allowing nonprofits to retroactively regain their tax-exempt status.

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It used to be that small nonprofits didn’t have to make any annual tax filings with the IRS. However, the IRS introduced a new form in 2008—Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations not Required To File Form 990 or 990-EZ. Beginning in tax year 2007, all nonprofits with gross receipts “normally” under $25,000 were required to file the form, a simple e-postcard that is filed electronically. In tax year 2010, the $25,000 threshold for filing went up to $50,000, so that more small nonprofits are eligible to file the e-Postcard.

Congress imposed this new filing requirement because of concerns that small nonprofits were not keeping the IRS up to date on their address and other changes. The 990-N form has enabled the IRS to create a database that stays current with basic information on all active nonprofits: the IRS online Exempt Organizations Select Check Tool. This is important both for IRS administrative purposes and for donors who want to make sure they are contributing to recognized nonprofits.

Loss of Tax Exemption for Failure to File Form 990-N

Unfortunately, the penalty for failing to file Form 990-N is severe. Any nonprofit that fails to file Form 990-N for three consecutive tax years (starting with 2007) will automatically have its tax exemption revoked by the IRS. This occurs on the filing due date of the third year. For example, if a nonprofit’s returns are due on May 15 each year, and it fails to file by May 15 of 2012, 2013, and 2014, it will automatically lose its tax-exempt status on May 15, 2014.

When a nonprofit loses its tax exemption, the IRS sends it a Revocation Letter (CP-120A) and places its name on the Automatic Revocation of Exemption List on the IRS website. This is not good. But even worse, donors may not deduct their contributions made to a nonprofit after it loses its tax exemption. In addition, the formerly exempt nonprofit must pay income tax on any income it earns after its exempt status is revoked. The nonprofit is also liable to the IRS for penalties for failure to file of $20 per day, up to a maximum of $10,000 for each return not filed.

As you might expect, tens of thousands of small nonprofits failed to timely file Form 990-N and have lost their tax exemptions. Many of these were inactive, but not all of them. Many failed to file the form simply because they were unaware of the new requirement, or were poorly administered organizations without staff to take care of such details.

Regaining Tax-Exempt Status

If a nonprofit loses its tax-exempt status, it has to apply all over again to get it back by filing IRS Form 1023—the application form all nonprofits must file to obtain their tax exemption. There is a hefty fee to file this form--$400 if a nonprofit’s income is less than $10,000, otherwise $850. Not to mention all the hassle of filling out the complex form. In addition, such reinstatement is ordinarily not retroactive. This means that a reinstated nonprofit's donors cannot claim a tax deduction for contributions made to the nonprofit before the date of reinstatement. Moreover, the nonprofit will still owe tax on income it earned before the reinstatement, as well as nonfiling penalties. In 2012, the IRS created a special program that allowed smaller nonprofits to regain their exempt status retroactively back to the date of revocation, but the program expired on December 31, 2012.

Streamlined Retroactive Reinstatement

The IRS has now created a new program for 2014 to help small nonprofits that lost their tax-exempt status due to failure to file Form 990-N. Starting in 2014, a small nonprofit can have its tax-exempt status retroactively reinstated to the date of revocation if it:

  • did not previously have its tax-exempt status automatically revoked, and
  • it completes and submits Form 1023 with the appropriate fee no more than 15 months after the later of (1) the date of the nonprofit’s Revocation Letter (CP-120A), or (2) the date the nonprofit appeared on the Revocation List on the IRS website.

When a nonprofit has its tax-exempt status retroactively reinstated on this basis, it’s as if the revocation never occurred. This means that donors may deduct contributions they made after the revocation, and the nonprofit need not pay any tax on the income it earned during that time. Nor will it have to pay any nonfiling penalties to the IRS.

Nonprofits that apply for reinstatement more than 15 months after the later of the date on the organization’s revocation letter or the date the organization appeared on the Revocation List on the IRS website may have their tax-exempt status retroactively reinstated to the date of revocation only if they can establish reasonable cause for the failure to file the returns for all three years, which can be hard to do.

For more details on the streamlined retroactive reinstatement procedure, see IRS Revenue Procedure 2014-11.

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