Key takeaways
- Federal law automatically revokes the tax-exempt status of an organization that fails to file a required Form 990-series return or notice for three consecutive years.
- The IRS notifies organizations with a CP-120A letter and lists them on its Automatic Revocation of Exemption List.
- Revenue Procedure 2014-11 provides four ways to apply for reinstatement. Acting within 15 months opens the most favorable options.
- Small organizations eligible to file Form 990-EZ or 990-N may qualify for streamlined retroactive reinstatement without showing reasonable cause.
- Organizations must also address state consequences, such as charity registration, state income tax and sales tax exemptions.
It happens more often than most board members would expect. A volunteer treasurer moves away. A small foundation’s founder passes on. A community organization assumes it doesn’t need to file because its revenue is small. Three years go by without a Form 990, 990-EZ or 990-N being filed, and the organization’s federal tax exemption is automatically revoked.
Revocation can affect donors’ ability to deduct contributions, the organization’s eligibility for grants, and its tax liability. The good news: the IRS provides clear paths to reinstatement, especially for organizations that act quickly.
How automatic revocation works
Under Internal Revenue Code Section 6033(j), an organization that is required to file an annual return or notice and fails to do so for three consecutive years automatically loses its tax-exempt status. Revocation is effective as of the filing due date of the third missed return.
The requirement applies broadly, including to small organizations: – Form 990-N (e-Postcard) for many organizations with gross receipts normally 50, 000orless * *; − * * Form990 − EZ * * formanyorganizationswithgrossreceiptsunder * *200,000 and total assets under $500,000; – Form 990 for larger organizations; and – Form 990-PF for private foundations.
Churches and certain church-related organizations, and some government-affiliated entities, are generally not required to file and are not subject to automatic revocation.
How you find out
- The IRS sends a CP-120A letter confirming revocation.
- The organization appears on the Automatic Revocation of Exemption List, searchable through the IRS Tax Exempt Organization Search tool.
- Donors, grantmakers and banks may discover the revocation before the organization does.
Consequences of revocation
- Federal income tax: The organization may be required to file income tax returns (such as Form 1120 for corporations or Form 1041 for trusts) and pay tax on net income for periods after revocation.
- Charitable deductions: Contributions made after the revocation is published may not be deductible by donors, subject to limited reliance protections.
- Grants and funding: Many foundations and government programs fund only organizations with current exempt status.
- State exemptions: State income tax, sales tax and property tax exemptions often depend on federal status.
- Reputation: Being on the revocation list can concern donors, partners and lenders.
The four reinstatement paths
Revenue Procedure 2014-11 describes four procedures. The right one depends on the organization’s size, history and how quickly it applies.
In all cases, the organization must file the appropriate application for exemption, such as Form 1023 (or Form 1023-EZ, if eligible) for 501(c)(3) organizations, or Form 1024 / 1024-A for most other exempt organizations, with the required user fee. Applications are filed electronically through Pay.gov.
Path 1: Streamlined retroactive reinstatement (within 15 months)
Who qualifies: – The organization was eligible to file Form 990-EZ or 990-N for each of the three years it failed to file; – It has not previously had its status automatically revoked; and – It applies no later than 15 months after the later of the date on its CP-120A letter or the date it appeared on the Revocation List.
What’s required: – A completed Form 1023 (or Form 1023-EZ, if eligible), 1024 or 1024-A, with the user fee. – For processing, the IRS asks organizations to write “Revenue Procedure 2014-11, Streamlined Retroactive Reinstatement” at the top of the application (or follow the current electronic form instructions for indicating the request). – No reasonable cause statement is required, and the organization generally does not need to file the missing returns.
Result: If approved, exemption is reinstated retroactively to the revocation date, as if it had never been revoked.
Path 2: Retroactive reinstatement within 15 months (not eligible for streamlined)
Who qualifies: Organizations that apply within 15 months but don’t qualify for the streamlined process, for example, because they were required to file Form 990.
What’s required: – The application and user fee; – A reasonable cause statement for failing to file for at least one of the three years; and – Properly completed and executed returns for the missing years.
Result: If approved, exemption is reinstated retroactively to the revocation date.
Path 3: Retroactive reinstatement after 15 months
Who qualifies: Any organization applying more than 15 months after the CP-120A or Revocation List date.
What’s required: – The application and user fee; – A reasonable cause statement for all three consecutive years; – Properly completed returns for the missing years; and – A statement confirming that the organization has put procedures in place to ensure future filings.
Result: If approved, exemption is reinstated retroactively to the revocation date. Reasonable cause for all three years can be harder to establish, so documentation matters.
Path 4: Reinstatement from the postmark (application) date
Who qualifies: Any organization, including those that cannot show reasonable cause or do not seek retroactive reinstatement.
What’s required: The application and user fee.
Result: If approved, exemption is effective from the date the application was filed, not retroactively. The organization may owe tax and file returns for the gap period.
Summary table
| Path | Time limit | Reasonable cause | Missing returns | Effective date |
|---|---|---|---|---|
| 1. Streamlined | Within 15 months | Not required | Generally not required | Revocation date (retroactive) |
| 2. Within 15 months | Within 15 months | At least one year | Required | Revocation date (retroactive) |
| 3. After 15 months | After 15 months | All three years | Required, plus compliance procedures | Revocation date (retroactive) |
| 4. Postmark date | Any time | Not required | Not required for reinstatement | Application date |
Organizations whose status was previously revoked are not eligible for the streamlined process.
User fees
IRS user fees for exemption applications have been 600 * * forForm1023andForm1024/1024 − Aand * *275 for Form 1023-EZ. Fees are updated periodically, so confirm the current amount on IRS.gov before filing.
What counts as “reasonable cause”?
Reasonable cause generally means the organization exercised ordinary business care and prudence but was nevertheless unable to file. A strong statement: – explains the facts and circumstances that prevented filing, such as death or serious illness of the person responsible, records destroyed by casualty, or reliance on erroneous advice; – shows how the organization responded once it became aware of the problem; and – describes steps taken to prevent recurrence.
Simply not knowing about the filing requirement or a volunteer forgetting to file is often not enough on its own, so the facts should be presented carefully and with supporting documentation.
State issues: don’t forget Massachusetts and other states
Federal reinstatement doesn’t automatically resolve state matters: – Charity registration: Massachusetts public charities generally must file an annual Form PC with the Attorney General’s Non-Profit Organizations/Public Charities Division. Lapses can create separate compliance issues. – State income tax: Some states require separate exemption filings or returns for periods without federal exemption. – Sales tax exemption: Massachusetts and many other states issue sales tax exemption certificates (in Massachusetts, generally through the Department of Revenue) that depend on federal status. – Property tax: Local exemptions may need to be re-established.
Step-by-step reinstatement plan
- Confirm the revocation through IRS Tax Exempt Organization Search and locate the CP-120A letter.
- Determine the key dates: revocation date, CP-120A date and Revocation List date, to calculate the 15-month window.
- Assess eligibility for each path: size, filing history, reasonable cause.
- Gather records: governing documents, financial statements, board minutes and records for the missing years.
- Prepare missing returns if required.
- Draft the reasonable cause statement if required.
- Prepare and file the application on Pay.gov with the correct user fee.
- Address tax filings for any gap period, if needed.
- Address state requirements.
- Implement compliance procedures: a filing calendar, board oversight and backup responsibility.
Frequently asked questions
Yes, but understand the tax and donor implications during the gap. Communicate carefully with donors and grantmakers.
It depends on the path. Streamlined reinstatement generally does not require them; other retroactive paths do.
Generally not after revocation is published, unless reinstatement is retroactive. Limited reliance protections may apply. Donors should consult their tax advisors.
It is not eligible for streamlined reinstatement but may use the other procedures.
The bottom line
Automatic revocation is serious, but it is often fixable, especially for organizations that act within 15 months. Determine your dates, choose the right path, document reasonable cause carefully, and put procedures in place so it never happens again.
Foxboro Consulting Group, Inc. assists nonprofit organizations with the tax-exempt status re-application and reinstatement process, including eligibility analysis, application preparation and compliance planning. Contact us to discuss your organization’s situation.
This article is for general informational purposes and does not constitute tax or legal advice. IRS procedures and fees change; consult a qualified tax advisor or exempt organizations attorney.
