Industry Insights

IRS Issues Guidance for Organizations Applying to Reinstate Tax-Exempt Status

July 2011
Author:  Rita Worster

Rita Worster

Senior Manager

Health Care, Not-for-Profit & Government

111 S. Tejon Street, Suite 800
Colorado Springs, CO 80903-2286

Colorado Springs
719.471.4290

The IRS announced in June that approximately 275,000 organizations lost their tax-exempt status after not filing an annual report for three consecutive years. The IRS has announced steps for existing organizations to apply for reinstatement of tax-exempt status, as there is no appeals process for automatic revocations.

An organization seeking tax-exempt reinstatement must use the same forms as all other applicants. Organizations described in Internal Revenue Code Section 501(c)(3) will complete Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code,while other organizations will complete Form 1024, Application for Recognition of Exemption Under Section 501(a). To facilitate processing, “automatically revoked” should be written at the top of the application form and on the envelope. The appropriate user fee must be paid with the application; current user fees are $400 or $850, depending on annual gross receipts. 

All organizations must submit an application, even if an application was not originally required to apply for tax-exemption recognition. For example, a subordinate organization included in a group exemption letter must submit an application for reinstatement on its own behalf.

The effective date for reinstatement is the filing date of the application, except for small organizations as described below. Requests for retroactive reinstatement must include:

  • A written statement of reasonable cause for failing to file a required return
  • A written statement describing safeguards to prevent failure to file in the future
  • Evidence to substantiate material aspects of the written statements
  • Completed annual information returns, such as Form 990, 990-EZ or 990-PF, for all years during and after the consecutive three-year period resulting in revocation, even if the organization was eligible to file a 990-N e-Postcard
  • A declaration dated and signed by an officer, director or trustee; refer to Notice 2011-44, Section 5 for the declaration 

Except for small organizations, retroactive reinstatement requests must be completed within 15 months of the automatic revocation.

Small organizations can apply for retroactive reinstatement of tax-exempt status at a reduced user fee. Notice 2011-43 outlines three criteria for retroactive reinstatement eligibility and a $100 reduced fee. First, the organization is not required to file annual information returns such as Form 990 or Form 990-EZ for taxable years beginning before 2007. Second, the organization must have been eligible in each of the taxable years beginning in 2007, 2008 and 2009 to file a Form 990-N e-Postcard. In general, organizations (other than private foundations and 509(a)(3) supporting organizations) with annual gross receipts of $25,000 or less are eligible to file a Form 990-N e-Postcard. Third, an application for reinstatement must be submitted by December 31, 2012. The top of the application and envelope must include “Notice 2011-43” for small organizations seeking the transitional relief. 

Churches meeting Section 501(c)(3) requirements are automatically considered tax-exempt and not required to apply for recognition. Churches and certain other religious organizations are not required to file an annual return or notice with the IRS and are not subject to automatic revocation for failure to file. Many churches seek recognition of tax-exempt status to receive a determination letter for contributors or state and local authorities.

Some churches may find themselves on the auto-revocation list if IRS records do not identify the organizations as churches. However, if an organization on the list is a church meeting the requirements of Section 501(c)(3), it remains exempt from taxation and eligible to receive tax-deductible charitable contributions even though the IRS no longer recognizes its exempt status in Publication 78, in the Business Master File (BMF) extract or in a determination letter. If the church wishes to appear in Publication 78, have tax-exempt status reflected in the BMF extract or have a current determination letter, it must apply for reinstatement of tax-exempt status as outlined above.

For more on how these regulations could affect your organization, contact your BKD advisor.