Exempt Status Revoked? Get It Back!

Has the IRS revoked your organization's tax-exempt status because you didn't file Form 990-N, Form 990-EZ, or Form 990 for three consecutive years? Here's what you need to know:

1. The IRS made a new rule that took effect in 2007 that said if an organization fails to file a required Form 990 for three years in a row, the organization's tax-exempt status is AUTOMATICALLY revoked. This means that if you were required to file either Form 990-N, 990-EZ, or Form 990 and failed to do so for 2007, 2008, and 2009 (or any other 3 year period), your tax-exempt status is automatically revoked as of May 15, 2010 (or future corresponding due date).

2. In order to get your exempt status back, you have to re-apply by filing Form 1023, or Form 1024, whichever applies. Normally, the IRS will reinstate your exempt status as of the date of the application ( I would assume this means either the date it was mailed or the date the IRS received it ).

3. During the time period between revocation and re-approval (which could easily be many months) your organization will be treated as a taxable corporation and will have to file a regular corporate tax return (Form 1120) and pay any tax due on income; unless...

4. If your organization can show that it had "reasonable cause" for not filing a return for 3 consecutive years, the IRS may reinstate your tax-exempt status retroactive to date of revocation, which means your organization will not have any period in which it was not tax-exempt.

UPDATE: January 2, 2014: The IRS has published Revenue Procedure 2014-11 which provides streamlined procedures for 990-N and 990-EZ filers to get retroactive reinstatement and clarifies procedures for other organizations. Click to read an important summary of Revenue Procedure 2014-11 and what it means.

Showing "Reasonable Cause"

If you are going to re-apply to have your tax-exempt status reinstated, there really is no reason not to ask for "retroactive reinstatement" unless you think you don't have a reasonable cause.

The IRS has issued some guidelines regarding how to ask for retroactive reinstatement and how to show reasonable cause for late or non-filing. But, as usual, the IRS guidelines leave out more information than they reveal.

I've expanded my penalty abatement manual e-book to include detailed instructions that explain exactly how to show that your organization had reasonable cause for not filing returns for three consecutive years. It's the "instructions to the IRS instructions."

But, so far, the IRS has granted retroactive reinstatement in very few cases. They have, in effect, offered false hope to most organizations.

Read this before proceeding with a request for retroactive reinstatement.

Of course, if you don't have reasonable cause, i.e. if you knew you should have been filing but just never got around to it, then you are not eligible for retroactive reinstatement. But you can still apply to get your tax-exempt status back simply by filing Form 1023 or 1024 (whichever applies to you) and paying the application fee to the IRS (they call it a "user fee."