What Really Happens When You Lose Tax Exempt Status

A lot of organizations know they can lose their tax exempt status, but not many know the details of what happens during these periods.

So we’ve taken it upon ourselves to see what the IRS has to say about losing your tax exempt status.

How Do You Reinstate Your Tax Exempt Status?

How do you reinstate your tax exempt status reinstated if it was automatically revoked?

First, you must apply to have your organization’s tax exempt status reinstated. You still need to do this, even if you originally didn't have to.

According to the IRS, here’s what you need to do:

1. Apply for recognition of tax exemption by filing Form 1023 (if applying under section 501(c)(3)), or Form 1024 or a letter (if applying under a different Code section), regardless of whether the organization was originally required to apply for exemption; and
2. Pay the appropriate user fee.

An organization can also ask for retroactive reinstatement as part of its application.

What Happens When You Lose Tax-Exempt Status?

Well, first the IRS sends you a letter informing the organizations of the revocation!

When you lose your tax exempt status, you are automatically no longer exempt from federal income tax.

So you may be required to file one of the following federal income tax returns and pay the applicable taxes of said forms:

• Form 1120, U.S. Corporation Income Tax Return, due by the 15th day of the 3rd month after the end of the organization’s tax year
• Form 1041, U.S. Income Tax Return for Estates and Trusts, due by the 15th day of the 4th month after the end of your organization’s tax year

When your organization has its status automatically revoked, it is not eligible to receive tax-deductible contributions and will not qualify for the cumulative list of tax-exempt organizations, Publication 78.

For donors—they are able to deduct contributions made before an organization’s name appears on the Automatic Revocation List.

Be aware, there may be state and local laws as well as taxes that affect you once your exempt status is revoked.

What Happens When You Are Reinstated?

Most likely, your organization’s effective date of reinstated exemption will be the date that your application was submitted to the IRS.

Thankfully, you can request retroactive reinstatement for the effective date of revocation. However, the IRS only grants retroactive reinstatement of exemption under certain limited circumstances.

Once you’re back and running, be sure to e-file IRS Form 990 with ExpressTaxExempt!

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Form 990 Rejection: Surviving Bumps in the Road

Everything is going great—your nonprofit is growing in the community, volunteers are showing up for events, and you see people are getting the help they need. But then it happens. A bump in the road.

Your Form 990 return is rejected by the IRS.

What do you do? Who do you turn to? Well, you trusted us with video production, social media, and email marketing, so trust us when we tell you this isn’t the end. Take a deep breath, exhale, and keep reading.

First up, let’s examine Form 990 rejection:

• This may sound obvious, but you need to obtain tax exempt status from the IRS before filing Form 990. If you try to file without tax exempt status, you will be rejected. You can get tax exempt status by filing Forms 1023 or 1024.
• If you’ve already applied for exempt status as a 501(c)(3), your return may be rejected by the IRS unless you check the applicable option.
• If you file your Form 990 return with the incorrect tax period for your organization, the IRS will reject it. This is a pretty common error! Many organizations believe they run on a calendar tax year, even though they don’t. Don’t know your operating period? You’ll have to contact the IRS to find it out.
• If your tax exempt organization hasn’t filed for three consecutive years, the IRS can cancel your status. Not only will your 990 be rejected in this case, but you’ll also need to re-file a Form 1023 or 1024.

So what do you do if your 990 is rejected? Well, if you filed with ExpressTaxExempt, we will notify you right away if your form was rejected, explaining the reason so you can quickly correct any needed information.

After the corrections are made, you can re-transmit your return at no extra cost!

So what do you do if you’ve lost your status as a nonprofit? Your tax exempt organization will need to apply to have their tax-exempt status reinstated, even if you were not originally required to file an application.

What Do You Do If You Lose Tax Exempt Status?

You need to get it back, come on! To do this, you simply need to apply for tax exemption recognition by filing Form 1023, Form 1024, or a letter if applying under a different Code section, regardless of whether the organization was originally required to apply for exemption. Finally, you need to pay the appropriate user fee.

Want to reduce the chance of 990 rejections? By e-filing with ExpressTaxExempt, you replace the confusing and frustrating tax forms with the streamlined e-filing process of ETE.

If you run into any questions while e-filing, give our awesome customer support team a call at 704.839.2321. They can also be reached by email at support@ExpressTaxExempt.com.

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