On June 8, 2011, the Internal Revenue Service (IRS) released a list of more than 275,000 nonprofits that had their tax-exempt status automatically revoked due to failure to file annual returns. This list includes 1,744 nonprofits from Nevada. On this page, you will find valuable resources about the revocation compiled by the National Council of Nonprofits:
- Read the National Council’s tip sheet on automatic revocation and what to do if your organization’s tax-exempt status was revoked.
- Listen to this podcast from the IRS about the obligation of nonprofits to submit annual returns to the IRS and how revocation is automatic when a nonprofit does not file its annual returns for three consecutive years.
- The effective date of revocation is “the original filing due date, without regard to extensions, of the third annual required return or notice that was not filed.” (Source: IRS Exempt Organization Update, February 24, 2011) For many nonprofits on the automatic revocation list, this effective date is May 15, 2010.
How will we know if our organization’s tax-exempt status has been revoked?
- The nonfiler revocation list will be updated monthly by the IRS.
- Separate lists will be published for each state, the District of Columbia, and all other territories and countries. The list will provide each revoked organization’s name, Employer Identification Number (EIN), subsection code, last known address, and effective date of the revocation.
- Guidestar’s analysis in February 2011 indicates that 56 percent of the nonprofits most likely to be affected are 501(c)(3) public charities, and the vast majority—82 percent—appear to have incomes of $25,000 or less.
- Resources from Guidestar on revocation
What does it mean that a nonprofit’s tax-exempt status has been revoked?
- It means that your nonprofit is no longer exempt from federal income tax and will have to pay corporate income tax on annual revenue.
- The organization may also be subject to back taxes and penalties for failure to pay corporate income taxes as of the effective date of revocation.
- It may also mean that any state tax exemptions that your nonprofit received – such as exemptions for income tax, property tax, and sales/use tax — that are dependent on federal tax-exempt status, may also be revoked now.
- And it means that your organization will not be listed in IRS Publication 78,Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986, which is the official list of organizations eligible to receive tax-deductible charitable contributions.
- Additionally, this means that donors will not be able to receive a tax deduction for their gifts to the organization after the revocation date.
- Finally, most private foundations are unlikely to give a grant directly to nonprofits that are not tax-exempt because their guidelines normally require grantees to be recognized as tax-exempt public charities, since federal tax law imposes an excise tax on the foundation for grants made to organizations that are not tax-exempt.
What should you do now?
- Governance: Convene the board of directors to determine what the organization will do.
- Staff: Make sure that all staff (and volunteers, as applicable) understand what has happened and the significance of the revocation of tax-exempt status.
- Messaging: Make sure that the nonprofit’s website, and all other communications, are transparent about the fact that the organization is not tax-exempt. For example, remove any messages that state that donations to the organization are tax-deductible to the donor, or that describe the organization as tax-exempt.
- Donor relations: Be proactive about communicating with your donors and transparent in explaining that while donations given before the effective date of revocation are still deductible, future gifts are not, until such time as the nonprofit receives recognition from the IRS that is it once again tax-exempt. If your donors need more information on the deductibility of their gifts, refer them to IRS Publication 557. Donors to section 501(c)(3) organizations may rely on the organization’s determination letter or listing in Publication 78 to deduct contributions until the IRS publishes a notice on IRS.gov that the organization’s 501(c)(3) exempt status has been revoked.
- Recordkeeping and tax compliance: Make sure records are kept on revenue sources so that the nonprofit will be well positioned to file the appropriate tax return and pay the income taxes for the period of time that the nonprofit is not tax-exempt.
- Research the options, which may include:
- Re-applying for tax-exemption (if regaining tax-exempt status is important.)
- Note that this will require a lot of time (the IRS estimates that it takes well over 100 hours to fill out the Form 1023 (or 1024), Application for Tax-Exemption), and
- Money for filing fees (while filing fees are generally $400 for organizations that do not receive gross receipts of more than an average of $10,000 over a period of four years, or $850 for those groups whose gross receipts exceed a $10,000 annual average over a period of four years, the IRS is offering special relief to eligible organizations re-applying for tax-exempt status and reducing the fee to $100), as well as
- Fees paid to a lawyer or accountant to help you file the forms.
- Patience and time: The review process at the IRS takes between 6-9 months on average. Nonprofits applying for reinstatement should write either “Automatically Revoked” or “Notice 2011-43” on the envelope with their forms to ensure that the application is routed to a specialist who can assist.
- Know the impact on state tax exemption: Your organization’s tax-exempt status at the state level is most likely dependent upon the IRS determination of tax-exemption. Consequently, once you learn that the organization is no longer recognized as tax-exempt by the IRS you should contact the state agency responsible for issuing determinations of tax-exemption for state taxes, such as sales/use tax and property tax (as applicable to your organization) and be transparent about the IRS revocation with that agency.
- Nonprofits that re-apply may request in a letter to the IRS that the reinstatement of their tax-exempt status be retroactive to the date of their original tax-exempt recognition, but the IRS will grant that request only if it determines that there was “reasonable cause” for the nonprofit to have missed the filing deadlines. Make sure to carefully follow the instructions on the IRS website for requesting “retroactive reinstatement” of your organization’s tax-exempt status.
- Re-applying for tax-exemption (if regaining tax-exempt status is important.)
Nonprofits may also want to explore partnering with another nonprofit to serve as a “fiscal sponsor” until such time as the nonprofit is recognized as tax-exempt once again. Fiscal sponsorship can offer the nonprofit that is no longer tax-exempt a way to maintain relations with donors and continue to attract deductible gifts, although they are donated to the fiscal sponsor to fund the organization’s programs/activities. Read about fiscal sponsorship.
Revoked in error?
If you think that your tax-exempt status was revoked in error, contact the IRS. Before calling the IRS, be sure to obtain copies of all documentation you have showing a real mistake was made (such as copies of correspondence from the IRS or you proving that you had submitted a 990 in the last three years).
Read FAQs about revocation from the IRS website.
One of the compelling reasons for a nonprofit to join its State Association (like the Alliance for Nevada Nonprofits) is so that it will be alerted to critical information such as IRS filing deadlines, and other significant events or policies that impact its tax-exempt status. If you haven’t already, connect with your State Association.
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Disclaimer: The information on this website is intended as educational background only, not legal advice. The Alliance for Nevada Nonprofits encourages nonprofits that have had their tax-exempt status revoked to seek (i) professional guidance about specific situations from lawyers and accountants well-versed in the IRS Code and the law of tax-exempt organizations, and (ii) join the Alliance for Nevada Nonprofits so that they can be informed about such matters as filing deadlines and changes to IRS regulations that might impact their operations.
Note: Information on this page has been provided by the National Council of Nonprofits. The Alliance for Nevada Nonprofits is a proud Nonprofit Ally Member of the National Council of Nonprofits.