Nonprofits’ Second Chance: Exploring Retroactive Reinstatement Options for Revoked Tax-Exempt Status
By Ariana N. Jordan, Senior Manager, Tax & Business Services
The successful establishment of a charitable organization is a moment of pride and accomplishment, where altruistic visions are transformed into operational entities serving the public good. When this occurs, it benefits all of us. In the early stages, enthusiasm is high, and compliance with regulatory requirements is usually maintained with ease. However, as the years pass and an organization’s activities slow down or its mission becomes less relevant, critical filing deadlines may be missed—especially when the initial excitement fades.
So, what happens next? What becomes of a charitable organization that has lost its momentum? In many cases, failure to meet compliance obligations, such as filing required annual forms, can lead to the automatic revocation of its tax-exempt status by the IRS. While this is an unfortunate consequence, it’s not the end of the road. In fact, there are two primary options available for organizations to regain their tax-exempt status and be reinstated on the IRS Publication 78 list. These options apply to entities previously granted exemptions that are still operational.
The IRS is not deliberately targeting tax-exempt organizations for elimination. The most common reason for revocation is failing to file the annual Form 990 (or a related form in the series) for three consecutive years. When an organization’s tax-exempt status is revoked, the IRS promptly notifies the entity. It is essential that the organization responds quickly to this notification in order to request reinstatement. The two available options for reinstatement are:
- Streamlined Retroactive Reinstatement
- Retroactive Reinstatement
1. Streamlined Retroactive Reinstatement
Only certain types of organizations are eligible to use the streamlined process. Specifically, entities that file either Form 990-EZ or Form 990-N are eligible. Larger organizations that are required to file the full Form 990 cannot use this method. Additionally, if your organization’s tax-exempt status has been previously revoked, you are not eligible for the streamlined process and must consider the Retroactive Reinstatement option.
To qualify for Streamlined Retroactive Reinstatement, the organization must submit its application for reinstatement within 15 months of the date of the CP-120A letter or the date the organization appears on the IRS revocation list. This requires completing Form 1023, which corresponds to the organization’s level of activity.
2. Retroactive Reinstatement
Retroactive reinstatement is the alternative for organizations that are either ineligible for the streamlined process due to their size or complexity or that fail to respond within the 15-month window. This process also involves filing Form 1023, but additional documentation is required to substantiate the organization’s case. The organization must provide a reasonable cause for failing to file the required forms for one of the three years, along with a statement confirming that all necessary filings have now been submitted. The completed application package must then be mailed to the IRS office in Ogden for review.
Penalties and Compliance
In most cases, requesting retroactive reinstatement relieves the organization from penalties under Section 6652(c) for late filing. However, reinstatement does not guarantee future compliance, and organizations must remain diligent to avoid future revocations. It’s critical for tax-exempt entities to stay compliant with IRS filing requirements, as failure to do so could lead to another revocation.
As the saying goes, “An ounce of prevention is worth a pound of cure.” Ensuring your nonprofit organization remains in compliance will save time, resources, and potential penalties down the road.
