Lost your tax-exempt status? Here’s how to fix it.

Losing tax-exempt status can feel like a huge blow to your nonprofit organization. Without it, donations may no longer be tax-deductible for donors, you could risk paying federal income taxes, and your nonprofit's reputation might take a hit. But here's the good news—losing your tax-exempt status doesn’t have to spell the end of your organization's mission. With the right actions, you can regain it and get back to making a difference in your community.

This blog will walk you through why nonprofits lose their tax-exempt status, what steps you need to take to regain it, and how to ensure you stay compliant moving forward. Let's solve this challenge together.

Why Do Nonprofits Lose Tax-Exempt Status?

Before we discuss how to get your tax-exempt status reinstated, it’s crucial to understand why your organization may have lost it in the first place. Most nonprofits lose their status due to non-compliance or administrative mistakes. Common reasons include:

1. Failure to File Form 990

The IRS requires nonprofits to file an annual information return (Form 990, 990-EZ, or 990-N, depending on your size). If your organization fails to submit this form for three consecutive years, your tax-exempt status is automatically revoked.

2. Engaging in Prohibited Activities

Nonprofits must adhere to strict rules regarding their activities. Actions like excessive political lobbying, endorsing political candidates, or using funds for private benefits can lead to revocation of tax-exempt status.

3. Compliance Violations

This can include not meeting the organizational and operational tests, such as failing to pursue the charitable objectives outlined in your nonprofit's mission.

Understanding why the loss occurred is essential because your reinstatement process may depend on the nature and duration of the non-compliance.

Steps to Regain Your Tax-Exempt Status

The IRS does provide a pathway for reinstating your nonprofit’s tax-exempt privileges. While the process can be detailed, here’s a simplified breakdown to help you get started.

Step 1: Confirm Your Revocation

First, confirm that your nonprofit's tax-exempt status has been revoked. The IRS maintains a searchable database known as the Tax-Exempt Organization Search (TEOS). Check this database to confirm your organization is listed under the “automatically revoked” category.

Step 2: Assess Your Eligibility for Reinstatement

Next, determine which reinstatement process applies to your organization. The IRS typically offers the following options based on the severity of the issue:

• Streamlined Retroactive Reinstatement

If you've failed to file Form 990 for three consecutive years but act quickly (within 15 months of revocation), you may qualify for streamlined retroactive reinstatement by filing the overdue returns and paying any applicable fees.

• Retroactive Reinstatement with Reasonable Cause

If it's been longer than 15 months, you’ll need to prove that your failure to file was due to a reasonable cause. You’ll also need to file additional documents explaining the circumstances that led to the lapse.

• Post-Mark Date Reinstatement

For organizations that don’t qualify for retroactive options, you can still apply for reinstatement prospectively, from the post-mark date of your application.

Step 3: Prepare Form 1023 or Form 1024

To regain your tax-exempt status, you’ll need to reapply by submitting Form 1023 (Application for Recognition of Exemption Under Section 501(c)(3)) or Form 1024 (Application for Exemption Under Section 501(a)) to the IRS. Be sure to include all required documentation, including financial statements, governance policies, and proof of your past charitable activities.

Step 4: Pay the Correct User Fee

The IRS charges a user fee for processing reinstatement applications. This fee varies depending on your organization’s gross receipts, so carefully review the instructions to ensure timely payment.

Step 5: Submit Overdue Forms and Address Issues

If you missed filing Form 990s, file them now to demonstrate that your organization has addressed past non-compliance. Include a detailed explanation for the lapses if required by your reinstatement type.

Step 6: Wait for IRS Approval

After submitting your application, it’s a waiting game. The IRS typically processes reinstatement applications within 3–6 months. Once approved, you’ll receive a Determination Letter confirming your reinstatement and any retroactive privileges.

Staying Compliant Moving Forward

Now that your tax-exempt status is back on track, it’s essential to ensure compliance to avoid future revocation. Here are some tips to keep you on the right track:

1. Create a Compliance Calendar

Ensure your organization is aware of all critical IRS filing deadlines, including Form 990, unrelated business income taxes, and donor acknowledgment letters. A compliance calendar can save you from missing important dates.

2. Educate Your Staff and Board Members

Make sure your leadership team understands the requirements for maintaining tax-exempt status, including restrictions on political activity and for-profit ventures.

3. Adopt Strong Record-Keeping Practices

Maintain accurate financial and operational records. This includes documentation of revenue, expenses, board meeting minutes, and evidence of charitable activities.

4. Partner with Tax Professionals

Navigating nonprofit tax rules can be challenging. Partnering with financial professionals like SD Mayer & Associates ensures that your nonprofit stays compliant while focusing on its mission.

5. Regularly Conduct Internal Audits

Evaluate your nonprofit’s operations annually to ensure compliance with IRS guidelines and your tax-exempt mission.

Regaining Tax-Exempt Status: Crisis Turned Opportunity

Losing tax-exempt status can be a stressful experience for any nonprofit, but it’s also an opportunity to reinforce solid management and compliance practices. Taking the proper steps to resolve this issue can strengthen your organization’s operations and reputation in the long run.

If you’re navigating this process and need support, our team at SD Mayer & Associates is here to help. With years of experience working with nonprofits, we’ll simplify your reinstatement process and provide the financial clarity you need to focus on your mission.

Get in touch today to ensure your nonprofit stays compliant, efficient, and impactful.