Richard Sills is a Partner in our Washington, D.C. office
Hundreds of thousands of exempt organizations had their tax-exempt status revoked as a result of failing to file tax returns for three consecutive years. Many were smaller organizations that were not aware of the 2006 law change that required all exempt organizations (except churches) to file annual returns, regardless of how small their annual receipts may be.
Now, the IRS has issued guidance (Revenue Procedure 2014-11, attached below) to clarify and streamline the process for such an organization to have its tax-exempt status reinstated, on a retroactive basis. With a retroactive reinstatement, there is no gap in the organization's tax-exempt status. Consequently, there would be no need to file returns as a taxable organization for the interim period between revocation and reinstatement.
The most streamlined process applies to "small" nonprofits -- defined as those eligible to file Form 990-EZ or Form 990-N, rather than the more comprehensive Form 990. Currently, organizations with annual receipts of $50,000 or less may file the 990-N. Organizations with annual gross receipts below $200,000, and total year-end asset value below $500,000, may file the 990-EZ. These thresholds were different in some prior years.
A "small" nonprofit may apply for retroactive reinstatement by filing a new Form 1023 (or 1024), along with Forms 990-EZ for those past years in which it was required, but missed. If the nonprofit was eligible to file Form 990-N for any or all of the missed years, those do not have to be filed in arrears. Reasonable cause for failing to file the missed tax returns will now be assumed, and does not need to be demonstrated by a written submission. Also, late filing penalties for the prior year Form 990-EZs will be abated. These are significant changes that will benefit the "small" nonprofits.
There is a time limit: in order to take advantage of this process, the new application must be filed within 15 months of the revocation. If it is filed later, the organization must affirmatively demonstrate reasonable cause for failing to file its returns in order for tax-exempt status to be restored retroactively. That means the organization must show that it exercised "ordinary business care and prudence" in determining, and attempting to comply with, its reporting requirements.
The attached procedure also clarifies the process for organizations not eligible for the streamlined process.
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