How to get Tax-Exempt Status Reinstated

April 9, 2014

The IRS has recently issued guidance that allows some organizations that lost their exempt status for failure to file the required annual returns for three consecutive years to more easily have their tax-exempt status retroactively reinstated. Prior to the issuance of this guidance, it was very difficult for any organization to have its tax-exempt status reinstated retroactively, which led to some vexing and unanswered compliance questions during an organization’s “taxable” period.

Over the past several years, the IRS has attempted to inform organizations of their filing responsibilities and the consequence of failing to file. Nonetheless, many organizations have failed to comply and have had their tax-exempt status automatically revoked.

Board members and senior management of an organization that has lost its tax-exempt status for failure to file the required returns should be aware of three new procedures outlined in Revenue Procedure 2014-11:

1. An organization that was eligible to file either Form 990-EZ, Short Form Return of Organization Exempt From Income Tax, or Form 990-N (e-Postcard) for each of the three consecutive years it failed to file – and has not previously had its tax-exempt status automatically revoked – may use the following streamlined retroactive reinstatement process:

• Submit an application for recognition of exemption with the appropriate fee no later than 15 months after the later of the date of the IRS’s revocation letter or the date on which the IRS posted the organization’s name on the Auto-Revocation List – the list of organizations that have had their tax-exempt status revoked for failure to file returns.

  If approved, the organization will be deemed to have reasonable cause for its failures to file Forms 990-EZ or 990-N for three consecutive years, and it will be reinstated retroactively to the date of revocation.

  The IRS will not impose a penalty for failure to file the annual returns for the three consecutive tax years if the organization files properly completed and executed paper Forms 990-EZ for those tax years. For any year that it was eligible to file a Form 990-N, the organization is not required to file a prior-year Form 990-N or Form 990-EZ for that year.

2. An organization that is not eligible to use the process described above may use the following:

• Submit a reinstatement application with the applicable fee no later than 15 months after the later of the date of the revocation letter or the date on which the IRS posted the organization’s name on the revocation list.
• File properly completed and executed paper returns for:
  • All tax years in the consecutive three-year period for which the organization was required to file annual returns but failed to do so, and
  • Any other tax years after the consecutive three-year period for which required returns were due and not filed.
• Also include:
  • A statement confirming that the paper returns have been filed, and
  • A reasonable cause statement, described in Section 8.01 of Rev. Proc. 2014-11, showing reasonable cause for its failure to file a required annual return or notice for at least one of the three consecutive years.

​​If the organization’s application is approved, the IRS will not impose the penalty for the failure to file annual returns for the three consecutive tax years.

3. If it has been more than 15 months from the later of the date of the revocation letter or the date on which the IRS posted the organization’s name on the Auto-Revocation List:

• Follow the steps in the previous section, using instead the required reasonable cause statement described in Section 8.02 of Rev. Proc. 2014-11, showing reasonable cause for its failure to file a required annual return or notice for all three years that it failed to file.

  If the organization’s application is approved, the IRS will not impose the penalty for the failure to file annual returns for the three consecutive tax years.