Small nonprofits that lost exempt status may be eligible for reinstatement

By Nick Fiore

In general, exempt organizations must file an annual information return, such as a Form 990, Form 990-EZ, or Form 990-PF.However, several categories of exempt organizations, including most organizations whose annual gross receipts are normally not more than $50,000 ($25,000 for tax years beginning before 2010), were exempt from this filing requirement.

This was changed by the Pension Protection Act of 2006. For tax years after 2006, small nonprofits were required to annually file a Form 990-N e-Postcard; any organization that failed to do so (or failed to file an information return) for three consecutive years would have its exempt status automatically revoked.

In June 2011, the IRS announced that approximately 275,000 nonprofits had automatically lost their exempt status under these new provisions. To help those small organizations that had inadvertently found themselves in this situation, the IRS has issued Notice 2011-43, describing how the exempt status of these nonprofits may be reinstated.

According to this notice, a nonprofit that has had its exempt status automatically revoked under the provisions added by the Pension Protection Act of 2006 and that wants to have its exempt status reinstated must apply for reinstatement with the IRS (even if it was not originally required to submit such an application). If an organization applying for reinstatement of its exempt status can show reasonable cause for its failure to file for the three years involved, its exempt status may be reinstated, retroactive to the date it was revoked.

Reasonable cause. Before 2007, many small nonprofits had never been required to file an annual return or notice. In addition, many were (and are) operated by volunteers and face unique challenges in meeting federal tax obligations. Accordingly, under Notice 2011-43, the IRS will treat a small organization (i.e., one that normally has annual gross receipts of not more than $50,000 in its most recently completed tax year) as having established reasonable cause for failing to file a Form 990-N e-Postcard or an annual return for its tax years beginning in 2007, 2008, and 2009, if it meets each of these criteria:

The organization was not required to file annual information returns for tax years before 2007.
The organization was eligible in each of its tax years beginning in 2007, 2008, and 2009, to file a Form 990-N e-Postcard (rather than an annual information return). Generally, organizations with annual gross receipts not normally more than $25,000 in such tax years would have been eligible to file a Form 990-N e-Postcard.
On or before December 31, 2012, the organization submits, to the IRS, a properly completed and executed application for reinstatement of exempt status.

An organization's annual gross receipts are "normally not more than" $25,000 or $50,000 in a tax year if its average annual gross receipts for that year and the two years immediately preceding it are not more than $25,000 or $50,000, respectively.

Applying for reinstatement. An organization looking to regain its exempt status must use the proper form for seeking a tax exemption. Therefore, a Section 501(c)(3) charitable organization seeking reinstatement of tax-exempt status must submit Form 1023; most other organizations must submit Form 1024. Remember: Any organization that seeks reinstatement of exempt status must submit the appropriate application, regardless of whether the organization was originally required to apply for exempt status.

A small organization seeking this transitional relief must write "Notice 2011-43" on the top of the form it uses to apply for reinstatement and on the envelope in which the forms are sent.

The nonprofit must also attach the following statement to its application for reinstatement:

[Name of Organization] was not required to file annual information returns for taxable years beginning before 2007; was eligible in each of its taxable years beginning in 2007, 2008 and 2009 to file a Form 990-N e-Postcard; and had annual gross receipts of normally not more than $25,000 in each of its taxable years beginning in 2007, 2008 and 2009.

Note: Those small organizations eligible for this relief are also eligible for a reduced user fee of $100 for the application of reinstatement of tax-exempt status. For information on where to mail the application for reinstatement of tax-exempt status, see the Instructions for Form 1023 or Form 1024 (whichever is applicable).

Nonqualifying organizations. Nonprofits that do not qualify for the relief provided by Notice 2011-43 should instead consult Notice 2011-44. This notice provides similar, but much more stringent, requirements that must be met. The request for retroactive reinstatement and the application for reinstatement of tax-exempt status must include detailed written statements and supporting documentation, and properly completed and executed paper annual information returns (e.g., Forms 990, Forms 990-EZ, or Forms 990-PF).

In addition, an organization must demonstrate that it had reasonable cause for failing to file a return or notice, not only for each of the three years, but also over the entire three-year period. The notice includes a list of factors that the IRS will consider (and which must be substantiated to its satisfaction) in determining if reasonable cause was present.

Under Notice 2011-44, the IRS will consider an organization's request for retroactive reinstatement only if it submits such a request - together with a properly completed and executed application for reinstatement of its exempt status - within 15 months of the later of the date of the IRS revocation letter or the date on which the IRS posts the name of the organization on the revocation list available on the IRS website (or otherwise provides notice of the revocation to the public).

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