Not-for-profit companies must stay up to date on filing form 990 or 990-N with the IRS in order to maintain tax-exempt status. If at all possible, it’s best to avoid losing tax-exempt status in the first place, because failing to uphold California nonprofit audit compliance requirements means your company may be subject to corporate taxes on revenue, penalties, back taxes, and other problems.
Why it is important for your nonprofit to stay current with IRS 990 forms
The form 990 series explains your organization’s mission and financial situation to the IRS. They are part of your annual filing duties. Failing to file a form 990 for three consecutive years will result in your tax-exempt status being revoked.
How Your Nonprofit can get reinstated
Depending on the type of nonprofit organization you run, you can either file a form 1023 or form 1024 with the IRS. These are the “Application for Recognition of Exemption” forms for either a 501(c)(3) or a 501(a).
When you file, you will need to include your explanation for why your nonprofit has not filed a form 990 for three consecutive years. This is known as providing reasonable cause. If you can prove that you have a compelling reason for failing to file, provide details on what happened, when you discovered the mistake, and how you plan to rectify it so it doesn’t happen again, you may regain your tax-exempt status.
Keep in mind, however, that the period between the revocation and reinstatement dates will not be covered, and your organization’s activities will be taxable. To avoid this, you can apply for retroactive reinstatement that becomes effective on the date of the revocation. To qualify, you must apply within 15 months of the IRS sending you a letter explaining your revocation of tax-exempt status, or the IRS posting the name of your organization on their website, whichever happened later.
As you file, be sure to attach all evidence you have to back up your claims and include completed tax returns for the period in which your organization’s activities were taxable. A director or an officer in your organization will need to send a declaration along with your filing, according to the guidelines in IRS Notice 2011-44.
If you send the required fees and a notation of “AUTOMATICALLY REVOKED” at the top of the form and on the envelope, you may be able to have your case expedited.
Additional Nonprofit tax status questions?
Professional nonprofit audit services can help you straighten out your nonprofit accounting and regain your tax-exempt status, even if you’ve lost your status due to excess benefit transactions or other financial missteps.