What Really Happens When You Lose Tax Exempt Status

A lot of organizations know they can lose their tax exempt status, but not many know the details of what happens during these periods.

So we’ve taken it upon ourselves to see what the IRS has to say about losing your tax exempt status.

How Do You Reinstate Your Tax Exempt Status?

How do you reinstate your tax exempt status reinstated if it was automatically revoked?

First, you must apply to have your organization’s tax exempt status reinstated. You still need to do this, even if you originally didn’t have to.

According to the IRS, here’s what you need to do:

  1. Apply for recognition of tax exemption by filing Form 1023 (if applying under section 501(c)(3)), or Form 1024 or a letter (if applying under a different Code section), regardless of whether the organization was originally required to apply for exemption; and
  2. Pay the appropriate user fee.

An organization can also ask for retroactive reinstatement as part of its application.

What Happens When You Lose Tax-Exempt Status?

Well, first the IRS sends you a letter informing the organizations of the revocation!

When you lose your tax exempt status, you are automatically no longer exempt from federal income tax.

So you may be required to file one of the following federal income tax returns and pay the applicable taxes of said forms:

  • Form 1120, U.S. Corporation Income Tax Return, due by the 15th day of the 3rd month after the end of the organization’s tax year
  • Form 1041, U.S. Income Tax Return for Estates and Trusts, due by the 15th day of the 4th month after the end of your organization’s tax year

When your organization has its status automatically revoked, it is not eligible to receive tax-deductible contributions and will not qualify for the cumulative list of tax-exempt organizations, Publication 78.

For donors—they are able to deduct contributions made before an organization’s name appears on the Automatic Revocation List.

Be aware, there may be state and local laws as well as taxes that affect you once your exempt status is revoked.

What Happens When You Are Reinstated?

Most likely, your organization’s effective date of reinstated exemption will be the date that your application was submitted to the IRS.

Thankfully, you can request retroactive reinstatement for the effective date of revocation. However, the IRS only grants retroactive reinstatement of exemption under certain limited circumstances.

Once you’re back and running, be sure to e-file IRS Form 990 with ExpressTaxExempt!

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