Startup charitable nonprofit organizations typically file with IRS for recognition of tax-exempt status under Section 501(c)(3) of the Internal Revenue Code shortly after formation. If an application for such recognition (Form 1023) is filed within 27 months of formation, and approved, the IRS recognizes tax-exempt status retroactively as of the date of formation. But some organizations file beyond the 27 months, and that raises questions about whether they will receive retroactive recognition of tax-exempt status.
The short answer is it’s possible, but now only if the organization did not miss filing three (or more) consecutive Forms 990 by the application date, which would otherwise cause an exempt organization to have its tax-exemption automatically revoked.
The Form 1023 Instructions provide in pertinent part:
Generally, if you didn’t file Form 1023 within 27 months of formation, the effective date of your exempt status will be the date you filed Form 1023 (submission date). We may grant requests for an earlier effective date when there’s evidence to establish you acted reasonably and in good faith, and the grant of relief won’t prejudice the interests of the government.
Describe in detail your reasons for filing late, how you discovered your failure to file, any reliance on professional advice or advice from the IRS, and any other information you believe will support your request for relief. Also, you may want to provide a comparison of (1) what your aggregate tax liability would be if you had filed this application within the 27-month period with (2) what your aggregate liability would be if you were exempt as of your formation date. We may consider the following factors.
- You filed Form 1023 before we discovered your failure to file.
- You failed to file because of intervening events beyond your control.
- You exercised reasonable diligence, but you weren’t aware of the filing requirements. (The complexity of your filing and experience in these matters may be taken into consideration.)
- You reasonably relied on written advice from us.
- You reasonably relied on the advice of a qualified tax professional who failed to file or advise you to file Form 1023.
Revenue Procedure 2021-5, Section 6.08 provides in pertinent part the following, including clarification on granting relief under Treasury Regulation (Treas. Reg.) Sections 301.9100-1 through 3:
- In general. A determination letter recognizing tax-exempt status of an organization described in §501(c), other than §501(c)(29), is effective as of the date of formation of an organization if: (1) its purposes and activities prior to the date of the determination letter have been consistent with the requirements for tax-exempt status; and (2) it has filed an application for recognition of exemption within 27 months from the end of the month in which it was organized.
- When an application is not submitted within 27 months of formation. An organization that otherwise meets the requirements for tax-exempt status and the issuance of a determination letter but does not meet the requirements for recognition from date of formation will be recognized from the postmark date of its application or the submission date of its Form 1023 or Form 1023-EZ, as applicable.
- Application of Treas. Reg. § 301.9100-3: Organizations required to apply for tax-exempt status under §§ 505, 508, and 501(c)(29) and the regulations thereunder. … In its application for recognition of exemption under § 501(c)(3), (9), (17), or (29), an organization that has not filed its application within the required time period may request relief under Treas. Reg. § 301.9100-3 in order to be recognized and treated as tax-exempt effective as of a date earlier than the date of application, and EO Determinations may grant such relief if the requirements for relief are met. An organization applying for recognition of exemption under § 501(c)(3) after 27 months from formation may not use Form 1023-EZ if it requests an effective date earlier than the submission date, but instead must file a Form 1023. An organization will not be granted relief under Treas. Reg. § 301.9100-3 if either (1) granting the request for relief would result in the organization’s tax-exempt status being automatically revoked under § 6033(j)(1) effective before the application date (without regard to the provisions of § 6033(j)(3) and guidance issued thereunder), or (2) the period of limitations on assessment under § 6501(a) for any taxable year for which the organization claims tax-exempt status has expired prior to the date of application.
On March 17, 2021, an internal memorandum from the Acting Director, Exempt Organizations Rulings and Agreements, of the IRS to Exempt Organizations Rulings and Agreements employees provided for procedural changes to conform with Rev. Proc. 2021-5:
- EO Determinations won’t grant relief under Treas. Reg. 301.9100-3 if granting request for relief would result in the organization’s exemption being automatically revoked effective before the date of application.
- EO Determinations won’t grant relief under Treas. Reg. 301.9100-3 if the period of limitations on assessment under IRC 6501(a) for any taxable year for which the organization claims exemption has expired prior to the date of application.
- EO Determinations won’t consider relief for an organization that is not required to apply for recognition of exempt status in order to be tax-exempt.
- In all instances where the request for exemption is being approved but relief under Treas. Reg. 301.9100-3 isn’t being granted, prepare and send the correct determination letter along with Letter 6392, 9100 Effective Date.
- EO Determinations will no longer process cases where relief isn’t granted under Treas. Reg. 301.9100-3 as proposed adverse determinations or proposed approvals with an adverse issue.