Retroactive Reinstatement Procedures: Simplified

Published on: by Michele Berger Category:IRS & FEDERAL TAX ISSUES

Solutions and strategy

Generally, most tax-exempt organizations are required to file an annual return or notice with the IRS. Since 2010, the IRS has revoked the exemption of hundreds of thousands of organizations for failing to file the applicable annual return for three consecutive years. Once an organization’s tax-exempt status has been revoked, it may suffer a number of consequences including owing federal income tax and no longer offering a deduction to donors.

In January, the IRS published improved guidance for reinstatement procedures. These procedures, though more lenient, may be difficult to understand and maneuver. If your organization’s exempt status has been revoked, the first step is to determine which of these procedures fit.

Below is a chart to assist you in navigating the retroactive reinstatement procedures. Organizations applying for reinstatement within 15 months of automatic revocation should consider the first two procedures. An organization that applies for reinstatement after 15 months may skip to the third procedure.  

I. Streamlined Retroactive Reinstatement
Who May Apply
  • Organizations that were eligible to file 990-EZ or 990-N (ePostcard) for each of the three missed years that caused their revocation;

  • Organizations that are experiencing their first automatic revocation; and

  • Organizations that are able to complete and submit the proper exemption application within 15 months of receiving a Revocation Letter or appearing on the IRS’ Revocation List, whichever is later.
How
  1. Complete Form 1023 or Form 1024, Application for Exemption, depending upon whether your organization was exempt under IRC 501(c)(3) or 501(c)(4), respectively, within 15 months of revocation.

  2. Include the correct user fee.

  3. Write “Revenue Procedure 2014-11, Streamlined Retroactive Reinstatement,” at the top of Form 1023 or Form 1024 before mailing it.
Notes and Tips
  • Make sure your organization has adequate time to complete the appropriate exemption application within the 15-month grace period, as these applications require significant information.

  • In order to avoid late filing penalties, the organization should also file properly completed and executed paper Forms 990-EZ for all of the missed years for which Forms 990-EZ were required to be filed (no need to file for missed years for which Forms 990-N could be filed). The organization should write “Retroactive Reinstatement” at the top of the Forms 990-EZ .

II. Retroactive Reinstatement
( within 15 months of revocation)
Who May Apply
  • Organizations that cannot use the Streamlined Process above (such as those required to file Form 990 or Form 990-PF for any of the three years that caused their revocation, or those that were previously auto-revoked); and

  • Organizations that are able to complete and submit Form 1023 or Form 1024 within 15 months of receiving a Revocation Letter or appearing on the IRS’ Revocation List, whichever is later.
How
  1. File all required annual returns for the three consecutive missed years that caused the revocation, and for any following years. Write, “Retroactive Reinstatement” on these returns.

  2. Complete Form 1023 or Form 1024, Application for Exemption, depending upon whether your organization is exempt under IRC 501(c)(3) or 501(c)(4), respectively, within 15 months of revocation.

  3. Include two statements with the application:

    1. A statement establishing that the organization had reasonable cause for its failure to file a required annual return for at least one of the three consecutive years in which it failed to file. (See Notes and Tips for “reasonable cause” explanation)

    2. A statement confirming that it has filed required returns for those three years and for any other taxable years, including any recent years for which required returns were due and not filed.

  4. Include the correct user fee.

  5. Write “Revenue Procedure 2014-11, Retroactive Reinstatement,” at the top of Form 1023 or Form 1024 before mailing it.
Notes and Tips The reasonable cause statement should persuasively establish that the organization used ordinary business care and prudence in attempting to comply with its annual reporting requirements. The statement should include a detailed description about why the organization failed to file, how it discovered the failure, and the steps it has taken or will take to avoid or mitigate future failures. (For more information, see Section 8 of Revenue Procedure 2014-11 )

III. Retroactive Reinstatement
(after 15 months of revocation)
Who May Apply Any organization that applies for reinstatement after 15 months of receiving a Revocation Letter or appearing on the IRS’ Revocation List, whichever is later.
How
  1. File all required annual returns for the three consecutive missed years that caused the revocation, and any following years. Write, “Retroactive Reinstatement” on these returns.

  2. Complete Form 1023 or Form 1024, Application for Exemption, depending upon whether your organization is exempt under IRC 501(c)(3) or 501(c)(4), respectively.

  3. Include two statements with the application:

    1. A statement establishing that the organization had reasonable cause for its failure to file a required annual return for all three consecutive years in which it failed to file. (See Notes and Tips below for “reasonable cause” explanation)

    2. A statement confirming that it has filed required returns for those three years and for any other taxable years, including any recent years for which required returns were due and not filed.

  4. Include the correct user fee.

  5. Write “Revenue Procedure 2014-11, Retroactive Reinstatement,” at the top of Form 1023 or Form 1024 before mailing it.
Notes and Tips The reasonable cause statement should persuasively establish that the organization used ordinary business care and prudence in attempting to comply with its annual reporting requirements. The statement should include a detailed description about why the organization failed to file, how it discovered the failure, and the steps it has taken or will take to avoid or mitigate future failures. (For more information, see Section 8 of Revenue Procedure 2014-11 )

The new procedures also outline a process for organizations that have already been reinstated as of the postmark date of their applications for reinstatement, but before the effective date of Revenue Procedure 2014-11 (January 3, 2014), and have a taxable gap between their revocation and reinstatement period. For those organizations that would have satisfied the Streamlined Retroactive Reinstatement requirements, reinstatement goes back to the revocation date automatically (eliminating the taxable gap). However, for other organizations which can establish reasonable cause, reinstatement will only go back to the revocation date if such organization submits a copy of the Form 1023 or 1024 it previously filed to receive reinstatement and complies with the other requirements of the applicable section of Revenue Procedure 2014-11 (see Table Sections II and III above) on or before May 2, 2014. Note that the user fee is waived.

After your organization’s exempt status has been reinstated, it is important to remember to file timely annual returns.  An organization can be automatically revoked again if it fails to file the required returns for three consecutive years, beginning with the year in which the IRS approves reinstatement.

 

For Additional Information:

IRS: How to Have Your Tax-Exempt Status Retroactively Reinstated

Eve Rose Bornstein: New Retroactive Reinstatement Process(es)