In May 2011, the IRS may good on its promise to “wipe out” the 501c3 charity status of approximately 275,000 charities for failing to file three consecutive years of returns. Many suspected and thought this was good as it would wipe out “small” charities. As it turns out, this is not the case. There have been many substantial charities who have their 501c3 status revoked. With this revocation, these revocations are not appealable. You must apply for reinstatement.

But, where does this leave charities who have had their 501c3 status revoked under this IRS Action?

1. You have a limited period of time to seek reinstatement. As part of this, you must submit the Form 1023 and pay a User Fee.

2. From the period of revocation to when you are reinstated, you may have to file a Corporate Tax Return since you are not exempt from taxes. Further, you will have to account, report and pay taxes pursuant to Section 11 of the Internal Revenue Code.

3. The donors who have given during this “revoked” period must be informed of this “lack of 501c3 status”.

Furthermore, it is important to note that the IRS is not being lenient on granting “retroactive reinstatement”.

Some procedural policies of the IRS to note as follows:

The organization must reapply and pay the appropriate user fee ($850 if gross revenue is over $10,000 per year and $400 if under) to have the tax-exempt status reinstated since it was revoked due to failure to file for 3 years.  The status is automatically revoked by operation of law and not by a determination by the IRS. There is no appeal for the revocation. Reinstatement of tax-exempt status may be retroactive to the date of revocation if the organization shows that it had reasonable cause for not filing for 3 consecutive years.

To establish reasonable cause the organization must provide evidence that it exercised ordinary business care and prudence in determining and attempting to comply with its reporting requirements for each of the 3 years and over the entire 3 year period but was nevertheless unable to file the required returns. In making its determination, the IRS will take into account all pertinent facts and circumstances including the following factors:

  1. Failure was due to its reasonable good faith reliance on erroneous written info from the IRS, stating the organization was not required to file a return;
  2. Failure arose from events beyond the organization’s control that made it impossible to file for each of the 3 years;
  3. Organization acted in a responsible manner by undertaking significant steps to avoid or mitigate the failure to file the required returns and to prevent similar failures in the future, including:
    1. Attempting to prevent an impediment or failure, if it was foreseeable;
    2. Acting as promptly as possible to remove an impediment or the cause the the reporting failure, once it was discovered;
    3. After failure was discovered, implementing sufficient safeguards to ensure future compliance with the reporting requirements.
  4. Aside from the 3 consecutive years in which it failed to file returns, the organization has established history of complying with its reporting requirements (if any).

The IRS will only consider a factor on the above list or any other factor (such as the fact that substantially all of an organization’s activities are performed by volunteers) if the organization shows to the satisfaction of the IRS evidence to substantiate the factor.

Application for reinstatement must be done 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 list on the IRS website.