Tax Law Blog
Many nonprofit corporations are exempt from federal income tax pursuant to Section 501(c)(3) of the Internal Revenue Code. Until relatively recently, many of those tax-exempt nonprofits were not required to file annual Form 990 series returns. That all changed with the Pension Protection Act of 2006. Now, all tax-exempt nonprofits are required to file an annual Form 990 series return. If a tax-exempt organization fails to do so for three consecutive years, then its federal income tax exemption is automatically revoked - - no questions asked.
How Do You Know If Your Tax-Exempt Organization Has Lost Its
501(c)(3) Status?
The IRS maintains a list of organizations that have had their 501(c)(3) status revoked.
What Are The Consequences?
- The Organization Will Have Tax Liability. If your nonprofit has its 501(c)(3) status revoked, then it will no longer be exempt from federal income tax. As a result, the nonprofit may be subject to corporate income tax and required to file IRS Form 1120 (U.S. Corporation Income Tax Return).
- Donations Will Not Be Tax Deductible. Any donations received after the official notification of the revocation will not be tax deductible. This can be a major issue for donors who made donations and claimed tax deductions based on the belief that your organization was a valid 501(c)(3) organization.
- Bad Publicity. Enough said.
Can The Problem Be Fixed?
Yes. If a nonprofit wants to reinstate its revoked tax-exempt status, then it must file IRS Form 1023. The general rule is that the tax-exempt status (if reinstated) will be effective on the postmark date of the Form 1023. An organization may qualify for “retroactive reinstatement” if it had good cause for its failure to file the required Form 990 series returns. If “retroactive reinstatement” is granted, then the tax-exempt status will be effective back to the date of revocation. “Retroactive reinstatement” can avoid the potential problems caused by a taxable gap between the revocation date and reinstatement date.
Please contact me if you have questions.
Shareholder and Firm TreasurerNicholas focuses his practice in the areas of Michigan non-property tax disputes, business entity selection, corporate transactions, and information technology.
