THE CC FILES - HOW NOT TO LOSE (AND HOW TO REINSTATE) TAX EXEMPT STATUS

This is a first article from The Crazied Client Files, a publication by the lawyers at EM3 LLP designed to make your life exponentially easier by sharing lessons learned from the experiences that used to drive our clients crazy -- that is, until they hired us!

Today, we got a call from a client who was frantic because they received a call from a major donor who, in the process of preparing a big check, found their 501(c)(3) organization on the IRS's revocation list -- the list of charities from whom it has revoked their tax-exempt status. Yes, the IRS will revoke your tax-exempt status! And this can happen for a variety of reasons, including, for example, violation of the tax codes re the activities a tax-exempt organization can engage in; and, more commonly, failure to file the required tax returns and forms applicable to your tax-exempt organization. The latter most often occurs automatically, by operation of law, and without exception, after a tax-exempt organization fails to file its Form 990 (or other applicable 990 series form) for three (3) consecutive years. For a list of some of the other reasons the IRS may revoke tax-exempt status, please read this article by GrantSpace. Also, if you're wondering if your organization is on the revocation list, or if it is otherwise in good standing with the IRS, you can check that directly with the IRS, via IRS.gov.

As is often the case, the IRS' website provides many links, publications, and guidance on how to deal with problems that occur in connection with tax filings and liabilities. And, as usual, they are pretty complex, confusing and, often, leave the novice reader more confused than when they started. Or, if it does make sense, it sends you down a path that doesn't actually work. For example, in the case of an automatic revocation, it will tell you to file a new Form 1023 (or another form within that series), write certain things on the top, and MAIL it to the IRS for review, as might seem to be suggested here. Of course, many of the IRS' forms are now only accepted electronically, such is the case with Form 1023EZ, which applies to charities with under $50,000 in gross receipts over the past three years (or projected). The information on the IRS's website (and countless other gimmicky service providers) might also scare you into thinking you'll have to pay some hefty penalties for each day your 990 was late -- often citing statutory penalties of $20 per day up to $50,000 depending on the size of your charity. Of course, these amounts could easily be crippling-if-not-terminal to many nonprofits.

Fortunately, if you speak to an attorney or law firm experienced in representing nonprofits, you'll find out that there is an easier solution. Many of our clients have searched the web and IRS website on their own and discovered it isn't that easy to put all the pieces together themselves. So we've done it for you, here.

If it's been less than 15 months since your 501(c)(3) tax-exemption was automatically revoked for the first time, an organization may pretty easily apply to have its tax-exempt status reinstated. To do so, it must:

1. Re-apply for recognition of tax exemption by filing Form 1023 or Form 1023-EZ, as applicable(if applying under section 501(c)(3)), or Form 1024, Form 1024-A 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 (around $275).

An organization may also request retroactive reinstatement via its reinstatement application. There is even a Streamlined Retroactive Reinstatement process, which is available to organizations that were eligible to file Form 990-EZ or 990-N (ePostcard) (e.g., organizations with gross receipts of less than $200,000 and total assets of less than $500,000 at the end of their tax year) for the three years that caused their revocation. These organizations may have their tax-exempt status retroactively reinstated to the date of revocation--and avoid the otherwise significant statutory penalties -- if they:

1. Have not previously had their tax-exempt status automatically revoked.
2. Complete and submit Form 1023, Form 1023-EZ, Form 1024 or Form 1024-A with the appropriate user fee not later than 15 months after the later of the date of the organization’s Revocation Letter (CP-120A) or the date the organization appeared on the Revocation List on the IRS website.

You must submit your Form1023EZ via pay.gov (this is a government website, so beware of scamming knock-offs), and you will need to set up a free separate account with that site in order to do so. (This account is separate from any e-filing account you may have with the IRS or any e-filing service provider). Once you do so, you can file many IRS forms and, apparently, many other government forms for which a fee is required. To complete your 1023EZ online, you will need to attest that your failure to timely file your 990-series forms was not intentional -- which it shouldn't ever be (why would anyone intentionally want to lose tax-exempt status???). Once processed and approved, your tax-exempt status will be retroactively reinstated to the date it was revoked, with no lapse in exemption (which is important for your organization and your donors).

If you don't qualify to use Form 1023EZ or for the streamlined reinstatement process, there is still hope for you -- as long as it hasn't been 15 months since your revocation occurred (determined by the date of your revocation letter, or the date your organization was placed on the revocation list). But you'll have to fill out more paperwork (which you probably cannot file on-line), file all of the late 990's (on paper) and include a letter explaining your good cause for failure to timely file, among other things--all of which are listed on the IRS's website. You really don't want to fall into this category, because establishing "good cause" is not as easy as it sounds, and this becomes more of a legal inquiry (e.g., "I forgot" probably won't work) for which the IRS has substantial discretion -- and, if they say no, you'll need the help of a lawyer, and probably a judge, to get your exemption back. So, DON'T WAIT MORE THAN 15 MONTHS!!! PERIOD!

If you are responsible for a tax-exempt organization, we recommend that you speak to an experienced attorney or law firm, or at least a CPA who works with nonprofits to ensure you understand all of your corporate governance and tax obligations. This is the best way to avoid ever needing to reinstate your organization's tax-exempt status and, also, to avoid becoming a "crazied client." Frankly, you've got better things to do! As always, the talented team at EM3 is standing by.

This article is written by Jamal M. Edwards PC, an experienced attorney and counselor who represents small and midcap companies, entrepreneurs, start-ups and nonprofits. Mr. Edwards was formerly a partner in Chicago office of Kirkland & Ellis LLP and the Detroit office of Honigman LLP. In addition to representing several notable nonprofits, Mr. Edwards has also run several and sat on the boards of many more. He can learn more about him, his practice and #TeamEM3 here.

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