The vast majority of tax-exempt status revocations happened after enactment of the Pension Protection Act of 2006. Prior to this new act, there was no filing requirement for organizations with gross receipts under $25,000. The Internal Revenue Service (IRS) wanted to keep better track of the roughly 710,000 small nonprofits (the number of nonprofits at the time of enactment) with less than $25,000 in annual gross receipts. Now the IRS Form 990-N (referred to as the Postcard filing) is the new filing requirement for those organizations, as well as organizations with gross receipts under $50,000, who previously had to file the 990-EZ. An organization’s failure to file returns for three consecutive years, resulted in revocation of their tax-exempt status.
The IRS Form 990-N is completed electronically and requires just a few minutes to complete. The six questions are basic: 1)What is the tax year reporting period, including the beginning and ending dates of the 12 month period? 2) Has the nonprofit terminated operations? 3) Are gross receipts normally $50,000 or less? (Your receipts will satisfy the "normally" requirement if they averaged $50,000 or less in the prior three consecutive tax years, including the year in which the return would be filed) 4) What is the legal name and current address of the nonprofit? 5) What is the federal taxpayer identification number? 6) What is the principal officer’s name and address?
In June 2011, the Internal Revenue Service released the Automatic Revocation of Exemption List. The Urban Institute conducted an analysis of the data and found that over 279,000 out of 1.7 million nonprofits (large and small) lost their tax-exempt status. Drilling down, 20 percent of those revocations were from arts and culture organizations.
Initially to reinstate their tax-exempt status, nonprofits had a difficult time establishing sufficient reasonable cause why they missed filing their Form 990. If they could manage to establish reasonable cause, they then had to file IRS Form 1023, Application for Recognition of Exemption, as well as prepare and file Form 990-EZs for each of the years missed (even if initially, only a 990-N was required). This proved a time-consuming and expensive process.
Nonprofits could choose to forgo retroactivity but had to have a new 501(c)(3) effective date. The big problem with that the nonprofit then had a taxable “gap” period between the date the nonprofit first lost its tax exemption and when it got it restored. During this gap period, donations were not deductible and the organization had to pay tax on the funds received.
In August 2015, the Association of African American Museums held its Annual Conference and addressed this issue head on with session participants. Due to a serious illness of a couple of their administrators, and unbeknownst to the other members of the Board of Directors, they found themselves on the IRS Automatic Revocation of Exemption List.
Nona Martin, manager of public programs for the Smithsonian American Art Museum and AAAM Board of Directors’ secretary at the time, moved into the Treasurer’s position to take-on the responsibility of obtaining reinstatement. Ms. Martin was not only successful in reinstating AAAM’s exemption status, she was able to obtain approval for an expedited reinstatement and obtained reinstatement within four months.
IRS appreciated the burden reinstatement placed on small nonprofits and developed new procedures. Currently small nonprofits (those filing Form 990-N or Form 990-EZ) can apply for retroactive reinstatement with a newly created Form 1023-EZ, along with Form 990-EZs for those years in which it was missed. If any or all years missed required the 990-N, these are not required to be filed in arrears. The IRS will now assume reasonable cause and not require it in writing. In addition, late filing penalties for the prior year Form 990-EZs will be abated. This is no small change to the process and one that should benefit thousands of small organizations dealing with lost exemptions.
However, larger nonprofits will still be required to provide definitive reasonable cause and will not have late filing penalties waived.
The starting point for completion of the 1023-EZ is the eligibility worksheet. The nonprofit must be able to answer no to each question; otherwise, they will have to file the full IRS Form 1023.
In essence, the 1023-EZ allows you to self-certify your own 501(c)(3) status. The form is divided into five parts: Part 1 (name, mailing address, officers with their addresses, website and email information); Part 2 (type of corporation, state of incorporation, and incorporation date) -- it asks you to attest your reason for exemption and to attest that upon dissolution, your remaining assets will be used for an exempt purpose; Part 3 contains questions about what exempt activities you conduct; Part 4 asks you to attest that one-third of your support is from gifts, contributions, grants, memberships, etc.; and Part 5 asks if the organization is seeking reinstatement or retroactive reinstatement.
It is important to note that the 1023-EZ has to be filed within 15 months from date of revocation for retroactive reinstatement. If the nonprofit misses this filing requirement, they must file the IRS Form 1023. Currently the IRS filing fee for the 1023-EZ is $400 compared to $800 for the full Form 1023. The turnaround time for IRS approval of the 1023-EZ is one-two months compared to approximately 18 months to 2 years for the 1023.
Numerous nonprofits were never notified of their revocations, and instead heard from other parties that they were on the revocation list. This was the case for the Association of African American Museums. Mistakes happen, and it’s akin to checking your individual credit score for accuracy. Museum directors and board members should be very cognizant of their organizations’ filing status.
To search the Automatic Revocation of Exemption List and verify your status, visit the website here.