Tax-exempt organizations that have had their tax-exempt status automatically revoked because of failure to file required annual returns for three consecutive years can follow new procedures for seeking reinstatement of their tax exemptions. The IRS released these procedures in Revenue Procedure 2014-11 on January 2, 2014. The Revenue Procedure, which is the first IRS guidance on this topic since 2011, outlines three procedures that organizations may use to apply for reinstatement.
First, under a “Streamlined Retroactive Reinstatement Process,” small organizations eligible to file a short form (Form 990-EZ) or postcard return (Form 990-N) may have their tax-exempt status retroactively reinstated to the date of revocation, provided that they have not previously had their exemptions automatically revoked. Under this procedure, organizations must complete and submit Form 1023 (Application for Recognition of Exemption Under Section 501(c)(3)) or Form 1024 (Application for Recognition of Exemption Under Section 501(a)) not more than 15 months after revocation.
The second procedure applies to organizations not eligible for the streamlined process (because they do not file Form 990-EZ or Form 990-N). This retroactive reinstatement process is more involved, as organizations must demonstrate reasonable cause for their earlier non-filing. These organizations fall into two categories, depending on whether they file their new applications within 15 months of revocation. For applications submitted within 15 months of revocation, organizations must demonstrate reasonable cause for failure to file required annual returns for at least one of the three consecutive years in which they failed to file. For applications submitted more than 15 months after revocation, organizations must show reasonable cause for all three years that they failed to file annual returns.
Significantly, the IRS will not impose the usual monetary penalties for failure to file Form 990s for the three consecutive taxable years that caused the automatic revocations.
Finally, organizations that cannot qualify for retroactive reinstatement of tax-exempt status under the two aforementioned procedures may apply for reinstatement of their exemptions effective from the post-mark date of the new applications.
The new procedures outlined in Revenue Procedure 2014-11 provide important relief for the nonprofit sector after 275,000 tax-exempt organizations lost their tax-exempt status under the automatic revocation provision enacted as part of the Pension Protection Act of 2006.