Once your organization receives its notice of 501(c)(3), it gains specific tax advantages. Having said that, your nonprofit doesn’t get to keep its tax-exempt status forever. Regardless of what services your nonprofit provides, it has to continually meet the guidelines and requirements of the 501(c)(3) IRS code.
Various different things can cause your nonprofit to lose its tax-exempt status. It could be due to something intentional, unintentional, or it could simply be due to something that was overlooked. Difficult as the news may be, your board must take the issue seriously and tackle it swiftly.
Dealing with a Change in Tax-Exempt Status
If your board receives notice that your nonprofit’s tax-exempt status has been revoked, don’t panic. The first thing you need to do is to convene a board meeting, even if you need to schedule a special board meeting.
Your board will want to listen to a presentation by the executive director or a board member about how the revocation happened and open the floor for questions and discussion.
Next, you’ll need to decide on a course of action for the near term and the long term. For the near term, you’ll need to make decisions about how to communicate the matter to your stakeholders, how to manage your recordkeeping, and decide on the next steps until the matter gets settled.
For the long term, you’ll need to make a decision if the issue occurred because of a change in your mission. You’ll then need to decide whether you’ll try to get your tax-exempt status reinstated, get a fiscal sponsorship, or transition to a for-profit company. If your board decides not to pursue continuing as a nonprofit, you’ll need to start paying income taxes on revenue and donations and notify your donors that their contributions will no longer be tax-deductible.
Developing a Communication Strategy for Donors and Stakeholders
As part of your action plan, you’ll need to develop a communication strategy for your donors and stakeholders to inform them of your nonprofit’s change in status. It’s best to designate a spokesperson to be in charge of announcing the news to past and potential donors and keeping them updated.
Be aware that private foundations may need to stop their donations, or their boards may decide they want to stop donations. Your announcement should make it clear that donations given prior to the revocation date are still tax-deductible, and anything after that won’t be. If there are any questions on the matter, you might refer them to IRS Publication 557. You may want to add that you’ll keep them apprised of any updates and that you value their support.
You owe it to your staff and volunteers to communicate to them in writing that your tax-exempt status has been revoked and specify any implications for them in connection with the organization. Try to keep communications positive and keep them provide updates as they occur.
Check your website and remove any content that describes your organization as a tax-exempt nonprofit organization or claims contributions are tax-deductible. It’s best to be completely transparent in all your written and online materials and other content. You can always change things back if you can reverse your status back to a nonprofit.
Covering Your Bases with Compliance
Your federal IRS determination has a bearing on your state tax-exempt status. Be completely transparent with the state agency that’s responsible for issuing determinations for tax exemption. Your new status will also change your organization’s requirements for paying sales taxes, use taxes, or property taxes.
Keep clear records on the sources and amounts of revenue so you’ll be able to file the appropriate tax return. Also, be sure to keep records of income taxes that you’ve paid for the period of time your organization didn’t meet tax-exempt qualifications.
Still another way to continue to operate as a nonprofit organization is to arrange for fiscal sponsorship. Your board might opt for a fiscal sponsorship if your board is uncertain about your prospects for sustainability or if your nonprofit works closely in connection with the fiscal sponsor.
Fiscal sponsorships are well-suited for organizations that use all volunteers. There is no time limit for how long you can engage in fiscal sponsorship, and the partnership can last a long time.
A fiscal sponsor enables an organization to utilize the sponsoring nonprofit’s status to accept tax-deductible contributions. Bear in mind that private foundations may not be willing or able to contribute to your organization when you operate under fiscal sponsorship.
Can Our Nonprofit Get a Reinstatement?
Most tax-exempt organizations (other than churches or church-related organizations) have to file Form 990 every year. Failure to do so for three consecutive years will cause the IRS to revoke your status automatically. In rare cases, the IRS may automatically revoke your status in error. In either case, it’s possible to get it reinstated. All you have to do is file an application for exemption and pay the appropriate user fee.
As long as you meet the guidelines for tax-exempt status, you should receive a new determination letter in the mail. It will show the effective date of the redetermination, and they may make it retroactive based on your request. You may wish to share a copy of the letter with your donors and stakeholders and tell them how to verify your status online.
Be aware that the IRS maintains an official record of organizations that lost their tax-exempt status for failing to file for three consecutive years. If this is the reason for the revocation, your organization’s name will remain on the list in spite of your reinstatement.
As a nonprofit board, you’re responsible to ensure that your organization files IRS Form 990 and meets all the qualifications for tax-exempt status. By taking these steps you’ll avoid problems associated with revocation and reinstatement.
A good way to prevent a revocation is to incorporate filing activities on your annual board calendar. With BoardEffect’s board management system, all board members will receive an automatic alert when it’s time to prepare the filing and submit it, so you never miss a beat. If you need to work on getting reinstated or set up fiscal sponsorship, your calendar will help that too. That’s just one of the many advantages your board management system provides. It’s the best way to manage all your board meetings and responsibilities.