Losing your tax-exempt status or your good standing with a state agency can be a stressful experience for any nonprofit. However, understanding why it happened and how to regain your status is the first step toward getting back on track. Whether the revocation or loss of good standing stems from the Internal Revenue Service (IRS), California’s Franchise Tax Board (FTB), the Secretary of State (SOS), or the California Attorney General’s Office (AG), this guide provides a brief overview of the reinstatement process and offers insights to help your organization move forward.
Why Nonprofits Lose Their Good Standing with Regulators
Nonprofits are held to strict compliance standards to maintain their tax-exempt and nonprofit status. When organizations fail to meet these requirements, their status may be revoked or suspended. While some revocations are due to a failure to obey laws regarding permissible activities for your nonprofit (such as self-dealing, engaging in substantial non-exempt activities, or prohibited political activity), most occur due to technical issues. Understanding the most common reasons why this happens can help you prevent it and take corrective action if it occurs.
Common reasons for revocation and loss of good standing include:
- Failure to file annual information returns: Missing your Form 990 (IRS) or Form 199 (FTB) filings for three consecutive years.
- Noncompliance with state filing requirements: Failing to file Statements of Information with the SOS, or annual charitable reports with the AG.
1. IRS Revocation
The IRS enforces annual reporting requirements to ensure nonprofits remain accountable for their activities. Missing Form 990 filings (including Form 990-PF, Form 990-EZ and 990-N) for three consecutive years results in automatic revocation of your tax-exempt status and is the most common reason for revocation. If your organization has been revoked by the IRS for this reason, follow these steps to regain your status retroactively to the date of revocation.
Steps to Reinstatement:
- Determine eligibility for retroactive reinstatement:
- Streamlined Retroactive Reinstatement: Available for organizations that were eligible to file either Form 990-EZ or Form 990-N for each of the three consecutive years that they failed to file, have not previously had their tax-exempt status automatically revoked, and that are applying for reinstatement within 15 months of revocation.
- Standard Retroactive Reinstatement: Requires providing a reasonable cause explanation for the failure to file the required returns.
- Complete Form 1023 or Form 1023-EZ (if eligible) or Form 1024 / 1024-A (if applicable): Reapply for tax-exempt status, complete the applicable section of Form 1023, Schedule E, Form 1023-EZ, Part V, or Form 1024 / 1024-A, Part VI, requesting reinstatement, and include the reinstatement fee.
- File all delinquent Form 990s: Submit all missing returns for the years leading to revocation, with “Retroactive Reinstatement” written at the top of the return.
- Pay fees and wait for approval: Fees range from $275 to $600 depending on the filing method. As with initial applications for exemption, the IRS generally takes several months to review applications for reinstatement, although applications are occasionally processed more quickly than that. An organization can also request expedited processing of its application for reinstatement if there is a compelling reason, such as a pending grant that is crucial to the nonprofit’s continuing operation.
2. Franchise Tax Board Suspension and Revocation
The FTB oversees California nonprofits’ state tax filings. Organizations can lose their active status if they fail to submit required forms or pay their state taxes or penalties. Exempt organizations that are suspended by the FTB will have their exemption revoked. Reinstating your nonprofit with the FTB involves a few clear steps to bring your filings current and resolve outstanding fees.
Steps to Reinstatement:
- Resolve delinquent filings: Submit any missing Form 199 or 199N for past-due years.
- Pay required fees and penalties: Clear any penalties assessed for late filings.
- Request Revivor / Reinstatement of Exemption: File Form FTB 3500 (Exemption Application) or Form FTB 3500A (if the organization never applied for exemption but has been suspended for failure to file returns, etc.) to reinstate your status.
3. Secretary of State Suspension
In California, nonprofits must maintain active registration with the SOS by filing Statements of Information with the agency every two years (or every year, if it is an out-of-state corporation). Failure to file these forms can lead to suspension, preventing your organization from operating legally in the state. Fortunately, the SOS offers a straightforward process for reinstating your nonprofit’s status.
Steps to Reinstatement:
- File missing Statements of Information: Complete and submit Form SI-100 by logging onto the SOS website, locating your entity, and completing the online form.
- Resolve FTB issues: Often, SOS suspensions overlap with FTB problems, so address any outstanding tax matters –including any outstanding penalties relating to an SOS suspension— by contacting the FTB.
- Pay fees and penalties: Include the required fee with your submission.
- Wait a few days for your “Suspended” status to clear while the SOS confirms that no other organization has used your corporation’s name during the suspension.
4. Attorney General Delinquency, Suspension, or Revocation
Nonprofits engaging in charitable activities in California are required to register and file annual reports with the AG’s Registry of Charities and Fundraisers (the “Registry”). If your nonprofit has been classified as delinquent or been suspended or revoked by the AG, it’s often due to missing filings or incomplete information. Nonprofits not in good standing with the AG may not operate or solicit funds for charitable purposes in California, so any delinquency must be addressed promptly with the AG. Note that if an organization does not address a suspension in a timely manner it will be revoked by the AG, at which point reinstatement is discretionary. A revoked organization must submit a written request for reinstatement to the Registry accompanied by all deficient filings and fees and an explanation for the failure to comply that provides sufficient assurance that violations will not reoccur.
Steps to Reinstatement:
- File delinquent RRF-1 / CT-TR-1 forms: Submit all missing reports to the Registry. An organization can see which reports, fees, or attachments are missing by visiting the Registry website, searching for its name, and reviewing its registration page.
- Submit missing IRS Form 990s: Ensure your IRS filings are current, as you will be required to submit these to the AG with the RRF-1.
- Pay fees and penalties: Clear any late fees associated with the delinquent filings.
- Submit a written reinstatement request (required for revoked organizations): Write to the Registry of Charitable Trusts once all delinquencies are resolved.
Tips for Preventing Future Revocations
Regaining your tax-exempt status and good standing with state agencies is only part of the solution. To avoid future issues, nonprofits must take proactive steps to maintain compliance. By implementing the following tips, your organization can stay on track and focus on its mission without interruptions.
Proactive Steps:
- Stay organized: Use a compliance calendar to track IRS, FTB, SOS, and AG filing deadlines, as well as any out-of-state filing requirements, if applicable.
- Automate filings: Leverage nonprofit management software to ensure timely submissions.
- Conduct regular audits: Periodically review your organization’s compliance status.
- Educate your board: Ensure board members understand their oversight responsibilities. For more on this, read Board Member Responsibilities: Ensuring Your Nonprofit’s Legal Standing.
Conclusion
Loss of your nonprofit’s exempt status or good standing is undoubtedly a challenging experience, but with a clear understanding of the reinstatement process and a proactive approach to compliance, your nonprofit can regain its standing and continue its mission. If you need guidance navigating reinstatement, please contact us.