August 15, 2023

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Is your 501(c)(3) nonprofit complying with its regular filing requirements? Are you incurring penalties for late filing? Has your tax-exempt status been revoked? Read on for an overview of the filing requirements necessary to maintain or regain - a nonprofit’s tax-exempt status under federal law.

An existing tax-exempt organization has at least two essential filing obligations under state and federal law: it must file state reports with the Secretary of State where the nonprofit was formed to maintain its corporate status, and it must file federal returns with the Internal Revenue Service (“IRS”) to maintain its tax-exempt status.  

Below is an overview of best practices for compliance, the consequences of non-compliance, and methods for reinstatement of both state and federal filing requirements if an organization has become non-compliant.  

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State Filing Requirements

As a corporate entity, your nonprofit was formed by filing articles of incorporation or a similar charter in your nonprofit’s home state. To maintain a nonprofit’s corporate existence, a nonprofit must comply with the filing requirements of its state of incorporation.  

The reports required are generally simple, including only basic information indicating the nonprofit is still actively operating. For example, in Iowa, every nonprofit must file a biennial report disclosing the entity’s principal office address, the address of the nonprofit’s registered agent, whether the nonprofit has any members, and whether the nonprofit holds any interest in agricultural land. The information required can vary from state to state.

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Federal Filing Requirements

When your nonprofit was founded, it was formed under state law, obtained a FEIN from the IRS, and filed Form 1023 or 1023-EZ with the IRS to obtain federal tax-exempt status. Many states provide automatic state income tax exemption to nonprofits that obtain federal tax exemption. Consequently, failure to maintain federal tax-exempt status can leave a nonprofit subject to both state and federal income tax.  

To preserve its existing tax-exempt status, a nonprofit must file an annual tax return with the IRS called Form 990. This twelve-page form contains general information about the nonprofit’s operations in the previous year, including its charitable mission, charitable activities, income and revenue, net assets, contributions and grants, and the salaries and compensation of its employees and officers. Form 990 is an in-depth filing and generally requires much more attention and accounting than the state filings reviewed above.  

Some nonprofit entities, such as churches and integrated church auxiliaries, are exempt from filing Form 990. However, most faith-based nonprofits are not integrated church auxiliaries within the meaning of the Internal Revenue Code and therefore are subject to the Form 990 filing requirement. See the IRS’s guidance page on church affiliates and integrated auxiliaries if you believe your nonprofit is a qualifying integrated church auxiliary that may not need to file Form 990.¹

Depending on your nonprofit’s size, you may be eligible to file a shorter form of the 990 called Form 990-EZ. A nonprofit may choose to file Form 990-EZ instead of Form 990 if 1) the nonprofit’s gross receipts are below $200,000, and 2) the nonprofit’s total assets are below $500,000. A nonprofit must file Form 990 if its gross receipts are equal to or above $200,000, or the nonprofit’s total assets are equal to or above $500,000. Form 990-EZ is a third of the length of Form 990, but still requires disclosure of revenue, expenses, changes in net assets or fund balances, a list of officers, directors, trustees, and key employees, and an itemized list of any grants received.  

If your nonprofit is particularly small, it may instead file an annual notice called Form 990-N. A nonprofit may choose to file Form 990-N instead of Form 990 or Form 990-EZ if its gross receipts are normally less than or equal to $50,000. The IRS considers a nonprofit’s gross receipts “normally less than or equal to $50,000” if one of the following apply:  

1. The nonprofit has been in existence for one year or less and has received, or donors have pledged to give, $75,000 or less during its first tax year;

2. The nonprofit has been in existence between one and three years and has averaged $60,000 or less in gross receipts during each of its first two tax years; or

3. The nonprofit is at least three years old and has averaged $50,000 or less in gross receipts for the three immediately preceding tax years.

Form 990-N requires the least amount of information of the Form 990 variations, including the nonprofit’s FEIN, the relevant tax year, the nonprofit’s legal names and mailing address, the name and address of the nonprofit’s principal officer, the URL of the nonprofit’s website, and a representation that the organization’s annual gross receipts are normally under $50,000. The lack of accounting information required for this filing makes it the most attractive annual return option for nonprofits that qualify under the above criteria.  

In general, a nonprofit should file the annual return with the least amount of administrative burden associated, provided the nonprofit meets the relevant qualifications. Nonprofits should keep in mind that all information disclosed on Form 990 or any of its variations will be publicly available.  

Annual returns are generally due on May 15 for nonprofits with tax years ending on December 31. However, a nonprofit may obtain a one-time automatic six-month extension by filing Form 8868 with the IRS prior to the filing deadline. This extension is not available for nonprofits filing Form 990-N. If a nonprofit has reason to believe it might not meet the May 15 deadline, it should avoid the negative consequences of late filing by submitting Form 8868.

Consequences of Non-Compliance

A. Non-Compliance with State Filing Requirements

Failure to meet the state filing requirements reviewed above can result in administrative dissolution. Administrative dissolution causes a nonprofit to cease to exist as a separate entity under law. This means the nonprofit loses default protections under state law, and another entity could take the nonprofit’s name.  

Although not the subject of this article, many states require that nonprofits register with a state agency before soliciting that state’s residents for contributions. For more information on the requirements in your state, visit Napa Legal's Multi-State Compliance Matrix. As a consequence of administrative dissolution, nonprofits could have their registration for charitable solicitations automatically revoked or expired. An administratively dissolved nonprofit may find that it cannot legally solicit charitable donations in many states until they remedy their dissolved status in their state of incorporation. Soliciting donations without valid registration could subject a nonprofit to significant penalties, fees, or even lawsuits from state attorney general offices.  

B. Non-Compliance with Federal Filing Requirements

Regardless of which variation of Form 990 your nonprofit is required to file, late filings and failure to file have significant consequences.  

The IRS applies penalties for late filing relative to the nonprofit’s size. If a nonprofit whose gross receipts are less than $1,000,000 files after the due date without reasonable cause, the IRS can impose a penalty of $20 per day for each day the return is late, with a maximum penalty of $10,000 or five percent of the organization’s gross receipts, whichever is less. The penalty increases to $100 per day, up to a maximum of $50,000, for a nonprofit whose gross receipts exceed $1,000,000.  

If a nonprofit fails to file its annual return for three consecutive tax years, the IRS will automatically revoke the nonprofit’s tax-exempt status and issue a Revocation Letter (CP120A) notifying the nonprofit. If the IRS revokes your organization’s tax-exempt status, the organization will be added to the Revocation of Exemption list. You can check that list at the IRS website.

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Reinstatement Following Non-Compliance

A. Reinstatement Under State Law

Reinstating a dissolved nonprofit can be relatively simple (depending on the state): dissolved nonprofits generally must pay a filing fee and file a report with the Secretary of State including the entity’s name, its date of dissolution, a statement that the grounds for dissolution no longer exist, and the entity’s Federal Employer Identification Number (“FEIN”). If the nonprofit’s name was taken while the nonprofit was dissolved, the nonprofit must select a new name. In many states, once reinstatement is approved, the nonprofit’s good standing will relate back to and take effect as of the date when the nonprofit was administratively dissolved, as if the nonprofit was never dissolved in the first place. This is especially beneficial to nonprofits operating in states that require maintaining good standing in a nonprofit’s state of incorporation as a condition to charitable solicitation registration.  

Administrative dissolution can be avoided by ensuring your contact person on file with the Secretary of State is up to date. Often nonprofits that are administratively dissolved were not aware of the missed filing deadline that ultimately caused their dissolution. Many Secretary of State offices notify corporate entities of impending filing deadlines prior to the deadline. To avoid inadvertent administrative dissolution, ensure your nonprofit’s registered agent and address are up to date on the Secretary of State’s website.  

B. Reinstatement Under Federal Law

1. Abating Late Filing Fees

As noted above, a nonprofit that files its annual return after the due date without reasonable cause can be subject to significant penalties. To prove “reasonable cause” and abate the penalties reviewed above, a nonprofit should file the applicable variation of Form 990 even if it is past the May 15 deadline. The nonprofit should attach a written statement to its annual return containing the following:

• A declaration by the authorized signatory that the written statement is made under penalty of perjury.

• A description of the reason the penalty was charged. Penalties may be charged for a return being late, incomplete, or both. The written statement should identify why the relevant penalties were charged.  

• A description of what prevented the nonprofit from requesting an extension of time to file its return, assuming the organization did not request such an extension. This could be because the responsible person died or left the nonprofit, the nonprofit changed addresses, or any other justification for why the nonprofit was unaware it missed the filing deadline.  

• A description of how the nonprofit was not negligent or careless but exercised ordinary business care and prudence.

• A description of the steps the nonprofit has taken to prevent the same situation in the future.  

Oftentimes nonprofits have few resources to meet multiple responsibilities, and filing annual returns can slip through the cracks. A well-written statement should honestly address each item above with special emphasis on how the nonprofit exercised ordinary care and prudence under the circumstances and the steps taken to avoid the same situation in the future.  

Although it is harder to establish reasonable cause if the nonprofit requested and received a six-month extension, such an extension does not disqualify and should not deter a nonprofit from requesting abatement of penalties.

2. Regaining Tax-Exempt Status After Revocation

A nonprofit that fails to meet its annual filing requirements for three consecutive tax years will have its tax-exempt status revoked, leaving it subject to federal (and often state) income tax. If an organization’s tax-exempt status is revoked, it can apply for reinstatement through either a streamlined process, or a more arduous one.  

The streamlined process is available to nonprofits that 1) were previously eligible to file Form 990-EZ or 990-N and 2) have not previously had their tax-exempt status revoked. The streamlined process requires that nonprofits file either Form 1023 or Form 1023-EZ with the IRS and pay the associated fee no later than fifteen months following the date of the nonprofit’s revocation of tax exemption. The date is given in the Revocation Letter and disclosed in the Revocation List on the IRS website. If approved, reinstatement of tax exemption under this process will be retroactive to the date of revocation.  

If the streamlined process may not be used, a nonprofit must file Form 1023 with the IRS and pay the associated fee within fifteen months following the date of the nonprofit’s revocation of tax exemption. The nonprofit must also include a statement establishing it had reasonable cause for failing to meet the filing requirement in one of the three years it did not file, as well as a statement confirming it has since filed returns for those years and any other necessary years. If approved, reinstatement of tax exemption under this process will be retroactive to the date of revocation.

If a nonprofit is applying for reinstatement more than fifteen months following the date of revocation of its tax-exempt status, it must comply with all the requirements above and must include a statement establishing it had reasonable cause for each of the years in which the nonprofit did not file its annual return. If approved, reinstatement of tax exemption under this process will be retroactive to the date of revocation.

If none of the above processes for reinstatement are available, the nonprofit must apply for tax exemption by filing Form 1023 with the IRS and paying the associated fee as if it were applying for tax exemption for the first time, the only difference being that, if approved, reinstatement of tax exemption will be effective as of the postmark date of the application.

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Conclusion

Often a nonprofit misses its filing deadlines because the individual responsible for such filings or the individual listed as the contact person for the IRS and the Secretary of State no longer works for the nonprofit. To ensure compliance, review the IRS and Secretary of State websites and update your registered agent or designated contact person, and have internal succession policies ready to pass filing responsibilities to future responsible persons within your nonprofit.  

If your nonprofit is delinquent in its filings, reinstate your nonprofit’s corporate and/or tax-exempt status sooner rather than later. Immediate action will reduce the penalties owed and the administrative burden associated with regaining tax-exempt status.  

Regaining tax-exempt status after three years of failing to file annual returns is a burdensome process that can be avoided by responsible record keeping. However, the IRS has clear methods available to nonprofits for abating late penalties and regaining tax-exempt status.  

This article concerns the filing requirements of 501(c)(3) nonprofits. If your nonprofit is tax exempt under a different subsection, or has other specific considerations, the requirements may vary. For example, churches and church auxiliaries are exempt from filing Form 990 or any of its variations, and private foundations may file Form 990-PF instead of the above-reviewed forms. Please consult the IRS website and/or an attorney for more information.

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¹ Note that, if a religious organization believes it may qualify as an integrated auxiliary, the organization cannot make that determination itself. It must either 1) initially apply for this status on Form 1023 or 2) later file the request to be considered an integrated auxiliary on Form 8940.