Securing tax-exempt status is an essential element for any nonprofit organization. Serving as more than just a legal formality—it is a critical support system. This status enables nonprofits to receive tax-deductible donations, which are a significant source of funding, allowing them to fulfill their missions effectively.
Unfortunately, noncompliance with IRS guidelines, failing to submit required reports, and other tax-related errors can lead to the automatic revocation of your organization's tax-exempt status. If this happens, Chisholm Law can help you understand the reasons behind the revocation and guide you through regaining it.
Our attorneys have extensive experience in nonprofit law and are well-versed in the specific requirements and regulations governing tax-exempt status for nonprofit organizations in California. Whether your tax exemption was revoked due to missed filings, compliance issues, or other reasons, we can provide comprehensive support to guide you through the reinstatement process.
Common Reasons for Losing Tax-Exempt Status
Before you can take any action to regain your organization’s tax-exempt status, you have to know the exact reason it was revoked. Each cause of revocation requires a different approach to remedy. Some of the most common reasons a nonprofit can lose their status include:
- Failure to File Required Annual Returns (Form 990 Series): Nonprofits and charitable organizations are required to file annual information returns, such as IRS Form 990, 990-EZ, or 990-PF. Failing to submit these forms for three consecutive years results in your tax-exempt status being automatically revoked.
- Engaging in Excess Lobbying Activities: While nonprofits can engage in some lobbying, excessive lobbying activity can jeopardize tax exemption. The IRS closely monitors the extent and nature of lobbying activities to ensure compliance with legal limits.
- Participating in Prohibited Political Activities: 501(c)(3) nonprofits typically must avoid participating in political campaigns or supporting political candidates. Engaging in prohibited political activities can lead to revocation of tax-exempt status.
- Unrelated Business Income Exceeding Permissible Limits: Generating significant income from activities unrelated to your organization’s primary mission can result in losing tax-exempt status. The IRS sets strict limits on unrelated business income to prevent abuse of nonprofit status.
- Failure to Comply with Charitable Distribution Requirements: Some nonprofits are required to distribute a certain portion of their income for charitable purposes. Failure to meet these distribution requirements can lead to the revocation of tax-exempt status.
At Chisholm Law, we can help you identify the root cause of revocation and develop a clear strategy to reinstate your nonprofit’s tax-exempt status. From there, we will ensure your organization can quickly return to compliance and continue its vital work without unnecessary interruptions.
What Happens When You Lose Your Tax-Exempt Status?
Losing your tax-exempt status can have significant financial repercussions for your nonprofit organization. Your ability to get donations, qualify for funding, and ability to dedicate money toward your nonprofit’s mission can all be compromised.
Loss of Tax-Deductible Donations
When your organization loses its tax-exempt status, donors can no longer deduct their contributions on their tax returns. Such a change can reduce your fundraising capabilities, as the incentive for making donations diminishes. Potential donors may choose to support other nonprofits where their contributions remain tax-deductible.
Increased Tax Burden
Without tax-exempt status, your organization may be subject to federal income taxes on its revenue, including donations. With this increased tax burden, you will have to divert funds away from your programs and services, limiting your ability to fulfill your mission. Additionally, your organization might be responsible for other taxes and fees that were previously exempt.
Difficulty Attracting Grants
Many grantors and foundations require recipients to have tax-exempt status as a condition of funding. Losing this status can make it challenging to secure grants, which are often a critical source of support for nonprofit organizations. This can further strain your financial resources and hinder your ability to carry out your projects and initiatives effectively.
How to Get Your California Nonprofit’s Tax-Exempt Status Reinstated
Navigating the reinstatement process can be complex. It is a multi-step process that requires careful attention to detail.
- Identify the Cause of Revocation: Start by understanding why your tax-exempt status was revoked. Whether it was due to failure to file required forms, engaging in prohibited activities, or other reasons, pinpointing the exact cause is essential for addressing the issue effectively.
- Take Corrective Actions: Once you’ve identified the cause, take the necessary corrective actions. This might involve filing overdue forms, adjusting your organization’s activities to comply with regulations, or making other necessary changes to address the reason for revocation. Your organization may also be eligible for retroactive reinstatement, which allows it to regain its tax-exempt status as if it had never been revoked, provided it meets certain criteria and follows the application procedures.
- File Reinstatement Applications: To regain your tax-exempt status, you must file a reinstatement application with the IRS, as well as an exemption request.
- Work with the IRS: After submitting your applications, work closely with the IRS to resolve any outstanding concerns. This might involve providing additional documentation or clarification as requested. If the IRS determines your organization has fulfilled all compliance requirements, a new IRS determination letter will be issued.
Do You Need a Nonprofit Attorney to Reinstate Your Organization's Tax-Exempt Status?
It is possible to navigate the reinstatement process on your own. However, having a qualified nonprofit attorney on your side offers several advantages that can streamline the procedure and enhance your chances of success.
An attorney with a focus on nonprofit tax law brings a deep understanding of the complexities specific to this area. They are well-versed in the intricacies of tax regulations and can provide accurate, up-to-date advice tailored to your organization’s needs. They will ensure that every aspect of your reinstatement application is handled correctly.
Nonprofit attorneys are familiar with the reinstatement process and the specific requirements for tax-exempt reinstatement. They can guide you through each step, helping to identify and rectify any issues that led to the revocation of your tax-exempt status - saving you time and helping prevent costly mistakes.
Having legal representation during communications with the IRS can also be invaluable. An attorney can effectively manage these interactions, addressing any concerns or requests for additional information promptly and accurately. Having professional representation can make the process smoother and less stressful for your organization.
Why Choose Chisholm Law When You Need to Reinstate Your Tax-Exempt Status?
Choosing Chisholm Law means choosing a firm with a thorough understanding of nonprofit law and a commitment to your organization's success. Our team has a deep familiarity with the reinstatement process and the requirements set forth by the IRS and knows how to navigate all the intricacies.
We handle each case with meticulous attention to detail. From identifying the cause of your revocation to taking the necessary corrective actions, we ensure that every step is addressed comprehensively. Our approach involves close communication with the IRS, effectively managing any inquiries or additional documentation requests to facilitate a smooth reinstatement process.
We understand the unique challenges faced by nonprofit organizations in California and are dedicated to providing clear, actionable advice. Our team is here to guide you through the complexities of regaining your tax-exempt status, offering support and clarity at every stage. When you choose Chisholm Law, you can focus on your mission while we handle all the legal details.
Reinstate Your Tax-Exempt Status With Chisholm Law
Tax-exempt status is essential for nonprofit organizations, allowing them to secure vital funding to fulfill their missions. Chisholm Law is dedicated to helping you protect and restore this critical status, ensuring your nonprofit continues to flourish.
Reach out to our team today to begin your journey toward reinstating your tax-exempt status with assurance and efficiency.
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