The IRS regularly revokes the tax-exempt status of not-for-profits — mostly for failing to file annual information returns. Losing your exempt status can be devastating. Donors won’t be eligible to deduct contributions to your organization, grant-makers probably won’t even consider your applications and you may become retroactively liable for taxes. So the sooner you regain your status, the better. Here’s how.

Filing for exemption recognition

If your nonprofit is required to file an annual Form 990, 990-EZ or 990-N (e-postcard) and it fails to do so for three consecutive years, your exempt status will automatically be revoked. However, you can potentially regain it. First, make sure your organization is registered with pay.gov.

Then, you’ll likely need to submit one of these electronic forms:

• Form 1023, “Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code,” or
• Form 1024, “Application for Recognition of Exemption Under Section 501(a) or Section 521 of the Internal Revenue Code.”

Smaller organizations may be able to have their status retroactively reinstated effective from the revocation date. To qualify, your nonprofit must have been eligible to file either Form 990-EZ or 990-N for each of the three consecutive years and not have previously had its tax-exempt status automatically revoked. To apply for retroactive reinstatement, file the applicable form within 15 months or the later date of 1) the IRS revocation letter, or 2) when the IRS posted your nonprofit’s name on its website.

If you aren’t eligible for retroactive reinstatement, your organization’s activities between the revocation date and reinstatement date will be considered taxable. This includes donors’ contributions.

Supporting your request

When you file for recognition of exemption, you’ll attach a detailed statement that provides reasonable cause for failing to file required returns in each of the three consecutive years. You should state the facts that led to each failure, the continual failures and the discovery of the failures, and describe the steps taken to avoid or mitigate them.

In addition, you’ll need to include:

• Statements that describe safeguards put in place and steps taken to avoid future failures,
• Evidence that supports all material aspects of those two statements,
• Properly completed and executed tax returns for all taxable years during and after the three-year period your organization failed to file, and
• An original declaration dated and signed by an authorized person in your organization such as an officer or director.

Finally, you’ll be required to pay a filing fee.

Qualifying again

Assuming you file correctly and submit all required paperwork that shows your organization qualifies, it’s likely to regain its tax-exempt status. At that point, the IRS will issue a new determination letter and update its records that confirm your eligibility to receive tax-deductible contributions.

If you don’t qualify for retroactive reinstatement, generally, the effective date of reinstatement will be the date your exemption application was submitted. But if your nonprofit is retroactively reinstated, you may be able to request an abatement of any penalty the IRS may have assessed.

Essential help

If your tax-exempt status is revoked and you’re unsure how to proceed, contact us. In addition to helping you file for reinstatement, we’ll assist you in establishing procedures for future compliance.

© 2025

If you’re starting up a new 501(c)(3) not-for-profit organization, you likely face many decisions. One of them is which form to use when applying to the IRS for recognition of your tax-exempt status. There are two — Form 1023 and 1023-EZ, a newer, streamlined version of the original form. Let’s take a look.

Traditional route vs. EZ way

Many nonprofits still use the longer Form 1023 because it’s available to every 501(c)(3) organization and there are virtually no restrictions on its use. However, Form 1023 takes time and money to complete. It’s dozens of pages long and accompanied by lengthy instructions. The instructions explain how to fill out the form and list the documents you’ll need. If you decide to use Form 1023, do your homework first. Also know that it will cost $600 to file it. You’ll need to set up a pay.gov account first.

Form 1023-EZ is aimed at smaller nonprofits and is cheaper to file — only $275 (also via pay.gov). It’s only three pages and completing it should take less than half the time it would take to fill out Form 1023.

Work the worksheet

Eligibility for filing Form 1023-EZ isn’t automatic. You first must complete an eligibility worksheet to verify that your organization qualifies to use the form. Note that it only takes one “yes” answer to eliminate Form 1023-EZ as an option. For example, your organization can’t expect to accumulate annual gross receipts of more than $50,000 during the next three-year period. This includes receipts from all sources.

You’ll also be disqualified from using the EZ form if your nonprofit’s assets are valued at more than $250,000. Cash and the fair market value of bank accounts and loans receivable, inventories, bonds, stocks, equipment, and buildings all count toward the limit.

Among other eligibility requirements, your organization must:

• Have been formed in 1) the United States, its states, territories, or possessions; 2) federally recognized Indian tribal or Alaskan native governments; or 3) the District of Columbia; and
• Be organized as a corporation, unincorporated association or trust.

Be sure to complete the entire worksheet.

Getting off on the right foot

So long as your organization passes all the tests on the 1023-EZ eligibility worksheet, you should be safe submitting that form. But if you have questions or concerns, contact tax and legal professionals. Using Form 1023-EZ if you’re ineligible could make your new nonprofit more vulnerable to audits and other IRS scrutiny. And you wouldn’t want to get off on the wrong foot at the start of your organization’s run!

© 2024

How is your not-for-profit’s 2025 program budget looking? Unfortunately, some organizations may have to try to do more with less next year because donations and grants have fallen off. Even if your income is relatively stable or rising, you’ll want to ensure you’re making the most of your budget. Take the time now to review your programs and determine what no longer works and what might be missing.

Ask your stakeholders

Community and membership needs change over time, and your nonprofit must change with them. Instead of relying on assumptions and anecdotes about your programs’ effectiveness, survey clients, members, donors, staffers, volunteers and other stakeholders about which of your programs are the most — and the least — effective and why. You might also want to talk to community leaders and others with their ears to the ground, such as local journalists, about whether they know of unmet needs or have spotted trends that should inform your programming decisions in the future.

It’s common to get mixed responses regarding the same program, so consider their source. Employees and volunteers who work directly with program participants are more likely to know if your current efforts are off target than is a donor who attends fundraising events once a year. On the other hand, you can’t afford to alienate financial supporters. Be sure to let all stakeholders know how much you value their input, regardless of the decisions you ultimately make.

Use data and metrics

It’s also important to scour your community’s demographic data for changes relevant to your program offerings. And if you don’t already have goals and metrics for each program, set them. Specific measurements will vary according to the program, but your evaluation system should be strategic, realistic and timely. For example, a professional association evaluating its continuing education program could compare year-over-year enrollee numbers or the change in percentage of enrollees relative to overall membership.

Apply several measures, including subjective ones, to your programs before deciding to cut or fund them. Numerical data might suggest that a program isn’t worth the money, but those who benefit from it may be passionate and vocal about its success.

Redeploy funds where necessary

After researching your programs, you may find that it’s easier to identify obsolete ones than to decide on new ones. If one of your programs is clearly ineffective and another is wildly exceeding expectations, the decision to redeploy funds to the successful program is simple. But what if you discover that none of your programs are particularly effective?

New programs can be variations of old ones, but they must better serve your nonprofit’s basic mission, values and goals. You also should avoid repeating old mistakes, such as skimping on funding. At the same time, programs can’t be successful if you overspend on them. So for every new program, create a tight budget and stick to it.

No-waste operations

If you find that reviewing your programs and culling those that are less effective is productive, consider making it a routine exercise — for example, do it once a year or once every two years. In times of financial insecurity, it’s always better to keep waste to a minimum. Contact us with questions.

© 2024

The end of 2024 is rapidly approaching, and you know what that means: You need to fundraise in earnest. According to Double the Donation, 30% of all charitable giving occurs in December. Make sure your not-for-profit organization is top of mind when people pull out their credit cards and checkbooks.

Improve visibility

Only donors who itemize deductions on their 2024 federal income tax return can deduct donations made by Dec. 31. But plenty of others are motivated by the “holiday spirit” to give. And some prospective donors may simply use the calendar as a reminder to make their charitable contributions for the year. To help ensure the charitably minded know you want — and need — their support:

Take part in Giving Tuesday. Since launching in 2012, Giving Tuesday has grown swiftly to become one of the world’s biggest fundraisers. The online event is held on the first Tuesday after Thanksgiving — Dec. 3 in 2024. In 2023, 34 million Americans participated by volunteering and donating, including giving $3.1 billion to nonprofits. If you aren’t set up to participate, go to givingtuesday.org for information.

Focus on a theme or goal. Create a giving campaign around a fun participatory theme (one example being the ALS Association’s Ice Bucket Challenge). Or focus on a specific goal, such as constructing a new facility or introducing a new program.

Check your records. Reach out to supporters whom your records reveal have habitually made year-end contributions. You can also segment your donor database according to gift size and other characteristics that suggest some past donors may be more willing to give now.

Share your stats. Analytics can engage and motivate nonprofit stakeholders, so use statistics and infographics in your year-end appeals. Stats can illustrate your organization’s historical fundraising patterns and current goals. If you update them on your website, supporters will be able to follow your progress through a particular season or campaign.

Be prepared

Attracting support is only part of a successful fundraising season. You also have to make sure you’re equipped to handle donations.

To that end, test the donation page on your website to confirm it’s easy to navigate and ready for donors to input financial information. Your site should adhere to the highest security protocols, load quickly, and be free of dead links and error messages. Ensure your donation app sends emails to thank donors and provide them with a record for tax purposes.

Also critical: being ready to process any available matching gifts. According to Double the Donation, most companies that offer to match their employees’ charitable gifts donate at a 1:1 ratio — but some are known to go as high as 4:1. You can’t afford to miss out! Provide contributors with instructions on how to request matches. Also, set up automated emails to remind donors if you don’t receive a match.

Learn from success

Finally, be sure you document everything you learn — including what works and what doesn’t — this giving season. Contact us for more ideas on boosting your nonprofit’s income.

© 2024

You may know the difference between nonprofit and for-profit accounting systems, but do your newest employees and board members? Not-for-profits and businesses share certain similarities. For example, both must carefully track transactions and produce accurate, timely financial statements. But there are enough differences between the two that you may want to provide training for new board members and staffers who come from corporate backgrounds.

Profit vs. charitable mission

For-profit companies are driven to maximize profits for their owners. Nonprofits, on the other hand, generally want revenue to cover the costs of fulfilling their mission now and in the future.

Their respective financial statements reflect this difference. For-profits report mainly on profitability and increasing assets, which correlate with future dividends and return on investment to owners and shareholders. Nonprofits report on their financial position, stability and expenditures to funders, board members, the community and tax authorities.

Balance sheet vs. statement of financial position

For-profits and nonprofits use different financial statements to report assets and liabilities. For-profit companies prepare a balance sheet that lists the owners’ or shareholders’ equity, which is based on the company’s assets, liabilities and prior profits.

Nonprofits, which have no owners, prepare a statement of financial position, which also looks at assets, liabilities and prior earnings. Resulting net assets are classified as those without donor restrictions and those with donor restrictions. Nonprofits usually are more focused on transparency than are for-profit companies. Therefore, their financial statements and footnotes generally include disclosures about the nature and amount of donor-imposed restrictions on net assets, as well as internal limits set by the board.

Income statement vs. statement of activities

For-profits and nonprofits also take different reporting approaches to revenues and expenses. For-profits produce an income statement (also known as a profit and loss statement), listing revenues, gains, expenses and losses, to help evaluate financial performance.

Nonprofits often rely on grants and donations, in addition to fees-for-service income. So they prepare a statement of activities, which lists all revenues less expenses, and classifies the impact on each net asset class.

Unlike for-profit businesses, nonprofits also prepare a statement of functional expenses. Here, they break down their expenditures (such as salaries and benefits, rent and utilities, and office supplies) into functional categories — program, administration (also referred to as management) and fundraising. This statement often is used to help nonprofits prepare their annual Forms 990 and can provide greater transparency to their donors and supporters.

Other differences

There are other nonprofit financial reporting and accounting concepts that may be important for staffers and board members to learn, depending on their responsibilities. If you have questions or need help educating your stakeholders, contact us.

© 2024