Three missed years ends a club’s tax-exempt status, and it can be fixed

Nobody has to send a notice or make a decision. The status ends on its own on the due date of the third missed return.

A club changes treasurers twice, and somewhere in the middle the annual return gets missed. Then it gets missed again. The club still meets, the dues still come in, and everyone assumes the nonprofit side is fine. It’s an easy thing to lose track of, and the IRS rule behind it runs on autopilot.

The IRS says organizations that don’t file for three consecutive years automatically lose their tax-exempt status. That covers the Form 990, the Form 990-EZ, and the Form 990-N. The revocation is effective on the original filing due date of the third annual return or notice. There’s no appeal. The IRS says the organization must apply to have its status reinstated, even if it wasn’t originally required to file an application for exemption.

For a social club, losing it means the club is treated as a taxable corporation from the revocation date on. What that actually costs depends on the club’s income and expenses, and that isn’t something to guess at.

Now the good news. The IRS offers a way back. Revenue Procedure 2014-11 describes four procedures for reinstatement, and the IRS summarizes them on its reinstatement page. One is a streamlined retroactive reinstatement for organizations that were eligible to file the Form 990-EZ or the Form 990-N for each of the three years, haven’t been automatically revoked before, and apply within fifteen months of the later of the revocation letter or the date the club appears on the IRS revocation list. There are retroactive routes that call for a statement of reasonable cause for the missed returns, with different requirements depending on whether the application comes within fifteen months of the revocation letter or revocation list date. And there’s a route that reinstates the status from the postmark date of the application.

Which one fits depends on the club. How large it was in those years, whether it has been revoked before, why the returns were missed, and how much time has gone by. The difference between the routes is real. A retroactive reinstatement goes back to the date of revocation, while a postmark-date reinstatement starts when the application was mailed. The IRS also notes that a club which is reinstated and then misses three more years in a row can be revoked again.

On the penalties: under the retroactive routes, the IRS generally won’t charge late-filing penalties for those years if the club meets the conditions and files the past-due returns. The postmark-date route gives no such relief. Years when the club only owed a 990-N carry no penalty to begin with. Either way, the paperwork still has to be done.

There are the older years to deal with as well. Returns that were missed may still need to be prepared, which means the books for those years have to be rebuilt. That’s the slow part, and it gets harder the longer a club waits and the more volunteers have turned over.

A club that suspects it’s anywhere near three missed years can start by checking how the IRS lists it on its exempt organization search and by looking for the filing record. If it does look close, get help choosing the route before anything is filed. The right one depends on facts that only the club’s own records can answer.

Think your club may have missed returns? Let’s find out where it stands before the clock runs.

Everything here is general information, not tax or legal advice. Reading it doesn’t make you a client, and your facts will change the answer.