By / Nonprofit

When a Nonprofit Loses Tax-Exempt Status: What Happens Next?

When a nonprofit loses tax-exempt status, it usually doesn’t start with a dramatic IRS raid. It starts with missed filings. A deadline comes and goes. Then another. Then another. And one day you find out:
“The IRS automatically revoked your tax-exempt status… three years ago.”
Now you’re asking:
  • Are we personally on the hook for taxes?
  • Do we owe back taxes and penalties?
  • Can donors still deduct their gifts?
  • Is this fixable—or are we starting over?
Let’s walk through, in plain English, what “automatic revocation” really means, what happens next, and what realistic options you have to fix it.

How Does a Nonprofit Lose Tax-Exempt Status?

The most common way? Automatic revocation for not filing.
If your nonprofit doesn’t file the required annual return (Form 990, 990-EZ, 990-N, or 990-PF) for three years in a row, the IRS will automatically revoke your tax-exempt status.
No appeal first. No friendly reminder. Just: you’re revoked.
This can happen to:
  • Small nonprofits that think “we’re too small to file anything.”
  • Busy organizations that change treasurers or CPAs and drop the ball.
  • Groups that filed 990-N e-postcards and didn’t realize they missed several years.
If you’re unsure whether you’re on the revocation list, that’s a red flag in itself—it’s something your board should confirm, not guess about.

What Changes the Moment You’re Revoked?

Losing 501(c)(3) (or other 501(c)) status is not just a label change. It has real-world consequences for:
  • The organization
  • The board
  • Your donors
Here’s what typically happens.

1. You become a taxable entity

Once tax-exempt status is revoked, the organization is treated as a taxable corporation for federal income tax purposes. That means:
  • You may owe income tax on revenue (including program revenue, some grants, investment income).
  • You may have to file corporate tax returns instead of (or in addition to) Form 990.
If you were revoked three years ago and just found out now? The IRS can look back at those years.

2. Donor deduction issues

This one hits your supporters where it hurts:
  • Donations made after the revocation date may not be tax-deductible the way donors expected.
  • If donors claimed deductions based on believing you were still exempt, they may get pushback from their tax preparers or the IRS.
This is where trust can crack. Nobody likes to learn the nonprofit they’ve supported for years wasn’t actually tax-exempt during that time.

3. Public listing as “revoked”

The IRS maintains a public list of organizations whose tax-exempt status has been automatically revoked. That means:
  • Grantmakers, major donors, and watchdog groups can see that you were revoked.
  • Some funders will not make grants to organizations without current tax-exempt status.
  • It can complicate banking, leases, and contracts where your nonprofit status matters.
You may still be operating and serving the community—but on paper, you’re now a revoked, taxable organization.

What Does This Mean for the Board?

If you’re on the board, this can feel like a gut punch. You might be thinking:
  • “Are we personally liable for this?”
  • “Did we fail our fiduciary duties?”
  • “Can they come after us individually for taxes or penalties?”
Here’s the plain-English version:
  • The organization is the taxpayer—but
  • Board members have fiduciary duties (care, loyalty, obedience) to oversee compliance.
  • Long-term failure to file, ignoring warnings, or misrepresenting status to donors can raise serious governance concerns—and sometimes, personal risk.
At minimum, you now have:
  • A governance problem (why weren’t filings handled?).
  • A reputational problem (what do we tell donors and partners?).
  • A legal problem (what’s the cleanest path back to compliance?).
This is the moment when “we’ll figure it out internally” can shift to “we need legal counsel in the room.”

Step One: Confirm What Actually Happened

Before you can fix anything, you need the facts. Your board should get clear answers to:

When was the exemption revoked?

The IRS revocation list will show the effective date.

Which years did we miss?

Identify every year a Form 990/990-EZ/990-N/990-PF wasn’t filed.

Did we keep operating and soliciting donations during that time?

If yes, what did we tell donors about our status?

Did anyone receive an IRS notice that was ignored or misplaced?

Often these go to an old address, a past treasurer, or a prior CPA.

You can’t control the past, but you can control how quickly and accurately you respond now.

Can You Get Tax-Exempt Status Back?

Short answer: Yes, often you can. But how you do it—and how clean the outcome is—depends on your situation. Here are the common paths:

Option 1: Apply for Reinstatement (Same Organization, Same EIN)

In many cases, you’ll:
  • File a new exemption application (like Form 1023, 1023-EZ, or 1024, depending on your type).
  • Ask for “reinstatement” of tax-exempt status.
  • Explain what happened and what you’ve done to fix your compliance systems.
There are several “tracks” for reinstatement (including some simplified ones for smaller, first-time offenders), but the choices you make here affect:
  • Whether your status is reinstated retroactively back to the revocation date, or
  • Only going forward, leaving a taxable gap in the middle.
That gap matters for both the organization and your donors.

Option 2: Retroactive Reinstatement

In some situations, you can request that your status be reinstated as if you never lost it. To do that, you may need to:
  • File all past-due returns (990, 990-EZ, 990-N, or 990-PF).
  • Show reasonable cause for why you failed to file.
  • Provide detail on the steps you’ve taken to make sure it doesn’t happen again.
If the IRS agrees and grants retroactive reinstatement:
  • Your organization is treated as tax-exempt for the entire gap period.
  • Donor deductions during that period are generally preserved.
This can be a lifeline—but it’s not automatic, and how you frame your explanation matters.

Option 3: Start Fresh with a New Entity

Sometimes, especially if:
  • The old entity has messy records,
  • There’s significant tax or penalty exposure, or
  • The mission or leadership has significantly shifted,
…it may make more sense to wind down the old organization and start a new, clean nonprofit with a new application. This is not a quick or casual decision. It has implications for:
  • Assets and liabilities
  • Contracts, leases, employees
  • Restricted donations and grants
You’d want legal and accounting guidance before going this route.

What Should You Tell Donors and Partners?

Silence is rarely the best strategy. Once you know the facts and have a plan, you’ll likely need to:
  • Disclose the revocation to major donors, grantors, and key partners.
  • Explain what happened, in simple terms, without throwing volunteers or staff under the bus.
  • Share what you’re doing about it—for example, applying for reinstatement, filing back returns, strengthening governance.
Handled well, this can actually build trust: “We discovered a serious compliance issue. Here’s what happened, here’s what we’re doing to fix it, and here are the safeguards we’re putting in place going forward.”
Handled poorly—hidden, minimized, or spun—it can do lasting damage to your reputation.

How to Protect the Organization Going Forward

Once you’re dealing with revocation, you don’t just want a one-time fix. You want systems. That often includes:
  • Clear assignment of responsibility for annual filings (and a backup).
  • Updated addresses and contact information with the IRS and state agencies.
  • Regular board reporting on compliance—990 filing status, state filings, registrations.
  • Written policies that make it harder for filings to fall through the cracks when people rotate off the board.
This isn’t about perfection. It’s about making sure your mission doesn’t get derailed by avoidable compliance problems.

This Is Fixable—but Not DIY

Losing tax-exempt status feels like worst-case scenario. But it’s surprisingly common, especially for smaller or volunteer-run nonprofits. The key questions now are:
  • How much damage has actually been done?
  • What’s the cleanest, most realistic path to reinstatement or restructuring?
  • How do you protect your board, your donors, and your mission going forward?
Trying to navigate revocation and reinstatement with guesswork or conflicting advice from the internet can make the situation worse—especially if you’re asking for retroactive relief or dealing with multiple years of missed returns.

Worried Your Nonprofit Lost Its Status? Contact Laura Brown.

If you’ve discovered (or suspect) that your nonprofit’s tax-exempt status has been revoked, you’re not alone—and you’re not stuck.
You may be thinking:
  • “Are we on the IRS revocation list and don’t even know it?”
  • “Did we mess up our donors’ deductions?”
  • “Is this going to shut us down?”
You don’t have to sort that out on your own. Laura Brown helps nonprofits and boards:
  • Confirm whether and when tax-exempt status was revoked
  • Evaluate your options for reinstatement (including retroactive relief, where possible)
  • Coordinate with your CPA on back filings and cleanup
  • Put governance and compliance systems in place so this doesn’t happen again
If your organization’s status is in question—or you’ve already received a revocation notice—contact Laura Brown to schedule a consultation.

Get clear on your risks. Get a realistic plan to fix it.

Protect your nonprofit, your board, and the community that depends on your work.
Contact Laura Brown