Nonprofit Myths: #8 - File Taxes?

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Starting and running a 501(c)(3) tax exempt nonprofit is a lot of work and not everyone is cut out for it. Some go into the venture with false assumptions and myths and only later find out they didn’t understand what they were getting themselves into. Let’s examine some of those myths.



Myth: I didn’t apply to IRS for 501(c)(3) tax-exempt status, so I don’t have to file Federal annual nonprofit tax returns.


Truth: Definitions required here: nonprofit status is something your state approves; tax-exempt status is a Federal designation. Nonprofits are incorporated in a particular state and states have their own requirements for filing and reporting. All tax-exempt nonprofits (except churches) must file annual tax returns with the IRS because tax exemption is something granted by the Feds. 

Over 650,000 nonprofits have made the mistake of not filing required tax returns and have had their tax-exempt status revoked. If the nonprofit has failed to file for three consecutive years, IRS computers make a note and that organization is automatically revoked from 501(c)(3) status. Even if that organization has never applied.

If the nonprofit applies later, the IRS will review the application, approve it, and even mail out an approval letter. However the next day, the IRS will send a letter saying that the 501(c)(3) was automatically revoked for failure to file taxes for three consecutive years.

To get the status back, the nonprofit will have to reapply and give IRS good reasons to reinstate the organization. They will have to justify why they didn’t file each year individually (with proof) and all years cumulatively, and pay the filing fee again. Exceptions are churches, they do not have to file tax returns. Other organizations must file a return regardless of revenues. However, the appropriate schedules must be attached to the federal application for 501(c)(3) to avoid being revoked for organizations that fall into the "under $5,000" category.


Moral of this Myth: If your nonprofit hasn’t filed taxes, do not apply for Federal 501(c)(3) status until you catch up (and are sure IRS has the returns recorded in their computer system).

And if you are a tax-exempt nonprofit that has failed to file, and if many years have gone by and you have had over $5,000 annual revenue, you might just start a new nonprofit from scratch and let the other nonprofit die a quiet death. It is sometimes easier and wiser to start over rather than go through the hassles of resurrecting a dead paper trail of a nonprofit that has delinquent filings with the state or IRS. Once you get reinstated by the Feds, then many states want missing filings as well. It can turn into an expensive and time-consuming process to get caught up for the years you missed. Because nonprofit records are public records, it might be easier to pick a new name and start over so that your organization has a clean paper trail.





"Nonprofit Myths" is a 12-part series by Dr. Kitty Bickford, founder of Pasture Valley Children Missions. As a nonprofit consultant, Dr. Bickford has provided guidance to thousands of nonprofit leaders in best practices for setting-up and effectively running their organizations. We're also proud to claim Dr. Bickford as an alumna of The Grantsmanship Center. 

© Copyright 2020 Kitty Bickford, DBS, CPC     Used  with permission


For further delight and edification, here's a short series on board development:

Who's On Your Board?     Where Can You Find Board Members?     What Does a Board Do?


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You're welcome to link to these pages and to direct people to our website.
If you'd like to use this copyrighted material in some other way,
please contact us for permission: We love to hear from you!



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