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Consequences of loss of tax exemption:

The consequence of losing your organization’s tax exemption will vary from organization to organization, and will depend on its tax classification, type of assets, operations, and a number of other factors.  For an organization recognized as a 501(c)(3) by the IRS, here are some of the likely consequences:

  1. A donor to your organization cannot deduct a donation to your organization made after the date on which the exemption was lost.
  2. Your organization (if it is organized as a nonprofit corporation) will now have to file the return that a nonexempt corporation files from the date of revocation going forward.  It will be subject to failure to file penalties if it does not do so.
  3. If your organization’s exemption was revoked due to failure to file annual informational returns (e.g., Form 990-EZ, Form 990), it will be liable for failure to file penalties on those returns.  Note that if an organization whose gross receipts are less than $1,000,000 for its tax year files its Form 990 after the due date (including any extensions) the IRS will impose a penalty of $20 per day for each day the return is late. The maximum penalty is $10,000, or 5 percent of the organization’s gross receipts, whichever is less. The penalty increases to $100 per day, up to a maximum of $50,000, for an organization whose gross receipts exceed $1,000,000.
  4. The organization will likely not be eligible for grants from other charities, since most grantors want to know that the grant recipient is recognized as tax-exempt at the time of making the grant.
  5. The organization can lose other tax exemptions that are tied to federal tax-exempt status, such as exemptions from sales and real property tax.
  6. Potential donors and volunteers can lose confidence in the leadership of an organization that has its tax exemption revoked, leading to a loss of donations and assistance.
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