An exempt organization that does not file its required annual information form 990 for three consecutive years automatically loses its tax-exempt status. 2009 was the third year that the law has been in effect and many exempt organizations which have failed to file during that period will have their exempt status revoked this year, unless the IRS postpones the revocation program. This is especially important for affiliates of larger organizations.

If an organization loses its exempt status it must file Form 1120, U.S Corporation Income Tax Return or a Form 1041, U.S. Income Tax Return for Estates and Trusts, and may need to pay income taxes. 

Probably most of the organizations which will lose exempt status are small organizations with gross receipts under $25,000 per year who were formerly allowed to not file Form 990. In conjunction with the revocation program, the IRS created a simplified online 990 for those small organizations to file. If a small organization failed to file for 2007 and 2008, it is imperative that a 990-N be filed for 2009 by May 15, 2010 or revocation may apply.

In order for an organization to regain its tax-exemption, it must apply for IRS recognition of exemption (even it was not required to apply initially) by filing form 1023 (for 501(c) (3) organizations) and pay the appropriate application fee. If the IRS approves the application, tax-exempt status will be effective as of the date of the application unless the organization demonstrates reasonable cause for failure to file. In that case, exemption will be effective as of the date of revocation. 

MSAE thanks Forrest Lewis, CPA, Plante & Moran, PLLC for sharing this knowledge.