Nonprofit Taxpayers: What to Do If You Haven’t Filed Tax Returns in Years—A Complete Guide to Accounting, Bookkeeping, Compliance, and Avoiding IRS Scrutiny

Nonprofit Taxpayers: What to Do If You Haven’t Filed Tax Returns in Years—A Complete Guide to Accounting, Bookkeeping, Compliance, and Avoiding IRS Scrutiny

By Mike Habib, EA – Los Angeles, CA

Introduction

If you’re a nonprofit leader, board member, or bookkeeper, you know your mission is to serve the public good. But what happens when your organization falls behind on IRS filings? Maybe you didn’t realize you had to file, or perhaps you were overwhelmed by other priorities. Now, you’re worried about penalties, losing tax-exempt status, or even an IRS audit.

You’re not alone. Many nonprofits—especially smaller ones—struggle with tax compliance. The good news? With the right knowledge and support, you can get back on track, protect your organization, and focus on your mission.

As an Enrolled Agent (EA) and founder of Mike Habib, EA, a Los Angeles, CA-based tax firm serving clients nationwide (including Americans abroad), I specialize in helping nonprofits resolve tax problems, represent them before the IRS and state agencies, and set up robust accounting and compliance systems.

This comprehensive FAQ will answer your most pressing questions about nonprofit tax compliance, accounting, bookkeeping, and how to avoid IRS scrutiny—even if you haven’t filed in years.

Table of Contents

1. What are the IRS filing requirements for nonprofit organizations?
2. What happens if a nonprofit fails to file tax returns for several years?
3. How can a nonprofit regain tax-exempt status after revocation?
4. What accounting and bookkeeping practices are required for compliance?
5. How can nonprofits avoid IRS scrutiny and audits?
6. What are common compliance challenges for nonprofits?
7. How can a tax expert help nonprofits resolve tax problems and stay compliant?
8. How does Mike Habib, EA, support nonprofit organizations?
9. Frequently Asked Questions (Quick Reference)
10. Conclusion: Take Action to Protect Your Nonprofit

1. What are the IRS filing requirements for nonprofit organizations?

Q: Do all nonprofits have to file tax returns? A: Almost all tax-exempt organizations recognized under IRC §501(a) must prepare and file an annual 990 tax return with the IRS. The specific form depends on your gross receipts and assets:

• Form 990: For organizations with gross receipts ≥ $200,000 or assets ≥ $500,000.
• Form 990-EZ: For organizations with gross receipts < $200,000 and assets < $500,000.
• Form 990-N (e-Postcard): For organizations with gross receipts normally ≤ $50,000.
• Form 990-PF: For private foundations, regardless of size.

Exceptions: Some organizations are exempt from filing, including:

• Churches, their integrated auxiliaries, and conventions/associations of churches.
• Governmental units.
• Subordinate organizations included in a group return.
• Certain political organizations and state institutions.

State Requirements: Many states (like California) have their own annual filing requirements (e.g., Form 199 for the Franchise Tax Board). Failing to file at the state level can also result in penalties or loss of state tax-exempt status.

2. What happens if a nonprofit fails to file tax returns for several years?

Q: What are the consequences of not filing IRS returns for multiple years? A: The IRS imposes strict penalties for non-filing:

• Automatic Revocation: If a nonprofit fails to file a required return (Form 990, 990-EZ, 990-N, or 990-PF) for three consecutive years, its federal tax-exempt status is automatically revoked as of the due date of the third missed return. This is mandated by IRC §6033(j) and reinforced by the Taxpayer First Act and OBBB (H.R. 1, 119th Congress).
• Penalties: The IRS may assess daily penalties for late or missing returns, based on the organization’s size.
• Loss of State Exemption: States may also revoke tax-exempt status for non-filing.
• Income Tax Liability: Once revoked, the organization is treated as a taxable entity and must file Form 1120 (corporation) or Form 1041 (trust), paying income tax on net earnings.
• Public Disclosure: Revocation is published by the IRS, which can damage your reputation and fundraising ability.

Q: Can a nonprofit operate without tax-exempt status? A: Technically, yes—but donations are not tax-deductible, and the organization is subject to income tax. Most grant makers and donors require proof of IRS exemption.

3. How can a nonprofit regain tax-exempt status after revocation?

Q: Is it possible to get tax-exempt status back after automatic revocation? A: Yes, but you must reapply:

• File Form 1023 or 1023-EZ (for 501(c)(3) organizations) or Form 1024/1024-A (for other types).
• Pay the applicable user fee.
• Submit all required documentation, including organizing documents and financials.
• Request retroactive reinstatement (if eligible):
• If you act within 15 months of revocation and meet certain criteria, you may request retroactive reinstatement to the date of revocation.
• You must file all delinquent returns and demonstrate reasonable cause for failure to file.

Q: What if the organization continues to operate after revocation? A: You must file as a taxable entity (Form 1120 or 1041) and pay any taxes due until exemption is reinstated.

4. What accounting and bookkeeping practices are required for compliance?

Q: What records must a nonprofit keep? A: The IRS requires tax-exempt organizations to maintain accurate, complete records to justify their exempt status and support all items reported on tax returns. This includes:

• Organizing documents: Articles of incorporation, bylaws, IRS determination letter.
• Financial records:
• General ledger, journals, and bank statements.
• Receipts and disbursements journals.
• Payroll records (if applicable).
• Documentation for all income and expenses (invoices, receipts, contracts).
• Asset and liability records (property, investments, loans).
• Program records: Documentation of activities, grants, and services provided.
• Board minutes: Records of board meetings and major decisions.

Q: What accounting method should nonprofits use? A: Nonprofits may use cash or accrual accounting, but must be consistent and reconcile any differences between their books and the Form 990 filed. Organizations with audited financials must provide reconciliations on Schedule D of Form 990.

Q: How long should records be kept? A: Generally, keep records for at least three years after the due date of the return or the date the return was filed, whichever is later. For property records, keep documents for as long as the asset is owned plus three years after disposal.

5. How can nonprofits avoid IRS scrutiny and audits?

Q: What triggers IRS scrutiny or an audit for nonprofits? A: Common red flags include:

• Failure to file required returns or late filings.
• Incomplete or inconsistent information on Form 990.
• Unusual or excessive compensation to officers or insiders.
• Significant unrelated business income (UBI) not reported on Form 990-T.
• Engagement in prohibited political or lobbying activities.
• Failure to provide required public disclosures.
• Large or unusual transactions, especially with related parties.

Q: What steps can nonprofits take to minimize audit risk? A:

• File all required returns on time and accurately.
• Maintain thorough, well-organized records.
• Disclose all required information, including compensation and related-party transactions.
• Avoid prohibited activities (e.g., political campaign intervention for 501(c)(3) organizations).
• Review returns for consistency and completeness before filing.
• Engage a qualified tax professional to review filings and advise on compliance.

6. What are common compliance challenges for nonprofits?

Q: What are the most frequent compliance pitfalls? A:

• Misunderstanding filing requirements: Many small nonprofits mistakenly believe they are exempt from all filings.
• Poor recordkeeping: Inadequate documentation can lead to errors, penalties, or loss of exemption.
• Unreported unrelated business income: Failing to file Form 990-T for UBI can trigger penalties.
• Improper classification of workers: Misclassifying employees as independent contractors can result in payroll tax issues.
• Failure to follow state requirements: States often have separate filing and registration rules.
• Lack of board oversight: Weak governance can lead to compliance lapses and IRS scrutiny.

7. How can a tax expert help nonprofits resolve tax problems and stay compliant?

Q: What can a tax professional do for a nonprofit in trouble? A:

• Assess compliance status: Review past filings, identify missed returns, and evaluate risk.
• Prepare and file delinquent returns: Bring the organization current with the IRS and state agencies.
• Represent before the IRS and state authorities: Handle audits, penalty abatement requests, and negotiations.
• Guide reinstatement of tax-exempt status: Prepare and submit reinstatement applications, including reasonable cause statements.
• Set up accounting and bookkeeping systems: Implement best practices for ongoing compliance.
• Train staff and board members: Educate on compliance responsibilities and risk management.

8. How does Mike Habib, EA, support nonprofit organizations?

Q: What services does your firm offer to nonprofits? A: At Mike Habib, EA, we provide comprehensive support for nonprofit organizations, including:

• Tax Representation:
• IRS, FTB, EDD, and CDTFA audit representation.
• Penalty abatement and tax problem resolution.
• Tax Compliance:
• Preparation and filing of Forms 990, 990-EZ, 990-N, 990-PF, and 990-T.
• State filings (e.g., CA Form 199, RRF-1).
• Reinstatement of tax-exempt status after revocation.
• Accounting & Bookkeeping:
• Set up and maintain accounting systems tailored to nonprofit needs.
• Monthly, quarterly, or annual bookkeeping.
• Financial statement preparation and board reporting.
• Training & Consulting:
• Board and staff training on compliance, governance, and best practices.
• Internal controls and fraud prevention.
• Tax Planning:
• Guidance on unrelated business income, charitable contributions, and grant compliance.
• Strategic planning for growth and sustainability.
• Nationwide & International Service:
• Support for nonprofits across the U.S. and for Americans living abroad.

Q: Why choose Mike Habib, EA? A:

• Expertise: Enrolled Agent status means I am federally licensed to represent taxpayers before the IRS in all 50 states.
• Experience: Years of hands-on work with nonprofits of all sizes, from start-ups to established organizations.
• Authoritativeness: Up-to-date on the latest tax law changes, including OBBB (H.R. 1, 119th Congress), and state-specific rules.
• Trustworthiness: Transparent, ethical, and committed to your organization’s success.

9. Frequently Asked Questions (Quick Reference)

Q: My nonprofit hasn’t filed in 4 years. What should I do first? A: Contact a qualified tax professional immediately. You’ll likely need to file all missing returns, assess your revocation status, and begin the reinstatement process if necessary.

Q: Can I file old Forms 990 online? A: Yes, most Forms 990 and 990-EZ must be filed electronically for tax years after July 1, 2019. Form 990-N is always filed online.

Q: What if my nonprofit is very small? A: If your gross receipts are normally $50,000 or less, you may file Form 990-N (e-Postcard). But you must still file every year to avoid revocation.

Q: How long does it take to reinstate tax-exempt status? A: Processing times vary, but expect several months. Retroactive reinstatement is possible if you act quickly and meet IRS criteria.

Q: What if I can’t pay penalties or taxes owed? A: The IRS offers payment plans and may abate penalties for reasonable cause. A tax professional can help negotiate on your behalf.

Q: How can I prevent future compliance problems? A: Set up robust accounting and compliance systems, train your team, and work with a tax expert for ongoing support.

10. Conclusion: Take Action to Protect Your Nonprofit

Falling behind on nonprofit tax filings is stressful—but it’s a problem you can solve. The key is to act quickly, get expert help, and put systems in place to prevent future issues.

At Mike Habib, EA, we’re passionate about helping nonprofits thrive. Whether you need to catch up on filings, reinstate your tax-exempt status, or build a compliance program from the ground up, we’re here to guide you every step of the way.

Ready to get started? Contact Mike Habib, EA, at Los Angeles, CA, for a confidential consultation. Let’s protect your mission, your donors, and your future.

Authority Trail

• IRC §6033, §6033(j): Annual return and automatic revocation requirements.
• OBBB (H.R. 1, 119th Congress, Public Law 119-21, July 4, 2025): Current controlling law for nonprofit compliance.
• Treas. Reg. §1.6033-2: Filing requirements for exempt organizations.
• IRS Instructions for Form 990 (2024, non-binding): For practical filing guidance.
• IRS Publication 557 (2025, non-binding): Overview of tax-exempt status and compliance.
• California Franchise Tax Board (FTB) and Attorney General: State-level compliance.

Pre-OBBB vs. Post-OBBB Comparison Table

Requirement/Threshold	Pre-OBBB (2024)	Post-OBBB (2025)
990-N eligibility	≤ $50,000 gross receipts	No change
990-EZ eligibility	< $200,000 receipts, < $500,000 assets	No change
Automatic revocation for non-filing	3 consecutive years	No change
Electronic filing mandate	Phased in 2019–2021	No change
Reinstatement process	Rev. Proc. 2014-11	No change

No OBBB amendments affecting these core nonprofit compliance rules as of July 4, 2025.

Practical Next Steps

1. Assess your organization’s filing history and compliance status.
2. Gather all financial and organizational records.
3. File all missing federal and state returns as soon as possible.
4. If revoked, begin the reinstatement process immediately.
5. Set up or improve your accounting and compliance systems.
6. Schedule a consultation with Mike Habib, EA, for expert guidance.

Your mission matters. Don’t let tax compliance issues stand in the way. With the right support, you can restore your nonprofit’s good standing and focus on making a difference.