First and foremost, unless you used PTO money to put a new pool in your backyard (for example), you're not in any personal jeopardy for trying to straighten out this situation. And credit to you for taking on the task where others haven't.
Worst case scenario in a situation like this has been the group gets fined by the IRS (and has to do a lot of backward accounting). But we've primarily seen that when the IRS has taken the first step — contacting the group because they're out of compliance. The IRS has told us their primary concern is getting groups in compliance, not in levying penalties on PTOs. So if you make the move to get your group in good legal order, you're probably fine.
Regarding starting over, your group is considered new for IRS purposes on the date of your incorporation. So if you plan to incorporate, you have 27 months from that date to file for 501c3 tax-exempt status. If you do it within that time period, your status will be retroactive to the incorporation date. By the way, the main advantage of incorporating is that it provides a level of protection to your board in case of a lawsuit (called the corporate shield).
Our PTO Startup Toolkit walks you through IRS form 1023 question by question, and also addresses the other major steps (including incorporation) in getting your PTO buttoned up. Here's a link:
www.ptotoday.com/startup-guide
Good luck!