Nonprofits' IRS filing: Update

In a 6/4/10 post, we discussed the problems for small nonprofits, including §501(c)(3) charities, that were not required to formally register with the IRS and might be unable to submit the e-Postcard (Form 990-N) designed for them to use to fulfill the annual reporting requirement. The post concluded by passing along IRS statements that it was working on a way to resolve the problems — and avoid the catastrophic consequence that many non-profits would automatically lose their tax-exempt status.

That resolution was announced on July 26, 2010; on its website, the IRS provides a detailed overview of the program for allowing small nonprofits to preserve their tax-exempt status. In addition, the IRS provides lists, by state, of "organizations at risk" for automatic revocation of their tax-exempt status for failing to make the required filing for three consecutive years. Not every organization listed may be eligible for the program. More crucially, not every at-risk organization is on the list. Recall that this problem arose in part because many nonprofits quite legitimately had not registered with or been identified by the IRS as nonprofits. So:

Being listed does not itself make a nonprofit eligible for the IRS program.

Not being listed does not immunize a nonprofit from losing its tax exempt status for failing to comply with the annual filing requirement.

Two types of relief are available for small nonprofit organizations: (1) a filing extension for the smallest organizations, that are eligible to file the e-Postcard, and (2) a voluntary compliance program (VCP) for small organizations eligible to file Form 990-EZ, Short Form Return of Organization Exempt From Income Tax. The extension is to October 15, 2010, for filing the e-Postcard; for many organizations the deadline otherwise passed on May 15 of this year. The VCP involves much more paperwork and the payment of a fee (in lieu of late-filing penalties and interest), but is a mechanism for a nonprofit to "erase" any breaks in its tax-exempt status with the IRS.

Tax-exempt, but failing to report to IRS

(researched and drafted by Christopher L. Jackson, UK law student and summer clerk)

Under recent changes in federal law, tax-exempt organizations — with only a few, select exceptions — must annually file information (known as a Form 990) with the IRS. (Note: "tax-exempt" means that the organization itself does not have to pay taxes, not that contributions to the organization may be deducted from the donor's taxable income.) While this “reporting” requirement burdens many tax-exempt organizations, its effect may be most significant among small nonprofits which qualify as charitable organizations under §501(c)(3) of the Internal Revenue Code.

A charitable organization that normally has less than $5000 per year in gross receipts is generally not required to request formal recognition from the IRS of its §501(c)(3) status in order to be tax-exempt. (See 26 U.S.C. §508(c)(1)(B).) Most of these organizations, however, are required to make a Form 990 filing with the IRS; failure to file the requisite report for three (3) consecutive years results in automatic loss of an organization's tax-exempt status — which may result in liability for paying taxes. Organizations that did not request formal recognition of tax-exempt status did not receive individual notice of the Form 990 filing requirement because the IRS did not know that they were (or claimed to be) tax-exempt.

IRS Commissioner Doug Shulman, in an official statement, urges that organizations go ahead and file the report even if they missed the deadline. Any tax-exempt organization whose gross receipts are normally less than $25,000 per year may file an abbreviated report via the web known as an e-postcard (Form 990-N). Before attempting to submit an e-postcard, those organizations which have not requested recognition of their tax-exempt status (like those 501(c)(3) organizations that normally have less than $5000 in annual gross receipts) should call the IRS customer service hotline at 1-877-829-5500 to be set up to allow reporting through the e-postcard system. It appears that because many small organizations did not file on time (and may not have known that they were required to file), the IRS is working on a way to resolve the problem.