Have You Checked Your Tax Status Lately?

By James Kearney, published on July 13, 2011, in Business in Savannah.

The IRS recently published a list of organizations that automatically lost their tax-exempt status due to a failure to file information returns for three consecutive years. This first round of automatic revocations reduced the nonprofit sector by 17 percent or by 279,595 nonprofit organizations total.

The automatic revocations stem from a change in the law included in The Pension Protection Act of 2006. Effective for tax year 2007, this law requires most tax-exempt organizations, with the exception of churches and most church-related organizations, to file an annual information return with the Internal Revenue Service (IRS). Any exempt organization that fails to file a return for three consecutive years will automatically lose its tax-exempt status. Prior to this law, many small organizations with revenues under $25,000 had no filing requirement.

For small organizations, the IRS eased the new filing burden by creating a Form 990-N e-Postcard, named due to the brevity of the form. In spite of the law and IRS assistance, many tax-exempt organizations failed to file returns for 2007, 2008 and 2009.

In light of the overwhelming number of organizations on the verge of losing their tax-exempt status, the IRS offered a one-time limited relief program to help small tax-exempt organizations preserve their status and extended the final filing deadline to October 15, 2010. The IRS also published a list with the names and last known addresses of organizations that were at risk of losing their tax-exempt status in a further attempt to initiate across the board compliance.

GuideStar, a leading source of nonprofit information, published a report indicating that the 100 largest organizations on the IRS list previously reported revenue ranging from $4 million to just over $400 million. The detailed report also includes a full list of the largest nonprofits with a recently revoked status by state and by focus area.

The nonprofit world can’t say it wasn’t warned. The IRS has been pushing for increased compliance for years and it seems that even the extended deadline last year did not have the intended impact. This first round of automatic revocations will allow the IRS to clear the decks of those nonprofits that have long since dissolved and reveal the ones that need a thorough review and internal process restructuring.

There is hope for those nonprofits appearing on the list who wish to reinstate their tax-exempt status. The IRS published guidelines for these revoked organizations to apply for retroactive reinstatement of their tax exempt status. For small entities, the organization must file an application for exemption by December 31, 2012 and pay the appropriate user fee even if it was not required to apply for exempt status at its inception. If the IRS determines that the organization meets the requirements for tax-exempt status, it will issue a new determination letter.

For organizations that do not qualify as a small organization, the reinstatement process is more involved and requires the organization show reasonable cause for failure to file returns over the three-year period.
Where an organization does not qualify for retroactive reinstatement, the effective date of an organization’s tax-exempt status will be the date that the organization’s new exemption application was submitted to the IRS. Any gap in tax-exempt status will certainly create confusion for organizations relying on tax-exempt donations and grants, as such organizations will not qualify for such giving for a period of time.

As many smaller nonprofits are staffed and managed almost exclusively by volunteers, legally mandated filing and other compliance requirements can fall through the cracks. It is the responsibility of the board members for these organizations, even the volunteer board members, to ensure all filing and compliance requirements are met in a timely fashion. Even nonprofits that do not appear on the list should remain vigilant to maintain their current compliance. Based on the shocking number of revocations, it might also be prudent to reach out to donors, funders and other stakeholders to assure them all the organization is not on the list.

Donors, including foundations giving grants to other nonprofits, should also be more vigilant to confirm with the status of the nonprofits they support before making additional contributions or grants. If an organization’s tax-exempt status has been revoked, contributions to that organization no longer qualify for charitable deduction, and the IRS may disallow any deductions inadvertently reported and impose a penalty. If a grant is improperly made to an entity which no longer has tax-exempt status, the grant-maker organization may be liable for excise taxes.

A charitable organization that has had its status revoked should seek the assistance of a tax attorney or other tax professional for assistance with filing for reinstatement of its tax-exempt status and meeting ongoing filing requirements.
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Jim Kearney is an attorney at HunterMaclean who specializes in corporate tax law. He can be reached directly at jkearney@huntermaclean.com or 912-236-0261.