Don’t Let Your Nonprofit Be a “Day Late and a Dollar Short” For Failure to File Its Form 990
KYEstates has previously noted that when the mainstream media covers matters of interest to the T&E Community, results can be spotty in quality or usefulness. Last week, the New York Times published an exception to this rule – a very important article warning that up to 400,000 nonprofit organizations (i.e., up to one-fourth of the nation’s nonprofits) are at risk of losing their tax-exempt status if they don’t file their Forms 990 by May 15.
(Paul Caron covers the issue well in this post at TaxProf Blog.)
The IRS is (credibly) claiming that it wants to avoid hammering well-meaning nonprofits with loss of their tax exemption. In IR-2010-10, published January 21, it advised as follows:
The Pension Protection Act of 2006 requires that non-profit organizations that do not file a required information form for three consecutive years automatically lose their Federal tax-exempt status. This requirement has been in effect since the beginning of 2007.
A list of revoked organizations will be available to the public, as well as state charity and tax officials on this website.
If an organization loses its exemption, it will have to reapply with the IRS to regain its tax-exempt status. Any income received between the revocation date and renewed exemption may be taxable.
The IRS explained that compliance with the Form 990 filing requirement by nonprofits with annual revenues not exceeding $25,000 is relatively easy:
Small non-profit organizations with annual receipts of $25,000 or less can file an electronic notice, Form 990-N (e-Postcard). They will need only a few basic pieces of information to file: the organization’s employer identification number, its tax year, legal name and mailing address, any other names used, an Internet address if one exists, the name and address of a principal officer and a statement confirming the organization’s annual gross receipts are normally $25,000 or less.
Tax-exempt organizations with annual receipts above $25,000 are required to file the Form 990 or the Form 990-EZ annually. Private foundations file Form 990-PF. Churches and integrated auxiliaries of churches are not required to file Form 990-series returns or notices.
Form 990-series returns and e-Postcards, are due by the 15th day of the 5th month after an organization’s tax year ends. For more information visit the relevant page on this web site.
As the Times article noted, the IRS “has made a Herculean effort to let organizations at risk know it. For example, in 2007, it sent 665,000 letters to nonprofit groups that fell below the $25,000 threshold and those above that level that had not filed.” The Times continued:
Lois G. Lerner, director of the exempt organizations division of the I.R.S, said that while groups would lose their exemptions effective May 16, the I.R.S. would probably not send out notices until January to give nonprofits a chance to bring themselves into compliance with the law. Donors to affected groups will be able to take a deduction for gifts until formal notification is received by the recipient organization…
“We are moving very cautiously,” Ms. Lerner said. “The last thing we want to do is revoke the exemption of someone who has already filed.”
What does this mean for you, readers? The odds are quite high that you or someone you work with or know well is a director of a nonprofit organization.
Nonprofit directors have duties of care. It could be difficult to reconcile being a careful director with the director’s organization losing its tax-exempt status after years of gentle warnings and compliance opportunities from the IRS.
At best, loss of the exemption would create bad publicity or donor relations problems. It might also create unnecessary costs in reapplying for exempt status, and preparing and filing a second Form 1023. At worst, a director might face risks of a claim for breach of fiduciary duty. Don’t let it happen to you or your organization – call your executive director or board chair today, to make sure to avoid missing the May 15 deadline.
Readers may have noticed reduced post volume on KYEstates. Don’t worry – there hasn’t stopped being plenty of interesting things to cover, and we’re not going anywhere. I was in Florida at my brother’s wedding. Although my house doesn’t have too much to interest uninvited guests, it still didn’t seem prudent to mention my absence in advance on KYEstates. The wedding went well, and things are settling back toward something resembling normal, except that now it’s Derby Week here in Louisville.
Readers in Louisville, good luck pretending to get any work done this week. Readers outside Louisville, please be gentle with your Louisville contacts being less available or responsive than the other 51 weeks of the year. Instead of feeling put out, come visit and join in the fun! If past experience holds, however, Oaks Day will see several urgent calls from out-of-town advisors and clients with immediate litigation needs. (It never fails.) The Kentucky T&E Community is happy to help, but please don’t be surprised if we take calls at the track with julep in hand. That’s S.O.P. for Derby Week!