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June 28, 2011
Posted by Sanger & Manes, LLP

Be Careful About Your Charity of Choice- the IRS is Cracking Down on Nonprofits For Failing to File Form 990

In June 2011 the IRS announced that 275,000 nonprofit groups (around 18% of all nonprofits in the US) lost their tax-exempt status for failing to file the Form 990. The IRS Form 990 is the tax document that tax-exempt nonprofit organizations file each year with the IRS. The Form 990 (or (Form 990-N, 990-EZ, or 990-PF) allows the IRS and the public to evaluate nonprofits and how they operate.

Up until 2006, nonprofits with annual revenues under $25,000 generally did not have to file these informational returns. Generally speaking theses organizations didn't have much income and didn't pay large salaries. But under 2006 legislation, the rules changed. Now, even small nonprofits must file an informational return. And if they have failed to do so for three consecutive years (and plenty have failed), the IRS has now revoked their exemptions. The deadline for compliance was May 17, 2010. And sure enough, the IRS has now notified hundreds of thousands of small nonprofits (and the public via the IRS website) that their tax-exempt status was revoked.

The nonprofit sector is often overlooked in discussions of a state or the country's economy. But it's important to remember that this sector includes churches and many academic institutions and major foundations, as well as the familiar social-service agencies. In addition, they employ a significant amount of employees throughout the United Sates.

The non-compliant non-profits are now liable for paying taxes on any future revenue, and donations are no longer tax-deductible (DONORS NEED TO MAKE SURE THEIR NON-PROFIT OF CHOICE HAS NOT BEEN STRIPPED OF ITS TAX-EXEMPT STATUS). The complete "Automatic Revocation of Exemption List" for the state of California includes more than 33,000 organization names and addresses. It can be found on the IRS website (www.irs.gov). Locally, in Palm Desert for example, dozens of nonprofit groups lost their tax-exempt status.

The IRS recently released IRS Notice 2011-43, which provides transitional relief to small organizations which lost their tax-exempt status because they failed to file a Form 990 (or Form 990-N) for three consecutive years. The process for applying for retroactive reinstatement is similar to the application process for new organizations. Organizations that qualify for the transitional relief program are eligible for a reduced application fee. Further, Notice 2011-43 provides relief for organizations that have had their tax-exempt status automatically revoked but that do not qualify for small organization program. This is a welcome development because until now, there has been no clear process or procedure to request retroactive reinstatement. To qualify for retroactive reinstatement, such organizations must demonstrate that there was reasonable cause for failing to file a return or notice over the entire three year period.

In any event, now even small charities must go through the somewhat complicated and arduous process of become visible to the US government. The IRS is now watching.