Dodging a Bullet: More Than 200,000 Nonprofits Avoid Losing Exemption Thanks to IRS Extension of Filing Deadline

After several weeks of tense speculation that as many as 400,000 nonprofit organizations were set to lose their tax-exempt status, the Internal Revenue Service (IRS) is offering a time extension to more than 200,000 small charities that missed the May 17 filing deadline to file their IRS Form 990.

A 2006 law required nonprofit organizations with receipts of less than $25,000 to file IRS Form 990 for the first time in 2007. If charities fail to file for three (3) years, they will lose their tax-exempt status.

According to a May 18 press release from the IRS: “The IRS will be providing additional guidance in the near future on how it will help these organizations maintain their important tax-exempt status — even if they missed the May 17 deadline. The guidance will offer relief to these small organizations and provide them with the opportunity to keep their critical tax-exempt status intact.   So I urge these organizations to go ahead and file — even though the May 17 deadline has passed.”

Speaking on the upcoming guidance that the IRS plans to issue, IRS Commissioner Doug Shulman said “The guidance will offer relief to these small organizations and provide them with the opportunity to keep their critical tax-exempt status intact…Filing a tax return for the small organizations is easier than you’d think. It just takes a few minutes to fill out the electronic notice Form 990-N.”

Organizations that have questions or concerns regarding 990 filing procedures and the automatic revocation process should check out the following list of Frequently Asked Questions (FAQs) provided by the IRS.

Although many nonprofits may be unhappy about having to file additional tax forms such as the 990 and at the costs associated with the new requirement, there are certainly good reasons for the new requirement.

As Suzanne Garment and Leslie Lenkowsky of the Center on Philanthropy at Indiana University note in a recent article for the Wall Street Journal, the primary purpose of the filing requirement is to make sure that tax-exempt organizations are, in fact, “doing good” in some way.

Garment and Lenkowsky go on to argue that the IRS can and should continue vetting organizations to make sure they are operating charitably, but they express fear that the IRS and state regulators may feel pressure to deny exemptions based on public anger over “eccentric” tax-exempt organizations (the authors cite as examples a nonprofit women’s roller derby league in Oregon and an organization called “The Red Nose Institute,” which sends red clown noses to U.S. troops overseas).

As the authors recognize, the “IRS and state regulators have sought mostly to ensure that charities behave charitably, not to pass judgment on the relative value of their activities.”  It will be interesting to see if that role begins to shift in the years ahead.

Finally, because it’s always best to plan ahead, we would like to wrap up by highlighting some of the key considerations involved in preparing a 990:

  • Know your mission. Your organization should have a clear understanding of its mission and be able to articulate its mission in a manner that helps maintain its exempt status and attracts new donors at the same time.
  • Know your board. Your organization’s board should be engaged, informed, and independent.  They should be aware of and abide by all rule related to conflicts of interest, self-dealing and private inurement. Board meeting minutes should be duly recorded and kept on file by someone in your organization.
  • Know your budget. Your organization should ensure appropriate use of assets and should develop and implement policies and practices that address executive compensation, support independent financial audits.
  • Know your lawyer. If the advice here seems like a lot to take in, the good news is you’re not alone.  Most smart nonprofit organizations rely on the advice of skilled nonprofit lawyers to help them with these questions and in the preparation of 990 forms as well as other IRS documents. Please contact a nonprofit lawyer before attempting to prepare your 990 or any other documents related to tax, accounting, or governance. Our firm would love to start a new relationship with you today!

In general, it very important that all nonprofit publish their 990s in some manner.  This may be done in one of two ways—either by making 990s available via the organization’s website or through GuideStar, a service that enables nonprofits to disclose various information.  For more information about GuideStar, visit www.guidestar.org .

Please feel free to contact Elliott & Davis, PC with all of your questions about 990s, as well as nonprofit formations and management.  Elliott & Davis is a full service law firm with expertise in the areas of nonprofit law, civil litigation, corporate law, real estate law, estates & trust, immigration law, entertainment law, civil rights law and domestic relations law.  For more information about these or any of our other practice areas, please visit our website at: www.elliott-davis.com.

Advertisements

No comments yet

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: