Revocation of Tax Exempt Status

8/6/2019 Revocation of Tax Exempt Status

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Automatic Revocation o Nonprofts’Tax-Exempt Status

What Nonprofts, Grantmakers,

and Donors Need to Know

Updated July 27, 2010

Linda M. Lampkin

ERI Economic Research Institute

© 2010, GuideStar USA, Inc. All rights reserved.


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Automatic Revocation o Nonprofts’ Tax-Exempt Status

Introduction

So are there really close to 2 million tax-exemptorganizations operating in the United States—ornot? Soon we will be closer to a more accuratepicture o the sector.

For decades, once an organization received itsdetermination rom the IRS as tax exempt, thatstatus was fnal—it remained in eect unlessafrmatively revoked by the IRS.1 Althoughhundreds o thousands o nonprofts had to fle anannual inormation return (Form 990, 990-EZ, or990-PF) with the IRS, a signifcant number ailedto do so, and the majority o exempt organizations were not required to fle because they did not meetfling thresholds.

For many years, these non-reporting organizationsremained listed as tax exempt, but it was unclear whether they were active and didn’t meet thereporting thresholds, met the reporting thresholdsbut neglected to fle, or were in act no longeroperating (had merged, achieved the mission, ornot, and/or stopped activities). When IRS attemptsto contact non-reporting organizations wentunanswered, the only recourse available to the

IRS was to revoke those organizations’ tax-exemptstatus. The IRS was reluctant to take this step.

The situation changed with the passage o thePension Protection Act in 2006. Among the law’snumerous provisions was a new requirement oralmost all exempt organizations to fle inormation

with the IRS annually, starting in 2008 oractivities rom January 1, 2007, on. And the IRSis now required to revoke the tax exemption o any organization required to fle that doesn’t do so orthree consecutive years. Revocations will aect notonly the organizations that lose their exemptions

but also the donors and unders that support themand the audiences that rely on their services.

Just How Many Tax-Exempt

Organizations Are at Risk?

In a word—lots! Some nonprofts still are notrequired to fle, including religious congregationsand state institutions.2 But the remaining exemptorganizations now must submit a return to the IRSeach year. The IRS created a new orm, Form 990-N,or smaller organizations that previously did notmeet the thresholds to fle. See the appendix ormore inormation about Form 990-N and themechanics o fling it.

In April 2010, as the frst fling deadline that would trigger automatic revocations drew near, GuideStar analyzed the IRS ExemptOrganizations Master File (also known as the

Business Master File or BMF) to determinehow many organizations might be at risk. The April BMF listed more than 1.3 million exemptorganizations required to fle an annual return with the IRS. O that number, more than 373,000had never fled, and another 73,000 were at leastthree years in arrears with their flings.

Note: These materials are intended to provide only a general summary and overview o this topic as itpertains to nonprofts that have been granted tax-exempt status under the Internal Revenue Code. Thesematerials are not to be considered legal advice applicable to any particular situation, and organizationsand individuals needing specifc advice and counsel on these matters should always consult withknowledgeable counsel.

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What Does “Revocation o Tax-Exempt Status” Mean?

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May 17, 2010, was the frst fling deadline thatled to automatic revocations. At the end o theollowing month, the Urban Institute’s NationalCenter or Charitable Statistics (NCCS) estimated

that almost 300,000 small nonprofts had not yetcompleted the 990-N and were in jeopardy. Fity-eight percent o the organizations were 501(c)(3)public charities. The remaining nonprofts at risk were tax exempt under other 501(c) subsections.The NCCS estimates that about 16,000 additionalorganizations are part o a group return; theseorganizations are not required to fle i theirnational ofces fle on their behal.

In July 2010, more than 355,000 nonproftsappeared to be acing revocation. A new NCCSreport ound that more than 292,000 smallnonprofts still need to fle Form 990-N.3 GuideStar’s analysis o the July 2010 BMFrevealed that more than 63,000 larger nonproftshave ailed to fle a Form 990, 990-EZ, or990-PF during the past three years.

Organizations that registered with the IRS

between 2008 and 2010 still have time to fle within the three years and are not yet subjectto revocation.

What Does “Revocation o Tax-Exempt

Status” Mean? Revocation has a drastic and expensive impacton a nonproft. I it’s a charitable organization,it will no longer be able to accept tax-deductiblecontributions. Whatever type o exemptorganization it is, it will need to pay ederalincome taxes. It may also incur penalties or ailureto pay income taxes, to say nothing o the loss o the trust o its donors, members, and clients. Plus,most grantmakers (such as private oundations

and government entities) will only give grantsto charitable organizations, i.e., those that aretax exempt under section 501(c)(3). Obviously, well-run organizations should be meeting their

reporting obligations.

So revocation is very serious—and i anorganization wants to regain tax-exempt status,there are orms to fll out, ees to pay, and usually some time to wait beore it is granted again.

What Happens i I Give to a Charity

That Has Lost Its Exemption?

As long as the charity has not received a revocationletter rom the IRS, your contribution will stillbe deductible. Once the charity receives theletter, however, donations to it will no longer bedeductible.

The IRS is waiting until 2011 to start sendingrevocation letters. At that time, it will also posta Web page o nonprofts that have lost tax-exemptstatus because they ailed to fle with the IRS orthree consecutive years.

“Revocation has a drastic and

expensive impact on a nonprot. I

it’s a charitable organization, it willno longer be able to accept tax-

deductible contributions. Whatever

type o exempt organization it is, it

will need to pay ederal income taxes.

It may also incur penalties or ailure

to pay income taxes, to say nothing

o the loss o the trust o its donors,

members, and clients.”



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Impact o the Revocations on Grantmakers

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What Impact Will the Revocations Have

on Grantmakers?

Private oundations and sponsors o donor-advisedunds ace much the same situation as donors.Grants and disbursements made to a charity that has lost exempt status but has not receiveda revocation letter will still be qualiyingdistributions, i.e., charitable gits that reduce theamount o ederal tax a grantmaker pays. Payoutsmade to a charity that has received a revocationletter will no longer all into this category, anda grantmaker that declares them as qualiying

distributions could be subject to excise taxes.

Foundations may be permitted to make gits toorganizations that are not public charities undercertain conditions. The oundation’s governing

documents must permit this activity, and theoundation must assume expenditure responsibility or these grants. Foundations electing to assumeexpenditure responsibility or a grant must satisy a complicated set o rules and reporting obligations.Failure to meet these rules could also subject theoundation to excise taxes.

Once the IRS makes the revocations public,grantmakers will need to amend their pre-grantdue-diligence processes. This new era o nonproftrevocations has made relying on the IRS letter

o determination an incomplete and ineectiveprocess to protect a grantmaking oundation rompossible excise taxes.

GuideStar recommends that beore makinga payout, grantmakers confrm that granteeshave not lost tax-exempt status, in addition toveriying charitable status in IRS Publication 78and consulting the IRS Business Master File (ora third-party provider o BMF data that meets

the criteria outlined in IRS Revenue Procedure2009-32 4 ) to identiy supporting organizations. Although IRS revocations will a ect smallnonproft organizations disproportionately, thedata confrm that tens o thousands o larger andseemingly more established nonprofts will a lsobe removed rom the IRS BMF.

IRS Response to the First Round

o Revocations When the May 17 fling deadline passed and thenumber o Forms 990-N received was drastically short o expectations, IRS Commissioner DougShulman made the ollowing statement:

Now that the May 17 fling deadline haspassed, it appears that many small tax-exemptorganizations have not fled the requiredinormation return in time. These organizations

are vital to communities across the UnitedStates, and I understand their concerns aboutpossibly losing their tax-exempt status.

The IRS has conducted an unprecedentedoutreach eort in the tax-exempt sector on the2006 law’s new fling requirements, but many

“Once the IRS makes the revocations

public, grantmakers will need to

amend their pre-grant due-diligence

processes. This new era o nonprot

revocations has made relying on

the IRS letter o determination an

incomplete and ineective process

to protect a grantmaking oundation

rom possible excise taxes.”



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What Donors and Grantmakers Need to Do

o these smaller organizations are just now learning o the May 17 deadline. I want toreassure these small organizations that theIRS will do what it can to help them avoid

losing their tax-exempt status.

The IRS will be providing additional guidancein the near uture on how it will help theseorganizations maintain their important tax-exempt status—even i they missed the May 17 deadline. The guidance will oer relie to these small organizations and provide them with the opportunity to keep their criticaltax-exempt status intact.

So I urge these organizations to go ahead andfle—even though the May 17 deadline haspassed.5

The IRS issued the guidance on July 26, 2010,noting, “This one-time relie benefts Form 990-N(e-Postcard ) and Form 990-EZ flers only.Organizations required to fle Form 990 orForm 990-PF are not eligible and are automatically

revoked i they ail to fle or three consecutiveyears.” The guidance also specifes that this one-time relie is available to organizations whosereturns were due on or ater May 17 and beoreOctober 15, 2010, and reiterates that nonproftsthat do lose tax-exempt status must re-apply i they want their exemptions restored.6 See theappendix or more inormation.

What Nonprofts Need to Do

I your organization has been given tax-exemptstatus by the IRS (that is, it has received an IRSletter o determination), consult the IRS list o fling exceptions to determine whether you needto fle an annual return. I you do, assess whichIRS orm you should fle by checking out the

requirements on the IRS Web site.7 Then fle whatis required when it is due. Be aware that extensionsare available or Forms 990, 990-EZ, and 990-PFbut, with the exception o the one-time relie

announced in July, not or Form 990-N.

“The impact o revocation is dramatic—

donors can’t deduct their contributions,

grantmakers and unders won’t commit

unds, and the nonprot will have to pay

ederal income tax. I it is a charitable

organization, donors must be told that

contributions are no longer deductible.”

What Donors and Grantmakers

Need to Do

Stay abreast o the situation. The IRS is postingupdates in the Charities & Non-Profts sectiono its Web site.8 GuideStar has created a nonproft

resource center that provides an overview o theissue and links to several resources, including aForm 990-N fling status database ; inormationon fling exceptions, fling thresholds, and flingdeadlines and extensions; and FAQs.9 IndependentSector is monitoring developments on the IRSOversight page o its site.10

Once the IRS makes the revocations public,private oundations and sponsors o donor-advised

unds will need to add verifcation o continuedtax-exempt status to their pre-grant due-diligencepractices. GuideStar Charity Check, GuideStar’sdue-diligence tool or grantmakers, will incorporaterevocation inormation, providing a potentialgrantee’s IRS Publication 78 record, BMF data,and exemption inormation in a single report.



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Conclusion

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The Revocation Process

The IRS has yet to detail the ongoing revocationprocess, other than to say that it will publish theinitial list o organizations that have lost exemptionsor ailure to fle on its Web site in 2011.

The impact o revocation is dramatic—donorscan’t deduct their contributions, grantmakers andunders won’t commit unds, and the nonproft willhave to pay ederal income tax. I it is a charitableorganization, donors must be told that contributionsare no longer deductible. I the organization wantsto regain tax-exempt status, it must reapply or

exemption and pay ees based on revenue level.11 I proessional assistance in flling out the orm isneeded, then ees or those services must also beadded. Private oundations and sponsors o donor-advised unds will need to take an extra step inthis time o uncertainty and change to avoidexcise taxes.

Conclusion

The revocation o tax-exempt status by the IRSas required under the PPA will have a tremendousimpact on the nonproft sector. GuideStar’s

analysis o the July 2010 BMF indicates that asmany as hundreds o thousands organizations may be at risk.

The long-term benefts o the revocation processare much clearer than the short-term impact. Theincreased transparency will lead to a more accuratepicture o the nonproft sector, as almost all activeorganizations will be reporting. The IRS will beable to allocate its education and enorcementresources more efciently. Donors, unders,members, clients, and other sector stakeholders will have confdence that the organizations thatreceive their support have reported as required

and deserve their trust.

This is a time o transition or nonproftreporting. It may be difcult or the many smallorganizations with volunteer ofcers, but theIRS has made many resources available on its Web site, www.irs.gov, to help. In 2011, there will be more inormation on whether this changerepresents primarily a cleanup o the IRS flesor whether revocations have aected many

unctioning organizations. But more transparency and accountability can only help increase the trustnecessary to improve the nonproft sector.



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There is no late ee i the e-Postcard is not fled ontime, but a ailure to fle an e-Postcard, Form 990,or 990-EZ or three consecutive years normally will lead to revocation o tax-exempt status.

How to File Form 990-N

Filing is online only and accessible at http://epostcard.orm990.org. There is no charge.

The orm is short and only requires eight pieceso inormation:

• legal name o the organization,• any name under which the organization operates

or does business,• mailing address and Internet Web site address

(i any),• taxpayer identifcation number,• name and address o a principal ofcer,• evidence of the organization’s continuing basis

or its exemption rom the generally applicableinormation return fling requirements (typically certiying that annual gross receipts are lessthan $25,000), and

• notice o termination, i the organization nolonger exists or is going out o existence.

I a 990-N fler’s EIN (Employer IdentifcationNumber) is not in the IRS system, a call to IRSCustomer Account Services at 877-829-5500 will be necessary.

Advice or Smaller Nonprofts That

Missed a 2010 Filing Deadline

Start by checking the IRS list o organizationsat risk o revocation, available at http://www.irs.gov/charities/article/0,,id=225889,00.html. I you fnd your organization on the list and itsgross receipts are less than $25,000, an ofcer

Who Files the e-Postcard and When

Exempt organizations that do not all under afling exception and whose annual gross receiptsare normally $25,000 or less are required to submitForm 990-N.12 They can also choose to completea Form 990 or Form 990-EZ, but the Form 990-Nis much simpler and quicker to fll out. Althoughnonprofts with less than $5,000 in annual grossreceipts are not required to apply to the IRS ortax-exempt status, typically they must now fle a990-N.

The e-Postcard is due every year by the 15th day o the 5th month ater the close o the organization’stax year. For example, i the tax year ends onDecember 31, the e-Postcard is due May 15 o theollowing year. This means that i an organization with gross receipts o $20,000, or example, has atax year that coincides with the calendar year (endsDecember 31), it should have fled a Form 990-Nby May 15, 2008, or its 2007 activities, by May 15,2009, or its 2008 activities, and by May 15, 2010,or its 2009 activities. And i no orm was fled or

each o the three years by May 15, 2010 (actually Monday, May 17, 2010, because May 15 ell on aSaturday), then the IRS is required to revoke thenonproft’s tax-exempt status.

According to the NCCS, almost 100,000 nonproftssubmitted their e-Postcards to the IRS beore theMay 17 deadline. Since then, another 45,000 havefled, with an average o 1,000 fling every day through June 15. Although more than two-thirds

o small nonprofts operate on the calendar yearand had a deadline o May 17, 2010, IRS datashow that there are 67,000 nonprofts that must flethe e-Postcard by deadlines between July 15 andDecember 15 and another 25,500 that must fle by April 15, 2011.

Appendix. Form 990-N and Filing Relie or Small Organizations



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You will be required to pay a ee o $100, $200,or $500, depending on the amount o your 2009gross annual revenues.

I your organization is required to fle Form 990or Form 990-PF and has missed the deadline orfling your 2009 return, you cannot participate inthe Filing Relie Voluntary Compliance Program. You must re-apply to the IRS i you wish to regainyour exemption.

rom the organization should fle Form 990-Nat http://epostcard.orm990.org.

I your organization’s revenues are $25,000 or

greater, view the inormation on http://www.irs.gov/charities/article/0,,id=184445,00.html todetermine whether your organization qualifesto fle a Form 990-EZ. I it does, ollow theinstructions on http://www.irs.gov/charities/article/0,,id=225704,00.html to participate inthe Filing Relie Voluntary Compliance Program.

Appendix. Form 990-N and Filing Relie or Small Organizations

Linda M. Lampkin is research director o ERI Economic Research Institute (www.erieri.com), a company that

provides Form 990 compensation data or use by nonprofts, and ormer director o the National Center or Charitable Statistics at the Urban Institute.

1. For more background and detailed descriptions, see Technical Explanation o H.R. 4, the “Pension Protection Act o 2006,” as Passed by the

House on July 28, 2006, and as Considered by the Senate on August 3, 2006, ht tp://www.jct.gov/x-38-06.pd.

2. Exceptions or certain types o organizations are still in orce (churches, their integrated auxiliaries, and conventions or associations o

churches; the exclusively religious activities o any religious order; section 501(c)(1) instrumentalities o the United States; section 501(c)(21) trusts;

an interchurch organization o local units o a church; certain mission societies; certain church-afliated elementary and high schools; certain

state institutions whose income is excluded rom gross income under section 115; certain governmental units and afliates o governmental

units; and other organizations that the IRS has relieved rom the ling requirement pursuant to its statutory discretionary authority). For a list

o ling exceptions, see http://www.irs.gov/charities/article/0,,id=152729,00.html.3. “Here Today, Gone Tomorrow: A Look at Organizations That May Have Their Tax-Exempt Status Revoked,” http://www.urban.org/

UploadedPDF/412135-tax-exempt-status.pd.

4. See IRS Revenue Procedure 2009-32, Reliance Criteria or Private Foundations and Sponsoring Organizations, http://www.irs.gov/pub/irs-tege/

rp2009_32.pd.

5. Statement o IRS Commissioner Doug Shulman on the Filing Deadline or Small Charities, http://www.irs.gov/newsroom/

article/0,,id=223609,00.html.

6. http://www.irs.gov/charities/article/0,,id=225705,00.html.

7. See Annual Exempt Organization Returns, ht tp://www.irs.gov/charities/article/0,,id=152728,00.html, or the requirements, orms,

and instructions.

8. See Tax Inormation or Charities & Other Non-prots, http://www.irs.gov/charities/index.html.

9. Nonprot Resource Center: Automatic Revocation o Tax-Exempt Status, http://www2.guidestar.org/rxg/update-nonprot-report/nonprot-

resource-center-automatic-revocation-o-tax-exempt-status.aspx.

10. IRS Oversight o Charities and Foundations, http://www.independentsector.org/irs_oversight.

11. See IRS Form 1023, Applicat ion or Recognitio n o Exemption under Section 501(c)(3) o the Internal Revenue Code, http://www.ir s.gov/

pub/irs-pd/1023.pd; IRS Form 1024, Application or Recognition o E xemption under Section 501(a), http://www.irs.gov/pub/irs-pd/

1024.pd; and User Fee Program or Tax Exempt and Government Entities Division, http://www.irs.gov/charities/article/0,,id=121515,00.html.

12. The IRS denes gross receipts as the total amount the organization received rom all sources during its annual accounting period, without

subtracting any costs or expenses. See Gross Receipts Dened, http://www.irs.gov/charities/article/0,,id=177784,00.html. See also Gross

Receipts Normally $25,000 or Less, http://www.irs.gov/charities/article/0,,id=177338,00.html.

Documents

Revocation of Tax Exempt Status