Revocation Looms For 341,000 Nonprofits

May 10, 2010       Mark Hrywna      

More than 20 percent of the nation’s 1.6 million registered nonprofits could lose their tax-exempt status if they don’t file the proper paperwork this year. The Urban Institute’s National Center for Charitable Statistics (NCCS) estimates that of the 1,592,810 nonprofit organizations in the United States, more than 21 percent – or 340,834 – have not yet filed the required tax returns. The majority of those, about 213,497, face a Monday deadline or risk automatic revocation. Data are based on the total number of organizations considered active and included on the IRS Business Master File as of April 1, 2010.

NCCS has created a searchable database at http://nccs.urban.org/ where organizations can see if they are in compliance or if they need to file. The IRS also has a Web site for more information and Frequently Asked Questions (FAQs), at http://www.irs.gov/charities/article/0,,id=217087,00.html

Nonprofits were required to file some type of Internal Revenue Service (IRS) Form 990 starting in 2007. The Pension Protection Act of 2006 stipulated that automatic revocation of tax-exempt status would occur if the annual paperwork has not been filed for three consecutive years (this would be the third year). Organizations can request an extension of their filing date by filing Form 8868 by the original due date of May 17.

Groups that have not filed seem to be relatively young (38 percent registered with the IRS less than 15 years ago) but another significant chunk of the organizations (13 percent) registered before 1950, according to NCCS. More than half (51 percent) were described as either human services or public and societal benefit organizations and another 16 percent as education.

States with the largest number of organizations that have not filed the required tax forms were — not surprisingly — those with a large nonprofit presence: California, Florida, New York and Texas. But the percentage of organizations that had not yet completed the tax form was highest in Mississippi (38 percent), South Carolina and Washington, D.C. (36 percent), North Dakota (32 percent) and Louisiana (31 percent).

Organizations with annual revenue of less than $25,000 could file an electronic Form 990-N, or “e-Postcard,” while those with more than $25,000 in annual receipts must file Form 990 or Form 990-EZ annually. Private foundations file Form 990-PF. The tax forms are generally due four and a half months after the end of an organization’s fiscal year, so those operating on a calendar year would have a May 17 deadline (since May 15 falls on a Saturday).

Almost 40 percent of the 1.6 million nonprofits file a Form 990 or Form 990-EZ, according to NCCS, and another 13 percent are not required to file, such as churches and church-related organizations, black lung trusts and certain government organizations.

A list of revoked organizations will be available to the public, as well as state charity and tax officials on the IRS Web site, irs.gov. If an organization loses its exemption, it will have to reapply to the IRS.

An IRS spokesman said the law gives the agency no leeway and requires revocation of tax-exempt status. Any income received between the revocation date and renewed exemption may be taxable.

“While the IRS went to great lengths to alert organizations to this impending deadline, thousands of nonprofits with annual revenues of less than $25,000 may find themselves without their tax exemption and not eligible to receive tax deductable donations,” said Diana Aviv, president and CEO of Independent Sector.

Aviv indicated in a recent blog post that IS had pressed Congress to give the IRS the latitude to suspend rather then revoke tax-exemptions. “We believe the cost of re-certifying is a burden and we were concerned that organizations that do not follow the legislative process or sector news would be unaware of the requirement,” she wrote.

“Why did lawmakers include this provision? Because our government does not know how many 501(c)(3)s exist,” according to Aviv. “Many organizations are certified, but since those with annual receipts of less than $25,000 were not previously required to file tax returns, no one knows if they have continued to do their work or have simply closed the doors,” she wrote.

The Pension Protection Act of 2006 required the IRS to get a more accurate picture of the tax-exempt world, according to Bob Ottenhoff, president and CEO of GuideStar, a primary source of Form 990 research on the Web. “A lot of organizations didn’t need to file in the past and now they do,” he said, estimating that as many half of the nonprofits that could potentially lose their status are likely defunct or inactive for whatever reason. Others, he added, might be small neighborhood groups, such as athletic leagues or PTAs.

“It’d be a good idea to clean those up, but there are probably a bunch out there that don’t know about these requirements or haven’t been filing,” he said.

Ottenhoff said the requirement is welcome news for the nonprofit sector. “Transparency and accountability are requirements for nonprofits these days. It’s a privilege, not a right, to be a nonprofit organization. With that come certain responsibilities and obligations,” he said. Not only will the revocations clean up the IRS files but it also will put “everybody on notice that there are some responsibilities to being a nonprofit.”

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