In years past, nonprofit organizations have been largely ignored by the Internal Revenue Service. With the advent of the Pension and Protection Act of 2006 (PPA ‘06), the IRS has taken a more involved role with respect to oversight of nonprofit organizations. New filing requirements have been established and old rules are now more strictly enforced. This has culminated in the revocation of the tax-exempt status of more than 13,000 organizations in Illinois alone.
For many small nonprofit organizations, this has been a rather confusing ordeal. Prior to PPA ’06 they were not subject to IRS reporting requirements, but new regulations require almost all nonprofit organizations to file a return annually. The IRS has attempted to contact organizations at risk of losing their tax-exempt status. The problem is that, in the world of volunteer-based organizations, board members come and go. Consequently, the “last known address” on file with the IRS may be that of an individual board member who is no longer affiliated with the group and notices are sent to uninterested parties who disregard the warnings.
How do you know if your tax-exempt status has been revoked? If you are filing annually your form 990, 990-EZ, or 990-N, you probably have no worries. However, if you have not filed one of these forms for three years, your organization may be subject to the automatic revocation process. In that case, the organization probably will be found on the IRS exempt organization revocation list. You can view the list at http://apps.irs.gov/app/eos/. Organizations are listed by name, address, and federal identification number.
What does this mean to your organization? Once your tax-exempt status is revoked, you are required to file corporate income tax returns annually and pay taxes at the regular corporate rates. For public charities dependent on charitable contributions or grants, those contributions are no longer tax-deductible to the donor and grant eligibility will be impaired. Furthermore, if your organization owns property or has financing, there may be adverse consequences with respect to property taxes and bond obligations.
What can you do if your status is revoked? The law does not give the IRS authority to undo an automatic revocation and there is no appeal process. You must apply for reinstatement and pay the required user fee. There are special provisions for some small organizations with gross revenues of $50,000 or less, including retroactive reinstatement to the revocation date. Other organizations may receive reinstatement effective the day such request is received by the IRS. I emphasize the word "may" because the IRS decides each case independently on its own merits.
Information necessary to prepare a complete application for reinstatement is available at IRS.gov; however, you may require professional assistance from an accountant or attorney specializing in the area of nonprofit organizations. Lastly, gather your patience. More than 300,000 organizations have had their tax-exempt status revoked, and the IRS Tax-exempt Division is experiencing a serious log-jam with respect to reinstatement requests.
How do you ensure your organization doesn’t lose its tax-exempt status? The best way to protect your organization is to provide continuity for your board of directors. Make sure your by-laws are current, and provide for “staggered” board member terms of two or three years, so that you never have a complete turnover of leadership in one year. Take time to discuss reporting requirements with the entire board – never leave all financial oversight in the hands of one or two individuals. The entire board is always responsible!
Lastly, sign up for the IRS exempt organization update, at IRS.gov. This will provide you with informative emails and links to information that will ensure the financial health of your organization for years to come.
• Nancy Gonsiorek is a Certified Public Accountant providing audit, tax and consulting services to nonprofit organizations. Her firm, Nancy L. Gonsiorek, CPA, LLC is based in Crystal Lake. She can be reached at 815-455-9462 or via email at NancyGonsiorek@comcast.net.