May 5th 2010
Many small nonprofit organizations with annual receipts of less than $25,000 will lose their tax exempt status if they do not file a full return or a Form 990 N, an electronic notice e-postcard, with the Internal Revenue Service by May 15.
A provision in the 2006 Pension Protection Act requires tax-exempt organizations to file once during the three-year period following the passage of the act. The IRS wants to ensure that it and potential donors have current information about nonprofit organizations.
The IRS is not expected to send out any notifications until January of 2011, and until then donors may still claim a charitable deduction. More than 400,000 nonprofits could be affected, The New York Times reported.
“The requirement to file is automatic, but the IRS will be slow to remove the tax-exempt status because it is not going to be a priority for them,” Jim Simpson, managing director of Financial Technologies & Management LLC, told AccountingWEB. “The IRS is not geared to these small groups, and they do not have a lot of resources to devote to this, but they want to clean up their own records.”
Financial Technologies & Management is an Indianapolis-based financial management and software technology CPA firm dedicated to nonprofit organizations.
“There is a cost to sending out notices. They want to reach the right person. All that’s required is for someone in the organization to file the e-postcard notification saying that ‘we still exist,’” Simpson said.
“There are a lot of nonprofits out there and 80 percent of these, or even more, are small organizations,” he said. “Some of these can elect to file a full return even though they could just file the postcard. Many of these organizations are run entirely by volunteers. In some cases, the only information the IRS has is from the original tax-exempt application and that may be out of date.
“If these organizations do lose their tax-exempt status, they will need to reapply, and pay a fee," Simpson said. "While their status can be reinstated retroactively, it can be a problem for groups looking for donations.”
Simpson sees some hurdles for the IRS in enforcement. “Legally, it’s a slippery slope for the IRS to de-authorize these groups. They have some rights. They were formed for a tax-exempt purpose.”
The e-postcard, Form 990 N, only has eight questions and it must be filed electronically. There is no paper form. The filer must have an e-mail address, the IRS Web site states.
Charities with annual receipts greater than $25,000 must file the Form 990 or the Form 990-EZ. Churches and their associated auxiliaries, groups that are required to file a different form, and groups that are included on another organization’s form are exempt from the requirement.