Now that the October 15 deadline has passed, as many as 400,000 not-for-profit organizations could be in danger of losing their tax exempt status, according to Bob Ottenhoff, president and CEO of Guidestar USA, a Washington, D.C.-based philanthropic research organization.
The Pension Protection Act of 2006 required the Internal Revenue Service to revoke the tax-exempt status of organizations that failed to file annual returns for three consecutive years, including 2007, 2008, and 2009. Previously organizations with revenues of $25,000 or less were not required to file. To avoid revocation, they originally had to file by May 17, 2010. Those who missed the deadline were offered a one-time chance to comply by filing the required forms by October 15, 2010.
“The IRS's one-time filing relief program for small exempt organizations is a wonderful opportunity for these organizations to come back into compliance," Ottenhoff of Guidestar
said after the extension was granted.
Lindsay J.K. Nichols, Guidestar’s public relations and social media marketing manager, told AccountingWEB that Guidestar and the IRS performed extensive outreach to get the attention of small not-for-profits ahead of the deadline. One key effort to alert organizations was a free downloadable report, Automatic Revocation of Nonprofits’ Tax-Exempt Status: What Nonprofits, Grantmakers, and Donors Need to Know, which provided the steps nonprofits needed to take to avoid revocation.
More than a month after the deadline has passed, Ottenhoff estimated that approximately 400,000 organizations failed to file, which puts them in line to lose their ability to take tax-deductible donations and otherwise avoid taxes. According to Ottenhoff, it could take months to be reinstated. The process is both costly and time-consuming, as they will have to reapply and pay fees.
The revocation process will begin in 2011. Any income received between the date of revocation and the restoration date may be taxable, said Ottenhoff. As for contributors, they will no longer be able to deduct the donations to these organizations, which could adversely affect donations.
Unfortunately for charitable organizations, several factors currently are hurting donations, including:
- Fear that tax rates are about to rise in 2011
- The uncertain future of the estate tax
- The expiration last year of the tax break that allows taxpayers age 70-and-a-half and older to make tax-free withdrawals from their individual retirement accounts and donate the money to charity
With the landscape for making contributions already looking grim, it’s possible that nonprofits that are now also facing a revocation of their tax-exempt status will see a substantial drop in income for multiple reasons. Would-be donors might balk at giving to an entity that is not compliant with the law, and their donations likely will not be tax deductible.
"People give because they care about a cause or for other reasons, but, certainly, tax conditions affect the timing of the gift, the level of the gift, and the manner in which they give," said Una Osili, director of research at the Center on Philanthropy at Indiana University.
To make matters worse, these organizations probably will lose grant money. Grant makers who give funds to organizations that have received letters of revocation could be making themselves vulnerable to excise tax. To avoid that fate, Guidestar is advising and assisting grant makers in carefully verifying the tax-exempt status of any potential grantee.
"All grant makers must enhance and amend their due-diligence processes," said Ottenhoff. Guidestar provides tools for grant makers to protect themselves by checking the tax-exempt status of an organization before distributing funds.
Between increased generosity at the holiday season and a desire to minimize the current year tax by making tax deductible donations before January 1, most charities count on higher donation income around the holidays. Revocation letters are not scheduled to go out until 2011, so the possibility of revocation might not affect donations for 2010. However, nonprofits whose status is revoked need to prepare now by getting organized for the process of reinstatement so they can mitigate the damage to 2011 grant and donation revenue.