Many small nonprofits may lose tax-exempt status
Posted by AccountingWEB in Tax, Income Tax, Accounting & Auditing on 05/05/2010 - 15:57
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 In some cases, the only information the IRS has is from the original tax-exempt application and that may be out of date.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.
Related articles:
- Are you ready for the redesigned IRS Form 990? More disclosure, more detailed schedules and more pitfalls abound
- The new Form 990: Governance and internal controls under the microscope
- 6221 reads
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Gail Perry, CPA
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This industry is filled with too many complaints against representatives. For years I've been telling people to hire a professionally licensed CPA or law firm. Having over 25 years of experience in dealing with the IRS and solving people's tax problems, I'm saddened to see that there are so many people that are falling prey to the many scams and unethical practices going around in this business. The best advice I can give to anyone that is having tax problems is to do your research before taking action. First you need to understand your tax problem and what your options are, then, if you decide to hire a professional or a firm to solve your problem, you should do some background checks on them before you hire them; regardless of who recommended them to you, or where you've heard from them, you should always check them out.
To anyone having tax problems, I recommend you visit www.TaxProblem.org and read up on all the advice available there, it will help you better understand the depth of the situation you are in, and point out what the available options are. You should also check out the section about selecting tax advisors which details a couple of good things you should do before hiring someone in order to protect yourself from scams. www.TaxProblem.org