IRS To Publish Revocations of Tax Exemption

The day some nonprofits have dreaded is coming soon.  The IRS announced on February 24, 2011 that it will soon publish the list of 501(c) nonprofit organizations that had their tax exemption automatically revoked for nonfiling of Form 990 information returns.  This list, officially called the Nonfiler Revocation List, will be updated monthly once it is finally published.  In case you are not familiar with what this is all about, let’s start with a brief history.

Congress passed the Pension Protection Act in August 2006.  While the vast majority of the legislation dealt with pensions, about 140 pages regarding charities and other tax-exempt organizations were added in conference committee .  There were many significant law changes that resulted.  One of the most consequential was that starting with tax year 2007, 501(c) organizations failing to file Form 990 for three consecutive years would automatically lose tax-exempt status.  Another important law change was the introduction of Form 990-N for nonprofits with under $25,000 in revenue (increased to $50,000 in 2010).

Prior to 2007, these smaller organizations were not required to file Form 990.  Now, all 501(c) nonprofits must file and all are potentially at risk of losing tax exemption, not just the larger ones.  If you do the math, you will quickly realize that 2009 was the third year.  For those nonprofits that did not file for 2007-2009, the day of reckoning is almost here.  Guidestar.org estimates that 321,000 organizations may be on the first list.  That’s a lot of nonprofits!  As much as 1/2 of the list may consist of functionally dormant organizations.  Even still, we are talking about possibly 150,000 or more nonprofits suddenly getting a very unwelcome letter from Uncle Sam.

So what happens if an organization finds itself on the list?  The revocation effective date is the original filing due date of the third year’s Form 990.  That means the nonprofit is considered a taxable entity from that date forward and will be required to file federal tax returns and pay income tax on any net profit.  In addition, donations will no longer be tax-deductible to the donor.  Fortunately, the IRS will allow donations to be tax-deductible that are given up the date of the revocation notice. In order for a nonprofit to regain 501(c) status, it will have to file a new Form 1023 and pay the appropriate filing fee…all over again.

We are already getting phone calls from nonprofits that anticipate being on the list.  Once the list is published, our phones may just ring off the hook.  We have been sounding the warning for over two years that this day was coming.  Some didn’t take it seriously.  Unfortunately, they soon will.