Well, it’s official. We’ve known this day was coming since the Pension Protection Act was passed into law in almost 5 years ago. On the afternoon of June 8, 2011, the IRS released the initial list of nonprofits that have automatically lost 501(c) tax exemption due to non-filing of Form 990 for 3 consecutive years, 2007-2009. The numbers, while expected, are still staggering:
275,000 Nonprofits Are No Longer Tax Exempt!
Estimates are that as many as 2/3rds of this list may be functionally dormant. Even if that’s true, that leaves nearly 100,000 active charities and other nonprofits in a very critical situation.
Let’s take a look at exactly what the ramifications are for an organization on the list:
- 501(c) status is revoked retroactively with an effective date of May 15, 2010 (the due date of the 2009 Form 990).
- Donations are no longer tax deductible to the donor effective the date of the list publication…in this case, June 8, 2011. You’ll notice that while no grace is afforded the nonprofit, the unaware donor is catching a break.
- A for-profit corporate tax return is likely due.
- There may be serious (and expensive!) consequences at the state level including, but not limited to, sales and property taxes, payroll and unemployment taxes and workers’ compensation, as well as thorny issues with the state Department of Charitable Solicitations.
This list only scratches the surface of the problems facing these nonprofits.
So, how does such an organization go about restoring its 501(c) status?
For starters, it must file a new Form 1023 (or 1024) with the IRS, as well as pay the filing fee. The process will be a lot like the first time the nonprofit went through it, though I expect there will be additional scrutiny placed on these “do-overs”. I also expect enormous backlogs at the IRS. Assuming the organization still qualifies (and some will not) and the application is prepared by someone who knows what they are doing (a shameless plug for us), the IRS will issue a new determination letter effective the date of the new Form 1023’s receipt at the IRS.
A retroactive effective date is possible, but very tricky. First off, a letter requesting retroactivity back to the revocation date is required. In addition, all of the Form 990s that were not filed must be prepared and included with the Form 1023. Here’s where it gets even messier…even if the organization qualified to file the Form 990-N e-postcard for any of the years in question, a Form 990-EZ or Form 990 must be prepared instead.
Why is retroactivity desirable?
It seems easier to just forget about the past 990s and just accept IRS determination from the date of the application, right? Not so fast. While that may work for some, keep in mind that the nonprofit will have a period exceeding one year where it was operating as a for-profit organization. As such, it will likely be required to file a for-profit corporate tax return, Form 1120. That’s a big mess. Also, getting renewed status retroactively will help eliminate the many potential problems at the state level.
We honestly did our best to warn people about this. So did many others. Now that the list has been published, it will be interesting to see the fallout. I expect it will be epic.
To see the list for yourself, visit https://www.irs.gov/charities/article/0,,id=239696,00.html