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IRS Adds More Uncertainty to Tax Exemption Revocations

What a mess!  Now that May 17, 2010 has come and gone, we are waiting to see just how many 501(c) organizations around the country have lost their tax exemptions.  For those of you who have been keeping up, you know that May 17 was the due date for filing Form 990.  Additionally, under federal law passed in 2006, organizations failing to file Form 990 for 3 consecutive years were set to automatically lose tax exemption.  May 17 was, for most nonprofits, the due date of the third year.  Up to 1/4 of all nonprofits were at risk.

So, how many got their filing in on time and how many did not?  We just don’t know yet.  Here is how this whole thing is supposed to work:

NPOs that had their tax exemption revoked will not be notified by the IRS until the end of this year.  Why?  According to the Director of Exempt Organizations, Lois Lerner, it is because the IRS is very concerned that they get this right.  In other words, the scope of this thing is so big, they cannot afford to get it wrong.  But, the revocations are effective May 18.  This means that from May 18 forward, organizations that have lost tax exemption will be liable to file taxes as a for-profit company…even though they may not find out about this until December.  Even more interesting is the fact that donors will still be able to consider their post-May 18 donations tax deductible through the end of the year.

For effected organizations, the only path to reinstated tax exempt status is to file another Form 1023, pay the required filing fee and start all over…at least, that is what has been said.  The IRS’s FAQ page on the matter unequivocally says that this is statutory law.  No waivers, no appeals, no grace.  Done deal.

Not so fast!  Now, according to Doug Shulman, IRS Commissioner, they are considering granting some measure of grace to small organizations, presumably those who were required to file Form 990-N.  This is in direct contradiction to prior guidance.  In fact, under law, they cannot do this.  It appears that the only way to grant grace is to have Congress amend the law.  We’ll see.  For those affected organizations that were required to file Form 990-EZ or higher, it looks like you’re out of luck.

This is a fluid situation.  Stay tuned and we’ll bring you the latest as we learn it.

Greg McRay, EA

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

This Post Has 4 Comments
  1. Your coverage of this important issue is valued and appreciated. Could you comment as to what happens to undistributed funds when the 501c3 organization is found non-complaint and its non-profit status is revoked?
    Thank you.
    Joan Long

    1. That’s another one of the great unknowns at this point. The IRS is not really saying. Most likely, the orgs who are basically defunct anyway just go away and ones who had programs and assets will simply follow whatever path is required to regain status.

  2. Do you mind submitting information on how the revocation of the 501c3 was an act of Congress? I think that’s an error and that it was suggested, but not included and passed in the Act. The IRS never said they would loose their exemption, but that they “may” loose it. The grace period still stands for small charities.

    1. Actually, Dejae, you are incorrect. The Pension Protection Act of 2006 passed by Congress established the changes. And, the IRS has steadfastly maintained that they would absolutely lose exemption on its own FAQ page regarding the subject. It is only now that everyone is finally howling about it that the IRS has come up with an after-the-fact grace period until June 23. But, by rule of law, that’s about all the IRS can do because they can only interpret and enforce law, not make it.

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