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One-Fourth of Nonprofits Set to Lose Tax Exemption

Doomsday is coming…May 18, 2010 to be exact.  No, it has nothing to do with the Mayan calendar ending (that’s 2012!).  May 18 is the day that nearly 1/4 of all US nonprofits find that the IRS has automatically revoked their tax exempt status.  If you are doing the math, that is nearly 400,000 nonprofits.  At The Foundation Group, we have sounded the alarm numerous times over the past several months.  It seems like people don’t start paying attention until it is nearly too late.

Consider this quote from Diane Aviv, president of the Independent Sector, a nonprofit trade group: “It’s going to be an unholy mess once these organizations realize what’s happened to them.”

We implore you to pay attention now before it is too late.

So, why is this happening, what does it mean…and how can you avoid being among the 400,000?

First, the why. In August 2006, Congress passed the Pension Protection Act of 2006.  As the name suggests, this particular bill was an overhaul of the US code regarding the operation of large, corporate pension funds.  Slipped into the bill in conference committee, however, was 393 pages of legislation that have been progressively affecting 501(c)(3) and other tax exempt entities ever since.  While most nonprofits have been relatively unaffected by the PPA until now, that is about to change in the most dramatic of ways.

Historically, only nonprofits with annual gross revenue in excess of $25,000 were required to file Form 990.  The PPA changed all that with the introduction of the Form 990-N for small, low revenue organizations.  The 2007 tax year was the first year Form 990-N was required.  But Form 990-N was just the beginning.  The real kicker in the PPA is the rule that will culminate with the automatic revocation of the tax exemption of any nonprofit that fails to file its required Form 990 for three consecutive years.  Year three for most organizations is the due date of their 2009 return:  Monday, May 17.

What does it mean? The IRS is being uncharacteristically blunt regarding the outcome of the exemption revocations:  There is no recourse short of reapplying for 501(c) status. In other words, you will have to start all over.  These revocations are automatic and statutory.  No one is making a thumbs-up or thumbs-down determination.  Either you fall into the category or you don’t.  Pretty simple.

What can you do about it? File your Form 990…period!  It’s not too late.  If your nonprofit normally files Form 990 or Form 990-EZ, your due date can be delayed by 3 months, but only if you get a timely extension filed.  There is no extension for Form 990-N…so failure to file will mean the end of your tax exemption.

If you need help, call us. The Foundation Group prepares Form 990 for hundreds of nonprofits each year.  But time is quickly running out, so do not delay!

For more information, please see our Form 990 web page and the IRS FAQ on the subject.

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 26 Comments
  1. Hi,
    I am the director at a bible conference and retreat center. For many years we have been classified as a Church by the IRS. Because of this we have not filed a 990. We are a 501c3. Do you think I have anything to worry about? If we do begin filing are we required to have an external audit?

    1. If you are classified as a church, a 990 should not be filed. My question is whether or not you should be classified as a church if your current operations are as you say. If your org is no longer operating as a church, it needs to be reclassified. If you need help with such, call us. And no, an external audit is never required in conjunction with a 990 filing, though it may be a good idea at times.

  2. Hi, we just received our 501c3 determination letter in April after 2 years. I asked the IRS agent when we needed to file and he said in June, at the end of our fiscal year. Was he wrong? Were we supposed to file sooner?

    1. The due date of Form 990 is the 15th of the 5th month following the end of your fiscal year. If your fiscal year ends in June, your due date is November 15. May 15 (17 this year) was hugely important because the vast majority of NPOs operate on a calendar year basis.

  3. I got a feeling a lot of local sports officials associations sanctioned by state high school athletic associations will be hit hard by this action. Especially those states, who do not oversee or regulate the internal workings of those associations.
    Schools failing to have a W9 on file for the services rendered by an association or failing to issue end of season or end of year 1099s could find themselves in spot also.
    I am working to get my association in line with the proper reporting. BoD is resisting any change. Its a $$$$ thing!! Have not told them of the IRS action. But I did send links to the state association and all local sports associations. None have replied to my email.
    I have questioned many things locally….the usual answer I get is….”we have been during this way a few years and we know what we are doing”. I have asked about the filing of 990….was told “we will look into it”.


    1. You are right to be concerned. Unfortunately, the attitude you describe is far too common among small, volunteer-based NPOs. It is sad that so many get hurt by this. But, for some, this is what needs to happen to jar them out of their complacency.

  4. Hi, I am a director of a 501(c)3 non profit charitable Christian children’s camp. There were a few years in the 1990’s when we filed 990s, but in 2000 we received a letter from the IRS stating that we are not required to file form 990. The only reason given was that our organization is exempt from income tax under section 501(c)3 of the Internal Revenue Code. That doesn’t seem to make sense because most 501(c)3 orgs. are required to file 990. I have a copy of this letter in my files, but since I don’t understand the reason for the exception, I am not completely comfortable not filing. Any recommendations?

    1. Gabe…what you are describing does not make much sense. While churches are exempt from Form 990, other religious organizations are not. I suspect there is either an error or the letter is not being interpreted correctly. Have someone who knows about this take a look at the actual letter. Regardless, don’t take a chance. File an extension by May 17 for the 2009 tax year. If you need assistance with filing, give us a call…we can work with you.

  5. i am not yet established as a working non-profit business..i am in training to start my business next i need to be concerned about this?

  6. Greg,

    Thanks for continuing to shine the light on this issue. Hopefully, many nonprofits will be able to avoid the bullet on this one.

    Keep up the good work!

    Sandy Rees
    Fundraising Coach

  7. Hi and thanks for the heads up!
    For 2008 I filed a 990 as we had over 25K of donations. I filed for extension a few times and eventually got everything done. For 2009 I am under 25K, will I need to file a 990-N this time?

  8. I just incorporated in March. Do I have to worry about this? I don’t even have my application approved yet. Please advise.

  9. Hi,

    We are a 501c6 Professionals group. We make no money at the present, or since our incorporation in 2008. I got the really long form from my taxman, who didn’t think I needed to file it. What do you think?

    Also, does our 501c6 have a 501c3 capacity wrapped inside of it?


    1. If you have no gross income, your organization doesn’t likely need to file the long form. Instead, Form 990-N is much more likely. As far as your 501c6 doing 501c3 activity, keep in mind that donations to a 501c6 are not generally tax deductible to the donor. Read this post from last year that you may find helpful: The Other Nonprofits .

  10. I just incorporated on Jan. 26th of 2010, do I need to worry about this now or at the end of the year?

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