If you had told me three years ago that state-level compliance for nonprofits would someday become more of an issue than dealing with Uncle Sam, I would have been quite skeptical. If you had told me that it would happen by 2012, I might have laughed it off completely. More difficult than dealing with the IRS? Not likely! Compliance with IRS regulations and required filings is far more of a certainty than most anything at the state level. Or, at least that’s how it used to be.
Nonprofits have long had to navigate a fairly complex world of compliance. Typically, the degree of complexity is directly proportional to the size of the nonprofit’s operations and, more importantly, the annual gross revenue involved. But that’s changing quickly. Even relatively tiny organizations are finding themselves liable for compliance filing and reporting requirements that would have been reserved for much larger organizations just a few years ago.
What is driving all the change? For the most part, it is charitable solicitations registration and renewal requirements at the state level. Not only do 39 states plus DC require nonprofits to register prior to soliciting donations, more and more of these states are requiring levels of reporting and disclosure that greatly exceed that required by the IRS.
Let’s talk about specifics. The biggest and most obvious compliance filing requirement for nonprofits at the federal level is IRS Form 990. Organizations which normally gross over $200,000 in annual revenue file a Form 990 long form. Medium-sized nonprofits, with gross revenue between $50,000 and $200,000 can get by with filing the shorter version, Form 990-EZ. Very small nonprofits, those with under $50,000 in gross revenue, only have to file the relatively simple online Form 990-N each year. Well, that is unless your nonprofit is based in Massachusetts, Connecticut or New York…in which case, your organization will be required to complete and file IRS Form 990-EZ for the state, even if it is a “dummy” return that you will not file with the IRS! Nonprofits in Massachusetts with as little as $5,000 in revenue are now being required to have a federal return prepared, for state purposes, in order to be compliant and have the ability to solicit donations from the public. To make matters worse, this also applies to out-of-state organizations needing to register for solicitation purposes in the affected states.
This ever-increasing regulatory environment is putting an enormous burden on smaller nonprofits that are already painfully stretched in these tough economic times. While I am fully on board with nonprofits adhering to a policy of transparency and openness, I find it hard to understand how it serves anyone’s interest to so burden a community charity, one with as little as $5,000 in revenue, with such a requirement. Qualified professionals capable of preparing Form 990, like Foundation Group, typically charge anywhere from $500 to $1,000 to do so. And when that potentially represents 20% of the income of the lowest threshold, simply to qualify to solicit, nothing but mindless bureaucracy is served. Sure, it is certainly income security for us, but at what price to the community being served by these small groups.
Two years ago, the IRS raised its threshold for filing an actual, detailed Form 990-EZ to $50,000. Common sense says the states should align their requirements with federal requirements. But from what we are seeing, don’t count on it. Frankly, and unfortunately, we expect this state vs. federal divide to grow, not shrink. And it is the little guys who will be hurt the most.