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Tax Exempt Status of Non-Profits


Action Required by October 15, 2010

By Peter B. Nagel, Denver, Colorado


Section 6033(a)(1) of the Internal Revenue Code has always required a wide variety of tax-exempt organizations to file an annual return. The filing requirement has applied to all organizations identified in Section 501(a) and thus includes —

  • traditional charities
  • educational, religious, and social welfare organizations
  • labor unions
  • professional societies
  • social and recreational clubs
  • fraternal groups
  • war veterans organizations
  • trusts created as part of qualified retirement plans

Section 501(a) does not apply to political organizations and homeowners associations that are partially tax-exempt under Sections 527 and 528, respectively, nor does it apply to state and local governments that are exempt under Section 115.

Section 6033(a)(3)(A) has historically provided exceptions from the filing requirement to a limited number of organizations —

  • churches and certain other religious organizations that are closely related to churches (so-called "integrated auxiliaries")
  • most other organizations that normally do not receive more than $25,000 per year in gross revenues
  • (Section 6033(a)(3)(A)(ii) actually contains a filing threshold of $5,000 of gross revenues per year, but Section 6033(a)(3)(B) gives the IRS discretionary authority to relieve other organizations from the annual return filing requirement, and, in Announcement 82-88, the Service raised the filing threshold and stated that almost all other tax-exempt organizations having gross revenues less than $25,000 per year would be exempted from filing annual returns.)

Private foundations and Section 509(a)(3) supporting organizations are excluded from the filing relief granted to organizations with less than $25,000 of annual revenues and thus must file an annual return regardless of their size and financial support.

Recent Changes in the Law

A problem that has confounded the Internal Revenue Service for years is that it has had no way of knowing whether tax-exempt organizations that did not file annual returns failed to do so because (a) they had discontinued their activities or dissolved, (b) they had gross revenues that did not exceed $25,000 and therefore weren't required to file returns, or (c) they had gross revenues greater than $25,000 per year and were simply failing to comply with their filing requirements. In Section 1223 of the Pension Protection Act of 2006, Congress chose to fix the problem. It did so by enacting two new rules.

The first, set forth in Section 6033(i), states that all organizations with gross revenues of less than $25,000 must now furnish certain minimal information in electronic form to the IRS. The IRS has implemented this requirement with Form 990-N, the so-called "e-postcard" return, which is filed simply by filling in eight items of information online via the IRS's web site.

The second rule, set forth in Section 6033(j), now states that any organization described in Section 6033(a)(1) that is required to file an annual return, but that fails to do so for three consecutive years, will have its tax-exempt status revoked on the date of the filing deadline for the third such return. In other words, all tax-exempt organizations – not just those with less than $25,000 in gross revenues, that have not filed a tax return for three consecutive years will automatically lose their tax-exempt status. For tax-exempt organizations whose fiscal year is the calendar year, the filing deadline for their third return after the 2006 Act was May 17, 2010, and, for those organizations that fail to take advantage of the special relief described below, that is the date that their tax-exempt status has already been revoked.

Revocation of tax-exempt status under these provisions is automatic; it occurs by operation of law and is not the result of any administrative action by the Internal Revenue Service. Thus, organizations whose tax-exempt status is revoked under these rules will have no appeal rights within the IRS and have no recourse to the courts to reestablish their tax exemption. They can only reapply for tax exemption (on Form 1023 or Form 1024), and they must do so even if they weren't required to apply for tax-exempt status in the first place.

If an organization applies to have its tax-exempt status reinstated, the effective date of its reinstated exemption will generally be the date it mails its new application. However, organizations in this situation can include with their reinstatement application a letter that explains in detail why they had reasonable cause for not filing tax returns and that asks that their tax-exempt status be reinstated back to the date of revocation. Granting retroactive exemption is entirely discretionary with the IRS.

Actions the IRS Has Already Taken

The IRS has taken some rather extraordinary measures to publicize the 2006 Act's new filing requirements and the consequences of failing to comply with them. It has mailed reminders to the last known addresses of non-filing organizations, issued press releases, published an extensive FAQ, distributed media kits, developed podcasts for download to MP3 players, even published a YouTube video.

Most recently, it has announced a special amnesty program, one that has two components. First, it has extended the filing deadline for small organizations eligible to file Form 990-N. For these organizations whose filing deadline was on or after May 17, 2010, Form 990-N may be filed by October 15, 2010, and it will be considered timely filed.

Second, for organizations that were not eligible to file Form 990-N for all of the past three years, but that should have filed Form 990-EZ for any one or more of those years, the Service has implemented a "voluntary compliance program." Under that program, an organization can file, by October 15, 2010, its three years' delinquent Form 990-N's and Form 990-EZ's, accompanied by a "checklist," and pay a modest fee "in lieu ... of taxes, penalties and interest that otherwise would be incurred by reason of ... non-filing" of Form 990-EZ. There are normally substantial penalties for filing delinquent 990-EZ's, and so one of the significant benefits of this voluntary compliance program is that the IRS seems to be prepared to waive those penalties as a matter of course. Organizations required to file Form 990 or Form 990-PF for any one or more of the past three years are not eligible for relief under this voluntary compliance program.

In connection with its announcement of this special, one-time, amnesty program, the IRS has released a list of all of the "at risk" tax-exempt organizations in its database that have not filed returns for at least the past three years. Approximately 5,500 of those organizations are located in Colorado. There are about 300,000 nationwide.

Action the IRS Plans to Take Early Next Year

Early in 2011, the Service plans to release a second list of all the organizations identified in the first, "at risk" list that have not taken advantage of the extended filing deadline for Form 990-N filers and the voluntary compliance program for Form 990-EZ filers and whose tax-exempt status will therefore have been automatically revoked. Organizations of this nature that had been qualified under Section 501(c)(3) will, at the same time, be deleted from Publication 78, the list of organizations eligible to receive deductible charitable contributions.

Donors are entitled to deduct contributions to organizations that the IRS has recognized under Section 501(c)(3) until such time as the IRS publishes a notice to the contrary, even if their tax-exempt status has actually been revoked. The fact that charitable organizations are included on the recently released list of "at-risk" organizations does not mean, for the time being, that donors will be denied a deduction for contributions to them, even after October 15, 2010, and even if the charities have not filed their delinquent returns by then. However, once the Service publishes its second list early next year, contributions to organizations on that list will no longer be deductible. Similarly, private foundations will no longer be able to make grants to those organizations without exercising expenditure responsibility.

Action That Nonprofit Organizations and Lawyers Associated with Them Should Take Now

Every tax-exempt organization should review the IRS's recently released list of at-risk organizations. If an organization is included on the list and was eligible to file either Form 990-N or Form 990-EZ for the past three years, but hasn't, it should file those forms immediately.

If an organization is included on the "at risk" list and was required, but failed to file Form 990 or Form 990-PF for the past three years, then its tax-exempt status has already been revoked by operation of law. If it is a Section 501(c)(3) organization, however, it may continue to receive deductible charitable contributions until such time as the Service publishes its second list next year of Section 501(c)(3) organizations no longer eligible to do so.

Form 990 and Form 990-PF filers on the "at risk" list should therefore immediately reapply for tax-exempt status and, if they had reasonable cause for not filing returns, provide the Service with a detailed explanation of those reasons. If an organization has lost its exemption for failure to file Form 990 or Form 990-PF, but obtains a new exemption before the IRS publishes its second list, there should be no gap in the deductibility of donations to it.

It is also quite possible that the "at risk" list includes various organizations in error, and it should be vastly easier to inform the IRS now that an organization has in fact filed its required returns or that it is legitimately not required to file, than to sort through the matter once the IRS publishes its second list next year of organizations whose exemption has been revoked.

Important Links to Additional Resources

The IRS has developed an extensive web site devoted to this One-Time Filing Relief Program for Small Tax-Exempt Organizations.

List of Organizations At Risk of Automatic Revocation of Tax-Exempt Status

The IRS's Frequently Asked Questions about filing requirements and the special amnesty program

Instructions for organizations that feel they have been placed on the at-risk list by error