If the tax-exempt status of a nonprofit organization has just disappeared, it's likely to be in good company. Thanks to an administrative change in IRS regulations governing tax-exempt organizations with under $25,000 in annual revenue, many local, volunteer-powered nonprofit entities could be subject to an automatic change in tax status.
Starting in 2007, the IRS has required annual online reporting from exempt organizations under $25,000. If a small tax-exempt charity didn't file by May 17, 2010, it's in jeopardy of losing its valuable designation as a federally registered tax-exempt organization.
Forgetting to File the 990: A Small Change with Potentially Big Consequences
The IRS' intent is not to shut down volunteer activity or charitable organizations. It's simply seeking to remove dead wood from its roster, and weed out organizations that exist in name only, or are defunct.
Still, this administrative change could potentially affect all kinds of organizations, working across educational, environmental, welfare, health and other issues. There's been an explosion of small nonprofit organizations in the US; it's been a growth sector of the economy. The boom period started in the 1990s, when grassroots activism and a wave of public discussion lauding volunteerism. And, during the so-called "Great Recession" of the past few years, many underemployed and unemployed people, with time on their hands, sought work in volunteer organizations.
The majority of the 1.5 million nonprofits in the US are quite small. For those who neglected to file with the IRS but that are doing good works that benefit the public, loss of the tax-exempt status could translate into fewer services for their local communities.
Consequences of Being Out of Compliance with IRS 990 Filing
According to the IRS, "automatic revocation occurs when an exempt organization that is required to file an annual return form, or submit an annual electronic notice does not do so for three consecutive years."
Organizations that lose their tax-exempt status can continue to operate—but without holding out that carrot to potential donors that their contribution doubles as a tax deduction. And, once an organization loses its tax-exempt status, it will have to file and pay federal income taxes, which is both expensive and a hassle.
How Can a Nonprofit Get Its Tax-Exempt Status Back Once It's Revoked?
To do so, find the correct IRS form to apply for reinstatement. (There are different forms for organizations with 501(c) (3) designations, and other types of tax-exempt entities.) The application forms run over ten pages long. The application requires articles or organization, a description of purposes and activities, and detailed financial data from the past two or three years. Churches, schools, colleges and universities, as well as organizations that offer scholarships, may have additional specific requirements.
And, of course, there are fees associated with the applications, paperwork, and waiting times.The filing fee can be up to $800.
For those who think it's not worth fighting to keep a tax-exempt status, check out the paperwork associated with filing all over again. The IRS doesn't directly answer the question of how long it may take to process a new application, but you can read between the lines when they offer Top Ten Reasons for Delays in Processing Exempt Organization Applications.
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