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Is Your Nonprofit Tax Status at Risk?

Lori Halley 26 April 2010 5 comments

Up to 25% of American nonprofits – charities, trade associations and membership groups – will lose their tax-exempt status at midnight on May 15, when the provisions of a 2006 federal bill kick in.

As the New York Times reported, late last week:

The new law, embedded in the 393 pages of the Pension Protection Act of 2006, also directed the Internal Revenue Service to revoke the tax exemptions of groups that failed to file for three consecutive years. Three years have passed, and thus the deadline looms.

It’s likely to be small nonprofits who are most affected. That’s because, previously, those organizations with revenues under $25,000 were not required to file tax returns, and many may be unaware of the change in tax law.

The Chronicle of Philanthropy (Tax Watch) notes that charities who lose their tax exempt status will have to reapply with the Internal Revenue Service – “they basically have to start over”  -- and those nonprofits who have not filed tax returns may find that they owe money to the IRS, as well.

Lois G. Lerner, director of the exempt organizations division of the IRS, told the New York Time that the IRS would probably not send out notices of revoked tax status until January 2011, “to give nonprofits a chance to bring themselves into compliance with the law.” Donors will be able to take a tax deduction for gifts to those organizations until the formal notification is sent out and received.

Arlene Spencer of The Grant Plant, LLC, has posted a detailed explanation of how the Pension Protection Act of 2006 applies to nonprofits – including some good news in the area of donations of IRA assets – which is recommended reading. She notes that, in 2007, the IRS mailed “well over a half a million letters to American nonprofits that gross $25,000 annually, or less, and those that gross above this amount that had not filed, warning them…” of the consequences of failing to file.

Meanwhile, the Internal Revenue Service has posted a summary of nonprofit tax filing requirements:

Most tax-exempt organizations, other than churches, must file a yearly return or notice with the IRS. If an organization does not file as required for three consecutive years, the law provides that it automatically loses its tax-exempt status...

Nonprofits with gross receipts normally $25,000 or less are eligible to file the e-postcard (990-N) while those with higher income should file the 990-EZ or 990 forms. Private foundations, regardless of their financial activity, are required to file form 990-PF.  More information on these forms and the filing requirements for nonprofit organizations may be found on the IRS website at www.irs.gov.

Lori Halley [Engaging Apricot] Lori Halley [Engaging Apricot]

Posted by Lori Halley [Engaging Apricot]

Published Monday, 26 April 2010 at 6:52 AM


  • Pablo Edwards said:

    Monday, 26 April 2010 at 5:12 AM

    Thanks for the reminder/ warning.  Such a tough time for all companies and non-profits are certainly not exempt!

  • Shannon Otto said:

    Monday, 26 April 2010 at 8:00 AM

    Rebecca, thanks so much for the tip. I shared the information on our blog today, as many of our readers are affiliated with small-staff organizations.

  • Lori Halley [Engaging Apricot] Lori Halley [Engaging Apricot]

    Lori Halley [Engaging Apricot] said:

    Monday, 26 April 2010 at 8:49 AM

    Shannon, thanks very much for helping to spread the word - it seems this not-so-good news may have slipped 'under the radar' for many small orgs.

  • Kay said:

    Wednesday, 28 April 2010 at 5:05 AM

    Does this affect groups like local sports leagues, PTAs, etc. that are small volunteer groups set up as nonprofits to raise funds for local community projects?

  • Lori Halley [Engaging Apricot] Lori Halley [Engaging Apricot]

    Lori Halley [Engaging Apricot] said:

    Thursday, 29 April 2010 at 4:29 AM

    Kay, according to the information on the IRS website, the tax changes would appear to apply to all organizations that have legal charitable status in the US. If you're not sure this applies to your organization, the best thing to do would be to contact your tax department directly to clarify your situation. Good luck!

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