Small Charities Face October Deadline on Tax Status
By Grant Williams
Tens of thousands of small
charities will soon lose their
tax-exempt status under federal
law if they fail to meet a deadline for filing a simple eight-item informational tax form
that would take them as little
as five minutes to complete.
The consequences are significant for organizations that fail
to file the new form with the Internal Revenue Service by October 15. And the deadline could
have ripple effects throughout
the nonprofit world, as organizations and the IRS will likely
have to work for months to restore lost exemptions.
After the IRS announces early next year which small groups
have had their exemptions automatically revoked under the
law, organizations will have to
reapply to the tax agency for
new exemptions by filing some
complicated paperwork, pay a
fee of up to $850, and wait as
their paperwork is processed.
During that time, groups will
be liable for potentially costly
income taxes on money they receive from donors for the period
in which they were not exempt.
What’s more, donors will not
be able to take charitable-con-tribution deductions on their tax
returns for their gifts to such
groups until the organizations
regain their exemptions, which
will probably cause many donors to pull back on their gifts.
Lois G. Lerner, who oversees the IRS office that monitors charitable organizations,
said the tax agency has general advice for any small charity
that is confused about whether
it needs to submit Form 990-N,
also known as the e-Postcard.
“File, file, file, and we can
work this out with you later,”
Ms. Lerner said. Under the law,
she said, “if you don’t file, we
don’t have any ability to do any-
thing but publish your name on
the automatically revoked list.”
She added: “This isn’t one
where you can come in and make
an argument with me. By order
of the law, it just happens.”
The flurry of paperwork for
the IRS comes after Congress
passed a law in 2006 to help the
tax agency keep better track of
active organizations of all sizes
and figure out which charities
no longer exist. The law gave
organizations with annual rev-
enue of $25,000 or less three
years of tax-filing deadlines to
comply, which is why the situa-
tion has become so perilous for
many organizations now.
Nonprofits at Risk
of Losing Tax-Exempt Status
Number of Organizations by Type
Arts, culture, and humanities
Education
Environment and animal-related
Health
Human services
International and foreign affairs
Other public and societal benefit
Religious
Other
Not classified
Total
Number
Percent
9.4%
9. 2
4. 4
6. 2
27. 2
1. 1
20. 3
5. 8
8. 1
8. 4
100.0%
extra resources sitting around,”
said Mr. Owens. “It is fully com-
mitted in any given year, so
when something like this comes
around, it could really distort its
efforts to do its normal work.”
He added: “It could be a bit of
a stretch. The IRS might have
to pull revenue agents off au-
dits, and those resources are
pretty thin as it is.”
But Ms. Lerner of the IRS
said that the tax agency has
had more than three years to
plan for the time when a great-
er number of applications for ex-
empt status would be received.
The IRS is prepared if neces-
sary to “shift resources around”
to cope without problems, said
Ms. Lerner.
Number of Organizations by Age
IS IT ART
OR IS IT
SCIENCE?
By combining groundbreaking
analytics with unparalleled
field expertise, we find
innovative solutions to help
your institution realize its
development goals.
Year registered
with the IRS
Before 1960
1960-1964
1965-1969
1970-1974
1975-1979
1980-1984
1985-1989
1990-1994
1995-1999
2000-2004
2005-2008
Year unknown
Total
Number
Percent
10.9%
1. 6
3. 8
5. 5
4. 6
5. 3
18. 5
7. 2
12. 3
14. 8
7. 1
8. 4
100.0%
Note: Shows number of small organizations that have failed to file tax forms with the
Internal Revenue Service for the past three years.
SOURCE: The Internal Revenue Service and the National Center
for Charitable Statistics at the Urban Institute
To find out more about how we
blend art and science to meet
each of our client’s unique
needs, visit us on the web at
www.martsandlundy.com.
be a lot of smaller organizations
that are going to realize they’ve
lost their tax-exempt status
when their local newspaper
publishes that fact, and that’s
going to result in a lot of negative feedback,” said Marc Owens, a Washington lawyer who
used to manage the IRS’s non-profit branch.
If many thousands of groups
face such a crisis, Mr. Owens
said Congress could consider
passing a new law that would
allow any small organization
that existed in 2006 to immediately regain its exemption by filing a Form 990-N, rather than
going through the complicated,
expensive process of reapplying
for tax-exempt status.
“That would help the IRS
by getting the forms turned in
while taking away the sting
from the organizations and help
them comply,” Mr. Owens said.
Nobody knows for sure how
many charities could soon lose
their status because they fail to
file their forms on time.
The IRS has released the
names of 321,091 tax-exempt
organizations that have not
yet filed the required forms by
their due date of October 15 and
thus could be in jeopardy of los-
ing their tax-exempt status as a
result of the 2006 law. (An un-
known number of these groups
have closed their doors over the
years, and the IRS will formally
remove them from its books.)
Human-services organizations make up the largest share
Publication: PHL
Filename: 2301Danger990
Colors used: 1
Size: 2 x 49L
Date: 9/27/10
Time: 1pm
Version: 3
SP
EM
CB
Editor
Reporter
Other
“It’s not over
until it’s over, and
we are continuing
to push to get
the word out.”
BLENDING THE ART & SCIENCE
OF PHILANTHROPY
www.martsandlundy.com
800-526-9005
Join Marts & Lundy senior
consultant Tracy Savage in
a discussion on The Culture of
Philanthropy in Independent
Schools at the NAIS LTP Conference
on October 9th in Dallas, TX.
‘White Hats’ in Peril
Some observers said they anticipate an eventual wave of
complaints to the government
from “white-hat wearing” organizations such as Little Leagues
that never heard about the filing deadline and will wind up
losing their tax-exempt status.
“People are going to be caught
by surprise: There are going to
of the types of small groups that
have not filed their returns— 27
percent—according to the Ur-
ban Institute’s National Center
for Charitable Statistics.
Reaching Out
Ms. Lerner said she has high
hopes that numerous tax-exempt organizations will file
their forms by their deadline.
“It’s not over until it’s over,
and we are continuing to push
to get the word out,” she said.
Ms. Lerner said the October
15 deadline is so important that
she has personally responded
to a plea from her own office—
made to volunteers, donors, and
friends of small charities—to
remind organizations of the filing deadline.
“I’m no different than anybody else,” said Ms. Lerner,
who is a donor to two small local charities in the Washington
metropolitan area (a shelter for
older pets and a rescue and foster organization for golden retrievers) and recently contacted
them as a private citizen.
“I said to them, ‘I’m sure you
guys are up to speed, but, just
in case, could you please take a
look?’” Ms. Lerner said. “I got
responses back from both of
them that, Yes, they had filed
their appropriate forms and
they were on target.” She add-
ed: “I did the reachout. I hope
everybody will.”
Under the 2006 law, organi-
zations that never had to regu-
larly file returns in the past—
those with revenues of $25,000
or less—must now file a return
that requires basic information,
such as a mailing address and
the name of a principal officer.
While the first deadline for
groups was May 17, so many
organizations failed to file that
the IRS extended the deadline
to October 15.
The IRS also moved from May
17 to October 15 the filing deadline for slightly larger groups
that qualify to fill out the Form
990-EZ but have failed to do so
for the past three years as the
law now requires.
These groups may now catch
up by paying a fee of up to $500
and taking other steps to comply with the new law.
For details on all aspects of
the filing deadlines for tax-exempt organizations, go to the
IRS’s Web site, http://irs.gov/
charities.
