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Revocation of Tax Exempt Status

Revocation of Tax Exempt Status

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Published by Jill Allison Warren

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Published by: Jill Allison Warren on May 06, 2011
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 Automatic Revocation o Nonprofts’Tax-Exempt Status
What Nonprofts, Grantmakers,and Donors Need to Know 
Updated July 27, 2010Linda M. LampkinERI Economic Research Institute
© 2010, GuideStar USA, Inc. All rights reserved.
Automatic Revocation o Nonprofts’ Tax-Exempt StatusIntroduction
So are there really close to 2 million tax-exemptorganizations operating in the United States—ornot? Soon we will be closer to a more accuratepicture o the sector.For decades, once an organization received itsdetermination rom the IRS as tax exempt, thatstatus was fnal—it remained in eect unlessafrmatively revoked by the IRS.
Althoughhundreds o thousands o nonprofts had to fle anannual inormation return (Form 990, 990-EZ, or990-PF) with the IRS, a signifcant number ailedto do so, and the majority o exempt organizations were not required to fle because they did not meetfling thresholds.For many years, these non-reporting organizationsremained listed as tax exempt, but it was unclear whether they were active and didn’t meet thereporting thresholds, met the reporting thresholdsbut neglected to fle, or were in act no longeroperating (had merged, achieved the mission, ornot, and/or stopped activities). When IRS attemptsto contact non-reporting organizations wentunanswered, the only recourse available to theIRS was to revoke those organizations’ tax-exemptstatus. The IRS was reluctant to take this step.The situation changed with the passage o thePension Protection Act in 2006. Among the law’snumerous provisions was a new requirement oralmost all exempt organizations to fle inormation with the IRS annually, starting in 2008 oractivities rom January 1, 2007, on. And the IRSis now 
to revoke the tax exemption o any organization required to fle that doesn’t do so orthree consecutive years. Revocations will aect notonly the organizations that lose their exemptionsbut also the donors and unders that support themand the audiences that rely on their services.
 Just How Many Tax-ExemptOrganizations Are at Risk?
In a word—lots! Some nonprofts still are notrequired to fle, including religious congregationsand state institutions.
But the remaining exemptorganizations now must submit a return to the IRSeach year. The IRS created a new orm, Form 990-N,or smaller organizations that previously did notmeet the thresholds to fle. See the appendix ormore inormation about Form 990-N and themechanics o fling it.In April 2010, as the frst fling deadline that would trigger automatic revocations drew near, GuideStar analyzed the IRS ExemptOrganizations Master File (also known as theBusiness Master File or BMF) to determinehow many organizations might be at risk. The April BMF listed more than 1.3 million exemptorganizations required to fle an annual return with the IRS. O that number, more than 373,000had never fled, and another 73,000 were at leastthree years in arrears with their flings.
These materials are intended to provide only a general summary and overview o this topic as itpertains to nonprofts that have been granted tax-exempt status under the Internal Revenue Code. Thesematerials are not to be considered legal advice applicable to any particular situation, and organizationsand individuals needing specifc advice and counsel on these matters should always consult withknowledgeable counsel.
What Does “Revocation o Tax-Exempt Status” Mean?
May 17, 2010, was the frst fling deadline thatled to automatic revocations. At the end o theollowing month, the Urban Institute’s NationalCenter or Charitable Statistics (NCCS) estimatedthat almost 300,000 small nonprofts had not yetcompleted the 990-N and were in jeopardy. Fity-eight percent o the organizations were 501(c)(3)public charities. The remaining nonprofts at risk  were tax exempt under other 501(c) subsections.The NCCS estimates that about 16,000 additionalorganizations are part o a group return; theseorganizations are not required to fle i theirnational ofces fle on their behal.In July 2010, more than 355,000 nonproftsappeared to be acing revocation. A new NCCSreport ound that more than 292,000 smallnonprofts still need to fle Form 990-N.
 GuideStar’s analysis o the July 2010 BMFrevealed that more than 63,000 larger nonproftshave ailed to fle a Form 990, 990-EZ, or990-PF during the past three years.Organizations that registered with the IRSbetween 2008 and 2010 still have time to fle within the three years and are not yet subjectto revocation.
What Does “Revocation o Tax-ExemptStatus” Mean?
 Revocation has a drastic and expensive impacton a nonproft. I it’s a charitable organization,it will no longer be able to accept tax-deductiblecontributions. Whatever type o exemptorganization it is, it will need to pay ederalincome taxes. It may also incur penalties or ailureto pay income taxes, to say nothing o the loss o the trust o its donors, members, and clients. Plus,most grantmakers (such as private oundationsand government entities) will only give grantsto charitable organizations, i.e., those that aretax exempt under section 501(c)(3). Obviously, well-run organizations should be meeting theirreporting obligations.So revocation is very serious—and i anorganization wants to regain tax-exempt status,there are orms to fll out, ees to pay, and usually some time to wait beore it is granted again. 
What Happens i I Give to a CharityThat Has Lost Its Exemption?
  As long as the charity has not received a revocationletter rom the IRS, your contribution will stillbe deductible. Once the charity receives theletter, however, donations to it will no longer bedeductible.The IRS is waiting until 2011 to start sendingrevocation letters. At that time, it will also posta Web page o nonprofts that have lost tax-exemptstatus because they ailed to fle with the IRS orthree consecutive years.
“Revocation has a drastic andexpensive impact on a nonprot. I it’s a charitable organization, it willno longer be able to accept tax-deductible contributions. Whatevertype o exempt organization it is, itwill need to pay ederal income taxes.It may also incur penalties or ailureto pay income taxes, to say nothingo the loss o the trust o its donors,members, and clients.”

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