Over the years, there have been attempts to use the privilege of tax exemption for private gain, as well as financial scandals through poor governance and operations. As a result, there has been pressure to adopt laws and regulations governing nonprofits.

After Congressional hearings in 2004, the Independent Sector formed the "Panel on the Nonprofit Sector." In June 2005, the Independent Sector issued "Strengthening Transparency, Governance, and Accountability of Charitable Organizations, a final report to Congress and the Nonprofit Sector."

Congress responded by addressing many of the recommendations in the Pension Protection Act of 2006. A number of the recommendations also went to the IRS.

In revising the information return (Form 990), the IRS stated, "The IRS believes that a well-governed charity is more likely to obey the tax laws, safeguard charitable assets, and serve charitable interests than one with poor or lax governance." In order to accomplish this goal, the following guiding principles were established:

1. Enhancing transparency to provide the IRS and the public with a realistic picture of the organization.
2. Promoting compliance by accurately reflecting the organization’s operations so the IRS may efficiently assess the risk of noncompliance.
3. Minimizing the burden of filing organizations.

Over the past 50 years, the nonprofit sector has established an excellent body of policies, as well as governance principles and practices. The IRS wisely sought to rely on those providing an instrument of public exposure (transparency), as well as a form whereby the tax exempt organization could tell its story more fully (thereby increasing the "public trust").

The thresholds for 990-N, 990 -EZ and 990 vary by tax year.  For returns for tax year 2010 and later, here are the requirements:

Source: Internal Revenue Service.

It is possible for an organization to be included in a group having tax exempt status. As a member of the board of directors, it is your responsibility to make sure that the 990 filing for the parent organization includes your organization. The proper 990 filing for a parent organization results in two returns: one for the parent and one for all the subsidiaries under the group. It is, therefore, good governance practice for the subsidiary board to review the parent’s 990 filing.

• Nonprofits that have not received tax exempt status from the IRS.
• Most faith-based organizations.
• Through 2009 nonprofits with incomes of $25,000 or less. As of 2010, they too must file (see 990N – e-postcard).
• Subsidiary organizations covered under a group return filed by the parent organization.

For specific exceptions, see the instructions for Forms 990 and 990-EZ.

Nonprofits are required to file 990-T if they have "unrelated business income" during the year. The Unrelated Business Income Tax (UBIT) was enacted to prevent unfair competition from nonprofit organizations using their tax free monies to expand their businesses. Briefly, unrelated business income results from an activity that is 1) a trade or business, 2) regularly carried on, and 3) not substantially related to the organization's tax exempt purpose. Certain activities, such as work performed by volunteers, activities for the convenience of members, etc., are among the many activities specifically excluded from this broad definition. 

An organization with unrelated business income is subject to tax based on corporate income tax rates. Generally, if an organization receives more than 5% of its total income from unrelated business income, it may endanger its tax exempt status unless it files the 990-T.

Use the table below to find the due date of annual returns (Forms 990, 990-EZ, 990-PF, or 990-BL) that a tax exempt organization must file. To use the table, you must know when your organization’s tax year ends.

Use Form 8868, Application for Extension of Time to File an Exempt Organization Return, to request an automatic three-month (six-month for Form 990-T filed by a corporation) extension of time to file any of the returns.

Source: Internal Revenue Service.

The fine for filing a late or incomplete form is $20/day, up to the lesser of $10,000 or 5% of gross receipts. For organizations with gross receipts of more than $1 million in the year, the penalty is increased to $100/day to a maximum of $50,000.

However, if you’ve filed an application for extension, you won’t be penalized if you file within the 90-day extension period (if your application is approved), or between the time you file the application and the date it is rejected (if it is rejected).

In other words, be safe, and if there’s even a possibility you’ll be late, file the Application for Extension of Time to File. It takes only a few minutes to complete, and you’ll have the time to be sure your 990 is accurate.

If you think you’re going to be late getting your forms in, apply for an Extension of Time to File. The application for extension must be submitted on or before the due date of the required forms and must be submitted in duplicate. In most cases, requests for extensions are granted for 90 days. (Requests for longer than 90 days must be supported with evidence of need. No extensions are granted for more than six months.) This form is called Application for Extension of Time to File, Form 8868.

In order for an organization to regain its tax exemption, it must apply for IRS recognition of exemption (even if it was not required to apply originally) by filing Form 1023 (for 501(c)(3) organizations) or Form 1024 (for organizations exempt under other Code sections). The must also pay the appropriate application fee. If the IRS approves the application, tax exempt status will be effective as of the date of the application, unless the organization demonstrates reasonable cause for failure to file. In that case, exemption will be effective as of the date of revocation. Be aware: any income from the date of the revocation to the new effective date may be taxable.

Source

IRS Publication 4839 (January 2010)

The Internal Revenue Service does not want to revoke tax exempt status. They try to communicate directly with threatened organizations. In addition, they publish lists that are available on the IRS website (www.irs.gov). Click here for an IRS publication of all revocations since 2005.

It is clear that the IRS will work its way through several hundred thousand revocations my mid-2011. The IRS revenue service will be providing a searchable database that can be utilized by foundations and individuals.

The ASU Lodestar Center concurs with the IRS objective that the 990 provides an opportunity to tell the story of the organization. We would recommend that the 990 be an educational tool at one board meeting a year. The board receives:

• an annual report of the organization
• assurance that certain policies are in place, and they are followed
• assurance of adherence to compensation policy and practice

A good summary of many of these issues can be found in "Need To Know" by Fennemore Craig, published December 18, 2008. http://www.fclaw.com/newsletter/materials/Nonprofit_Update_12-18-08.pdf

Within the Pension Protection Act of 2006, there is a stipulation that an organization’s exempt status will be automatically revoked if it has not filed the appropriate IRS 990 form for three consecutive years. That date quietly slipped by as of December 31, 2009.

Larger nonprofits have been filing the 990 for over a decade, but, as of 2008, all nonprofits, regardless of size, must file. Organizations with annual receipts of less than $25,000 may file the 990N (e-Postcard). Click here for an IRS link with further information.

There are very important consequences of revocation of tax-exempt status.

First, the organization becomes liable for paying income tax on gains (net income).

Second, even if the organization has no gains or losses, it becomes an entity that must file corporate income tax on an annual basis.

Third, most states reflect the federal tax exemption status; therefore, the organization will have the same repercussion with state and local taxing authorities.

Fourth, donors deduct contributions depending upon the organization’s 501(c)(3) status. Should their individual income tax return be subject to audit, any finding that they have deducted contributions to an ineligible recipient will result in penalties to them.

Finally, as the number of revocations increase, foundations and sophisticated donors will develop means of testing whether their potential gift or grant is going to a recognized organization. In other words, being ignorant or not telling will not work.

An organization is not required to have one for the 990, but requirement for this federally approved audit is clear and affects many organizations that file the full 990 return. 

This is a detailed audit required for organizations which spend $300,000 or more (in a given year) in total federal funds (including federal funds which have passed through state or local government agencies). This audit, performed by a C.P.A., is described in OMB Circular A-133 and is usually referred to as an A-133 audit. A-133 audits are frequently substantially more expensive than "regular" audits.