By Debra E. Blum

The Internal Revenue Service plans to introduce a new program this year for charities in jeopardy of losing their tax-exempt status for failure to file informational tax returns, called Forms 990.

Organizations will be allowed to file their missing forms without penalty, paying only a small fee based on their size.

The program is a response to a tough new rule contained in the Pension Protection Act of 2006 that calls for any organization that fails to file its required tax returns for three consecutive years to automatically lose its tax-exempt status. Since the rule went into effect starting with the 2007 tax year, 2010 will be the first year that charities could have their status revoked.

“We recognize that there are a lot of good charities out there doing a lot of good work, and we want to give them an opportunity to get right with the government,” says Jason Kall, manager of the IRS’s Exempt Organizations Compliance Strategies and Critical Initiatives group.

Small Charities

The IRS especially wants to help small nonprofit groups that may not even know about the filing requirement, which directs tax-exempt organizations with at least $25,000 in annual revenue to submit the Form 990 each year. An IRS study in 2006 found that in nearly one-quarter of the cases where groups did not file a form, the person responsible for maintaining the organization’s books and records was unaware of the obligation to submit an annual return.

An IRS memo says the new system will facilitate “public scrutiny of exempt organizations that have previously operated ‘under the radar’”, and keep the IRS and charities from wasting time and money dealing with revoking and reinstating tax-exempt status.

Key to the success of the program, Mr. Kall says, will be getting the word out to charities about their obligations and the new revocation rule. He says it’s impossible to guess how many organizations may take advantage of the program, but, he says, it’s a good deal for those that do.

As it now stands, the penalty for late filings of the Forms 990 can run as high as $10,000 a year for small organizations and $50,000 a year for big ones. Under the program, the delinquent tax forms will still need to be filed, but late fees will be waived and the charities will retain their tax-exempt status.

Mr. Kall says based on how well the new effort works, the IRS may consider expanding it to give relief to charities dealing with other problems besides late filings. He says, for example, that a charity that has been tagged for paying its officials too much, but has taken corrective action, may be able to avoid certain penalties.