Too Many Small Groups Must File Informational Tax Return, IRS Official Says

October 17, 2007

Too Many Small Groups Must File Informational Tax Return, IRS Official Says

An Internal Revenue Service official is urging the tax agency to increase the threshold for nonprofit groups that file the Form 990 informational tax return.

Nina E. Olson — who serves as the national taxpayer advocate at the IRS — has told the tax agency that only charities with revenue of $50,000 or more should be required to file the form. Today, organizations with at least $25,000 in revenue are required to do so.

Ms. Olson also recommends that the threshold be indexed to inflation.

Ms. Olson, who operates independently of other IRS offices and reports to Congress, made the recommendation as part of her comments about proposed changes to the Form 990, says changing the budget ceiling would eliminate administrative burdens faced by small charities that are required to file the form.

She says the threshold has been static for 25 years. Meanwhile, the Consumer Price Index, which measures inflation, has increased by more than 109 percent during the same period.

“There is little risk that relieving more small exempt organizations from the filing requirements will increase noncompliance or abuse,” Ms. Olson wrote in explaining the recommendation.

What do you think? Should the $25,000 requirement stay in place or should it be increased? Click on the comments link below this post to share your thoughts.

— Peter Panepento

Comments

Small tax-exempt organizations, whose gross receipts are normally $25,000 or less, are not required to file Form 990, Return of Organization Exempt From Income Tax, or Form 990-EZ, Short Form Return of Organization Exempt from Income Tax. With the enactment of the Pension Protection Act of 2006 (PPA), these small tax-exempt organizations will now be required to file electronically Form 990-N, also known as the e-Postcard, with the IRS annually. Exceptions to this requirement include organizations that are included in a group return, private foundations required to file Form 990-PF, and section 509(a)(3) supporting organizations required to file Form 990 or Form 990-EZ. In addition, this filing requirement does not apply to churches, their integrated auxiliaries, and conventions or associations of churches.

The IRS began mailing educational letters in July 2007 notifying small tax-exempt organizations that they may be required to file the e-Postcard. The IRS is developing an electronic filing system (there will be no paper form) for the e-Postcard and will publicize filing procedures when the system is completed and ready for use.

The PPA requires the IRS to revoke the tax-exempt status of any organization that fails to meet its annual filing requirement for three consecutive years. Therefore, organizations that do not file the e-Postcard (Form 990-N), or an information return Form 990 or 990-EZ for three consecutive years, will have their tax-exempt status revoked as of the filing due date of the third year.

So, I think the trend is actually toward having additional small organizations file (albeit with reduced information content).

— RCHjr Oct 18, 12:24 PM #
Actually, implementation of the 990 e-postcard paves the way for raising the 990 filing threshold. With the 990-N in place, it will be easier to make the case that raising the 990 filing requirement will not have an adverse compliance impact, since those organizations in the $25-50K range will still be required to file the new electronic notice rather than falling below the radar altogether.

— jwdc Oct 19, 02:20 PM #
GuideStar agrees and made a similar recommendation in our comments. (Go here for our full comments: http://www.guidestar.org/news/features/990_comments.pdf)

GuideStar writes:
“Raising the filing threshold on 990-N filers from $25,000 to $50,000 as the Tax Payer Advocate and others have recommended. Indexing the filing thresholds and making periodic adjustments will balance the need to gather information from filers with the burden for small, community-based organizations.”

GuideStar comments further on other ways to manage the burden on filers. We write:

“Changes to the Form 990-EZ that is based on elements of the Core Form and Schedules A and B. The filing threshold for 990-EZs should be raised from $100,000 to $500,000. The Service needs to balance the need to gather relevant data with the burdens of filing timely, accurate and complete information from organizations with total revenues from $50,000 to $500,000. Our federal system permits state regulators to require additional reporting by these organizations if state legislatures determine additional information is required from organizations of this size.

Focus on the 100,000 organizations with total revenues greater than $500,000. And for this group of filers, the Service should carefully stagger the reporting of many of the new schedules to provide time for changes in record keeping that are a significant driver of the increased costs of compliance.”

— Dan Moore Oct 22, 02:01 PM #
The first question that needs to be resolved is the purpose of the filing.

My guess is because organizations have not had a need to report the I.R.S., they (the I.R.S.) has no idea where most of these entities are or if they even exist. In time the absence of an informational return would deprive an organization of its tax-exempt status and reduce the rolls of qualified organizations. If the sole purpose of the filing is to identify organizations and if they are operating that have income less than $25,000 or whatever figure chosen then the I.R.S. needs to undertake a serious public awareness campaign. The reason for the need is most of these organizations are run by volunteers who may be totally unaware of the requirement to file a return.

If the purpose is to track assets and revenue then indexing filing thresholds would make perfect sense. Revenues may increase in small volunteer run organizations as do expenses. The consequence of indexing would be that a significant number of organizations who need to file might receive relief – A relief from incurring additional expenses or diverting volunteer time from their purpose/mission.

No matter what the purpose of the filing may ultimately be, I would strongly urge the I.R.S. to undertake a major and national educational campaign about the purpose of not-for-profit informational filings in order that the small and mid-size nonprofits might understand the expectation and the requirement. The I.R.S. would do the nation and the sector a great disservice if by failing to aggressively inform organizations about the need to file; organizations find themselves losing their tax-exempt status.

— John C McGee Oct 25, 02:40 PM #

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