Hundreds of thousands of nonprofit organizations could lose their tax-exempt status this month.
Nobody really knows for sure how many organizations will lose their tax exemptions, but several research groups estimate that more than 300,000 organizations listed on the Internal Revenue Service’s rolls ultimately could be affected. While many of those groups have long since ceased to exist, many others, such as soup kitchens, neighborhood baseball clubs, and local arts organizations are likely to be affected because they have not filed required IRS forms for the past three years.
Organizations that are still in business but lose their tax-exempt status will face an array of problems. They will have to reapply with the IRS for a new exemption and pay a fee. And if they regain their tax exemption, they will be liable for income taxes for the period in which they were not exempt.
Donors will also be affected, but won’t have to worry about losing the ability to deduct a gift to charity until January, when the Internal Revenue Service will announce an official list of which organizations are still eligible for tax-deductible gifts.
Congress passed a law in 2006 to help the IRS keep better track of active organizations of all sizes and figure out which charities no longer exist.
As part of the law, small organizations that never had to regularly file returns in the past—those with annual revenues of $25,000 or less—must now file a new online return, called a Form 990-N or “e-postcard,” which requires basic information, such as the name of a principal officer and a mailing address. But getting the word out about the change has proven tricky. Several officials of very small charities reached by The Chronicle in the past two weeks said they had only just learned of the requirement.
Jayne Lee, executive director of the Human Nature Dance Theatre, in Flagstaff, Ariz., which has had annual revenues of less than $25,000 since it registered with the IRS in 2005, says she recently learned about the need to file a return by chance when visiting the IRS Web site. “Maybe it was just intuition that took me there—I don’t know,” she says with a laugh. Ms. Lee filed the Form 990-N last week.
The reason so many groups will lose their status this month is that May 17, 2010, marks the first three-year filing deadline for groups whose fiscal years end in December.
Contrary to some published reports, the May deadline is final for those groups. Lois G. Lerner, who oversees the IRS office that monitors charities and foundations, has implored charities in several speeches in the past weeks to remember that “if you’ve got a May filing date, you don’t have any more time to come into the IRS. You will lose your exemption.”
The IRS will wait until January to release the names of organizations that will have lost their exemptions in May because it says it wants to avoid errors.
In the run-up to the May deadline, some groups have sought automatic three-month extensions to file their forms and the tax agency wants to be sure those are noted, the forms filed, and the exemptions preserved.
Other groups that file forms before the May deadline may face other problems with the IRS, and the revenue service wants to be sure those concerns are sorted out before the government deems a group to have failed to keep its exemption. “I am not going to put any organization’s name out as revoked until the entire process is completed,” says Ms. Lerner. “We’re being extraordinarily cautious.”
Ms. Lerner says the IRS has been working hard for three years to let tax-exempt organizations know about the looming deadline. She says the tax agency has been particularly concerned about groups with revenues of $25,000 and below that have been out of touch with the IRS since obtaining their tax-exempt status years ago and have not, until the 2006 law was enacted, been required to file annual returns.
“We sent letters to all the small organizations that are on our master file explaining this right after the law was passed,” says Ms. Lerner. “We have continued to send letters to those organizations that haven’t had to file with us,” she says, and to larger groups that have failed to file.
Because leaders of small organizations are not likely to read official IRS announcements on the tax agency’s Web site or attend legal conferences where such matters are discussed, the revenue service has tried to get the word out through public libraries, Congressional offices, and employers.
“We’ve talked it up everywhere, from meetings with small organizations to cocktail parties,” says Ms. Lerner.
Many tax-exempt groups, including Toastmasters International and the League of Women Voters, have posted alerts on their Web sites for their own member organizations.
Counting Up the Losses
Just how many nonprofit groups will be dropped from the IRS’s books remains to be seen. GuideStar, which provides an online database of nonprofit groups using IRS and other information, has predicted that 350,000 to 400,000 organizations, perhaps half of them defunct, may lose their tax exemptions because of the new law.
The Urban Institute’s National Center for Charitable Statistics, in a new report for The Nonprofit Quarterly, estimates that as many as 341,000 organizations, many of them groups that no longer operate, could lose their tax-exempt status as a result of the new law. The final figure could be lower, however, as organizations rush to meet the May deadline, the center says.
Ms. Lerner says an estimate of 400,000 is not “appropriate” but declines to make a prediction. “I don’t want to be a Pollyanna about this,” she says. But she says the IRS is “optimistic that we’ve gotten the word out to a lot of folks. And we know this because we’ve had lots and lots of people running to us and saying, How do we do this?”
Out of Touch
Some nonprofit experts, however, say that, despite the IRS’s efforts to publicize the impending deadline for keeping tax-exempt status, trouble may be brewing, especially for small charities.
“These are the ones that often have volunteer officers and an address that changes as the shoebox of records is passed from one volunteer mom or dad to the next,” says Marc Owens, a Washington lawyer who used to manage the IRS’s nonprofit branch. “They’re a tough group to try to get in touch with.”
Mr. Owens says he anticipates “a wave of complaints, many that will probably go to the members of Congress, about the IRS revoking Little League after Little League, a lot of organizations that wear white hats.”
If, say, 200,000 organizations lose their exemptions and only 20,000 of these are actually in business and not defunct, “that’s still an awful lot of organizations that have suddenly lost their tax-exempt status,” says Mr. Owens.
Even so, some experts say requiring small organizations with $25,000 or less in revenue to file is sensible.
The government is saying that “all we need you to do is fill out this tiny little 990-N form,” says Bob Ottenhoff, chief executive of GuideStar. “Just tell us that you are out there, that you are still alive, that you are a functioning nonprofit organization.”
He adds: “This is not going to guarantee that an organization is well run or even effective in its work. But at least it’s a basic minimum standard.”