Failure to File 990-N: Lose Tax Exemption

Failure to File 990-N: Lose Tax Exemption

One-fourth of nonprofits may lose tax exempt status due to oversight

by Maribeth Wright, CPA

On May 15, 2010, an estimated one quarter of the 1.6 million charities, trade associations and membership groups in the United States lost their tax exempt status if they hadn't filed the IRS Form 990-N.

The action results from a provision buried in the 2006 Pension Protection Act, aimed at pension reform.The legislation required all nonprofits to file tax form 990-N beginning in 2007. Prior to 2007, only organizations with revenue of $25,000 or more had to file the document. The law directs the Internal Revenue Service to revoke the tax exempt status of groups that fail to file the 990-N for three consecutive years. Now that the initial three year period has passed, the agency will begin the process of revoking the exempt status of the applicable organizations.

Although the noncompliant groups lost their exemption status effective May 16, the IRS is expected to delay sending notices to them until January, to give the nonprofits a chance to bring themselves into compliance with the law. Donors to affected groups will be able to take tax deductions for their gifts until a formal notice is received by the recipient organization.

Smaller organizations, especially those that have become inactive or are dormant, are most likely to be impacted. Many may have been unaware of the reporting requirement when they closed. Since the law was passed, the IRS has sent out hundreds of thousands of letters to potentially affected organizations.

If an organization loses its tax-exempt status, there are consequences. The organization must file a corporate trust income tax return to report its income, and the group's income may be taxable. Unpaid taxes on that income could be subject to interest or penalties. And, if the organization received charitable contributions, donors would no longer be able to take a charitable deduction for their donations.

The organization can regain its tax-exempt status by filing the proper form (1023 for a 501(c)(3) or 1024 for other types of exempt organizations) and paying a $850 new application user fee. If the IRS approves the organization's application, the group's exempt status would become effective the date of the application. However, the approval process can take six months to a year to complete.

Additional information about filing the 990-N is available on the IRS web site, www.irs.gov.