IRS changes leave thousands of nonprofits scrambling to maintain status

In a story that’s been gathering steam for quite some time, it is feared that many thousands of nonprofit businesses throughout the US are in danger of having lost their tax-exempt status this week due to filing rules that went into effect in 2006 with the deferred deadline now having arrived. Research is showing that thousands of small nonprofits of varying types face revocation due to incorrect or non-filing of tax paperwork.

Why have IRS changes caught nonprofits unaware?

Back in June the Internal Revenue Service published state-by-state listings of all groups facing automatic revocation if the deadline was not met. Each of the small organizations would be scheduled to pay taxes on income effective this week unless a new application had been submitted before the deadline designating the company as a new not-for-profit business. Prior to 2006 a nonprofit with less than $25,000 in annual gains were not required to file federal annual returns, legislation was then passed requiring all tax-exempt companies with the exception of churches to begin filing in 2008 with an extension until 2010 if required. The condition that is putting many at risk is that tax-exempt status could be lost for any nonprofit who fail to file for three consecutive years, a warning that seems to have not been heeded.

For their part the IRS stated that they have sent out more than 1 million pieces of informational mail although many groups say they did not get the memo regarding the necessary paperwork filing. The potential for chaos according to reports is significant and nonprofits are questioning whether the IRS is sufficient job in making the changes well known and understood . Over 1.5 million nonprofits have active registrations in the United States, according to the reports more than 300,000 of them now face a risk in their status due to the changes created by the new ruling. That equates to more than 20% of nonprofits potentially now seeking a reapplication of status or the potential for complete revocation. The IRS maintain that the official deadline actually passed during the spring and the further extension until October was granted to allow more nonprofits to filing time. They also said that there won’t be further extensions granted.

While the news is sending alarm bells ringing in many nonprofits, the IRS maintain that so long as an organization pays taxes until reinstatement is approved there will not be further consequences as a result. The common thread that does apply seems to be one of confusion about acquiring exemption status and the deadlines that were in place with many saying that the IRS were not clear enough about the process and resultant changes.

The required paperwork to be completed is form 990-N and is available via the IRS website. The fact that hundreds of thousands of individual organizations have not complied does lead me to think there was a major breakdown in understanding of the changes.