IRS Announces First Round of Revocations for Nonprofits that Failed to File Form 990

The IRS is conducting the biggest crack-down on nonprofits in my memory.  I believe part of this is an attempt to make up sluggish revenues due to our recession.  The implication for nonprofits is great and the burden falls greater on small nonprofits.  Think garden club or the local Kiwanis Club.  Those with revenues below $25,000 per year are now required to file a 990 (pick the form).

According to Nonprofit Times, "In 2008, nonprofits known as “nonprofit institutions serving households,” a broad subset of the sector, generated 5.2 percent of U.S. GDP, representing $751.2 billion worth of output. Nonprofits’ share of GDP grew 0.4 percentage points from 1998 to 2008."

As a friend pointed out the other day, nonprofits are domestic because most work to benefit their local communities.  That means nonprofits typically are not shipping jobs off shore, but instead keeping them local, very local.

I get it...we need revenue, but cracking down on the small nonprofits may not be exactly the most efficient way to get there.  Thanks to the folks at Venable for another great article on trends in the nonprofit sector.  Bunnie

Audra J. Heagney

Kristalyn J. Loson

 

IRS Announces First Round of Revocations for Nonprofits that Failed to File Form 990 

by Audra J. Heagney and Kristalyn J. Loson 

On June 10, 2011, the Internal Revenue Service ("IRS") released the complete list of approximately 275,000 nonprofit organizations that have lost their tax-exempt status for failure to file Form 990, Form 990-N, Form 990-EZ, or Form 990-PF for three consecutive years. The list of revoked entities is available on the IRS website.

The list includes the organization’s name, Employer Identification Number, last known address, and effective date of revocation of exempt status; it will be updated monthly. In its announcement, the IRS indicated that it believes most of these organizations are likely defunct, however, it has issued guidance regarding the steps such organizations must take to apply for reinstatement of their tax-exempt status.

This is the first group of revocations resulting from the passage and implementation of the Federal Pension Protection Act (the "Act"), passed by Congress in 2006. The Act mandated annual filing requirements for virtually all tax-exempt organizations, including tax-exempt organizations with gross receipts of $25,000 or less that were not previously required to file an annual return with the IRS. The Act also provided for the automatic revocation of any tax-exempt organization that does not file the required returns or notices for three consecutive years, and requires the IRS to publish and maintain a list of all such organizations that are so revoked.

In conjunction with its recent publication of the names of the first wave of organizations with revoked tax-exempt status, the IRS also issued guidance regarding the impact that the revocations have on charitable contributions to revoked organizations, and the manner in which organizations may seek reinstatement of tax-exempt status, including retroactive reinstatement. The IRS also announced transition relief for certain small tax-exempt organizations.

In connection with the announcement and publication of revocations of exempt status, the IRS issued the following guidance:

Revenue Procedure 2011-33 (Contributions to Revoked Organizations) states that where an organization listed in Publication 78 ceases to qualify as an organization to which contributions are deductible under Section 170 of the Internal Revenue Code (the “Code”), as a result of loss of exempt status due to failure to file annual reports for three consecutive years, grants and contributions made to the organization by persons unaware of the change in the status of the organization generally will be considered allowable if made on or before the date of publication of the list of revoked organizations. The IRS may disallow a deduction for any contribution made after revocation of exempt status but prior to the published notice of the revocation where the grantor had knowledge of the revocation prior to publication, was aware that revocation was imminent, or was, in part, responsible for the revocation. Publication on the list of organizations whose tax-exempt status has been revoked is intended to serve as a notice to donors and others that they may no longer rely on a prior listing in Publication 78.

Revenue Procedure 2011-36 (Reduced Fee for Reinstatement) reduces to $100 the user fee charged for the reinstatement of exempt status of small exempt organizations that normally have annual gross receipts of not more than $50,000 whose exemption was automatically revoked pursuant to Code Section 6033(j).

Notice 2011-43 (Transitional Relief) provides transitional relief for small organizations that had their exempt status revoked because they failed to file a required annual electronic notice for the last three consecutive years. An organization with annual gross receipts of less than $50,000 that qualifies for transitional relief pursuant to the criteria set forth in this Notice, and applies for reinstatement of exempt status by December 31, 2012, will be treated as having established reasonable cause for failure to file annual returns and exempt status will be reinstated retroactive to the date it was revoked.

Notice 2011-44 (Process for Reinstatement) sets forth the steps that an organization must take to apply for reinstatement of exempt status and request retroactive reinstatement after an organization's tax-exempt status was automatically revoked under Code Section 6033(j). An organization must use the same form filed by other applications for recognition of tax exemption to seek reinstatement, and must pay the applicable user fee. If an organization is seeking retroactive reinstatement, it must submit information demonstrating reasonable cause for failure to file an annual report, among other supporting materials.

The Treasury Department and the IRS intend to issue regulations under Section 6033(j) of the Internal Revenue Code, implementing rules regarding the application for reinstatement of tax-exempt status and the request for retroactive reinstatement. Comments are currently being solicited on the materials and issues addressed in Notice 2011-44. Comments are due August 19, 2011. 

You can contact the folks at Venable, LLP at http://www.venable.com.

Common Myths Concerning Nonprofits

There are thousands of nonprofits that are started in the United States every year.  Most are started for excellent reasons, someone finds a need and establishes a nonprofit to meet that need.  The nonprofit or civil society sector accounts for between 5% to 7% of the Gross Domestic Product of eight countries studied by John Hopkins University.  This is as much (or in some cases more) than the banking, insurance, financial services, construction and utilities industries individual share of GDP.  However, as well meaning as founders of nonprofits can be, there are persistent mythologies surrounding nonprofit management.  Greg McRay of the Foundation Group takes on a few.  I would love for people to send me their favorite myths!  Bunnie

Common Myths Concerning Nonprofits
by Greg McRay, EA

Just yesterday, I was interviewing a new student intern candidate in my office. During the course of our wide ranging discussion, the conversation turned to some of the interesting misconceptions we encounter with clients. I made the comment that we often feel like the crew of the Discovery Channel show, Mythbusters. There is a never-ending supply of well-entrenched myths and misconceptions in the nonprofit world…and dispelling them is part of our job! In this article, let’s take a look at a few of the more common ones.

MYTH: Build it and the grants will come.

FACT: Uh, good luck with that.

We get to burst this balloon a lot. Many who are starting nonprofits for the first time are convinced the government is waiting with bated breath for them to get going so they can cut them a check. Given the drunken sailor spending spree in Washington, it’s certainly understandable, isn’t it? Jokes aside, this is too often the by-product of a less-than-ethical fringe of the fundraising profession. Whether it is over-hyping the latest grant writing workshop or selling books on late night infomercials, this mindset doesn’t just come by accident. Here’s a newsflash: Startups are rarely grant funding recipients! The typical startup is much better served by focusing its efforts on building a fanbase of committed donors and only later looking to grants to help them expand what they have proven they can do.

MYTH: Nonprofit means you must zero-out at the end of the year.

FACT: Great plan…assuming you’ve got a pot of money waiting for you New Year’s Day!

Just a couple of weeks ago, a good friend approached me at church. She was recently elected to serve on the board of a small charity and at her first meeting, several of the existing board members were discussing their dilemma: The organization was quickly approaching the end of the fiscal year, but still had money left over. The conversation revolved around how they could spend down this money before the clock ran out. Well, her instincts told her this didn’t sound right. Good for her! And even better that she asked me about it.

I suspect the origins of this myth might be in the corporate world where departmental budgets are often use-it-or-lose-it. Anyone who has worked for a large corporation may be familiar with the race to spend down the budget in years of surplus. Combine that mindset with the notion of nonprofit, and you’ve got a myth in the making. I certainly hope your nonprofit is not sitting on $0 when the ball drops in Times Square!

MYTH: If our nonprofit’s purpose is not panning out, we’ll just shift gears and go in another direction.

FACT: Not so fast. You might want to make sure Uncle Sam is OK with that.

This sort of thing happens all the time. For example, ABC Charity was formed to raise money for cancer research. After a couple of years of disappointing results, the board sees the devastation from the latest disaster and decides to retool their organization as a disaster-relief charity. They make plans to travel to Haiti/New Orleans/Wherever and provide shelter and hot meals to those impacted.

Don’t get me wrong…there is nothing wrong with that in principle. In practice, it is not so simple. When the IRS granted tax-exempt status to this nonprofit, it was on the basis of its proposed program: fundraising for cancer research, not disaster relief. A serious change in purpose and program requires that the IRS be notified in detail on the next Form 990 that is due. Even then, it is highly probable that your case will be transferred to Cincinnati for further review and questions before approval is granted.

This list could go on and on and on. Sometime soon, we’ll share some more common myths and their corresponding realities. Here’s to facts!

You can contact Greg at the Foundation Group, http://www.501c3.org/