The IRS and Non-Profits

In a move that will hurt many small nonprofit organizations, the IRS has announced that 275,000 non-profit organizations- around 18% of the country’s tax-exempt organizations- have lost their status because they failed to file Form 990s.  Although tax law has changed regarding non-profits in recent years, the blow will likely put many of these charitable groups out of business.  

Until 2006, nonprofits with annual revenues under $25,000 were not required to file tax returns to the IRS.  However, a provision in the 2006 Pension Protection Act (read pork barrel legislation) required nonprofits to file an abbreviated form beginning in 2007.  If the nonprofits did not file fore three consecutive years after 2007, their exemptions would be revoked.  

While these nonprofits are waiting for reinstatements, they are liable for income taxes and are unable to get tax-deductible donations.  The Boys and Girls Club is one notable organizations put at risk.  Although the IRS gets a bad rap among taxpayers, this situation isn’t their fault.  To be fair, the IRS sent 665,000 warning letters out to small nonprofits in 2007, but on the deadline, more than 300,000 organizations had not filed.  The IRS extended the deadline until October 15, 2010 to give small nonprofits another chance, but when the list was finally published, 275,000 organizations had lost their exemptions.   

Furthermore, the IRS announced a reduced refiling fee and retroactive exemptions for small organizations that can demonstrate good reasons for not having filed.  Before 2007, small nonprofits didn’t have to file because the tax revenue generated was insignificant.  Taxable income in the nonprofit sector is historically low and deductions for charitable contributions weren’t outrageous.

I’m noticing a push from the Federal government to make corporations and industry more transparent to the average American, but this pressure is forcing small businesses to spend beyond their means for full disclosure.  As a result, more companies are being forced to (re)file tax returns, which will likely generate elevated costs.  The IRS is now subjected to dedicate large amounts of resources to ensure the nonprofits refile properly.  I’m not sure how sustainable this system is.


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