Wednesday, September 14, 2011

Analysis of Nonprofits Forfeiting Federal Income Tax Exemption for Failure to File Annual Information Returns

The Urban Institute ("UI") recently published on its website Revoked: A Snapshot of  organizations that Lost Their Tax-Exempt Status -- a brief study of the 275,000 plus nonprofit organizations that have lost their federal income tax exemption on account of failing to file an information return with the Internal Revenue Service within the last three years. Based on its review of the Automatic Revocation of Exemption List released by the IRS on June 8, 2011, the UI provides in its study “a snapshot of the organizations that have lost their tax-exempt status and examine[s] these organizations by type, age, and location.”  The study concludes as follows:

While it may be tempting to attribute the failing of these organizations to the recession, it is more likely that these organizations have been out of operation for many years. In fact, more than a quarter of all organizations whose exempt status was revoked last appeared in the IRS Business Master File before 2007, and only 10 percent of organizations that lost their tax-exempt status filed a financial return (Form 990 or Form 990-EZ) during their lifespan.

Some organizations whose status has been revoked are likely still operating; only time will tell how many. IRS efforts to communicate the new requirements were extraordinary, with multiple mailings to addresses on file, public announcements on TV and the radio, pamphlets in libraries, and many public presentations. This coupled with the fact that the vast majority of these organizations have never filed an information return and many of them have not appeared in the IRS Business Master File for four years lead us to believe that most of these organizations are, in fact, defunct and have been for several years.

Losing tax-exempt status can be detrimental for an operating nonprofit. Everyone involved with small nonprofits should go to the Nonfiler Automatic Revocation List published by the IRS … to make certain that the organization has not lost its status. If an organization’s status has been revoked, taxes and donations made to the organization will no longer be tax deductible. Donations made to organizations before revocation remain tax deductible. To have tax-exempt status reinstated, organizations will need to reapply. The IRS announced transition relief for certain small tax-exempt organizations—those with annual gross receipts in 2010 of $50,000 or less—to regain their tax-exempt status retroactive to the date of revocation and pay a reduced application fee of $100 rather than the typical $400 or $850 fee. Full details are available on the IRS web site ….

The IRS News Release announcing the Automatic Revocation of Exemption List provides links to publications that explain how a nonprofit that has lost its exempt status can apply for reinstatement of exemption.


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