[Legislative Update] 275,000 Nonprofits Lose Tax-Exempt Status
On June 8, 2011, approximately 275,000 nonprofit organizations lost their tax-exempt status for failure to complete the IRS Form 990-N. Below is a summary of what this means for small foundations and how you can find out whether your foundation or any of your grantees are on the IRS revocation list.
How did 275,000 nonprofits come to lose their tax-exempt status?
Prior to 2006, tax-exempt public charities with annual revenues of less than $25,000 were not required to file a version of the Form 990 with the IRS. Without reporting mechanisms in place for these organizations, the IRS could not provide oversight or up-to-date information on these charities. In 2006, Congress passed the Pension Protection Act, which required the IRS to collect tax forms from ALL charities every year, regardless of their size. Small charities were required to complete a short online form called the Form 990-N. Any charity that failed to file the appropriate tax forms for three consecutive years would have its tax-exempt status revoked.
Since this law was passed, the IRS has made multiple attempts to notify charities of this requirement and the consequence of failing to file. As of June 8, 2011, approximately 275,000 nonprofits have still failed to file the appropriate forms and as a result, have lost their tax-exempt status. The IRS has developed a list known as the Automatic Revocation of Exemption List, consisting primarily of small public charities, but includes some larger public charities, private foundations and other types of nonprofits.
How does this affect small foundations?
First, it is important that you review the list to ensure your own foundation is not included. Even if you have filed all your forms, the IRS has acknowledged that the list may contain some errors which should immediately be identified with your review.
Second, a funder should not make any grants to a prospective grantee until the funder has confirmed that the grantee has not lost its tax-exempt status. Again, certain functioning charities may have been included in the list in error, but a private foundation will still be held responsible for making a taxable expenditure if it makes grants to an organization on the list without proper due diligence.
Grants made prior to June 8, 2011 to organizations that are now on the revocation list can be applied towards the foundation’s payout requirement and will not be treated as taxable expenditures.
How do I find out if my foundation or any of its grantees are on the IRS revocation list?
You can search the Automatic Revocation of Exemption List at the bottom of this page or at the IRS website.
Other organizations such as the Chronicle of Philanthropy provide similar links; many tools, such as Guidestar’s Charity Check and Grantr.com have incorporated the revocation list in their due diligence process.
What do I do if my foundation or any of my grantees are on the IRS revocation list?
If your foundation or any of its grantees are on the IRS revocation list, follow the steps below:
1. Verify that the status is indeed correct. If it is believed to be incorrect, the organization on the list should contact the IRS directly. No funding should be provided to an organization on the list, however, until the prospective grantee provides IRS documentation of the error and its correction unless the foundation is willing to exercise expenditure responsibility over the grant.
2. If the exemption was correctly revoked and the organization desires to continue tax-exempt operations, the organization must re-apply for tax exempt status.
If a nonprofit had less than $50,000 in revenues in 2010 and was listed on the IRS revocation list, the IRS will allow it to pay a reduced filing fee of $100 (instead of $400 or $850) to reapply.
If a nonprofit is re-applying for tax exempt status and would like the date of the new determination letter to be retroactive back to the date that it lost its exemption, the nonprofit must include an explanation and evidence why the organization failed to complete its filings, along with an explanation of the safeguards it has created to ensure future compliance. These materials must be presented in a specific format, outlined in Section 5 of IRS Notice 2011-44.
If my foundation wants to make a grant to an organization that appears on the IRS revocation list, can I help that organization re-apply?
Yes, you can make a grant to a nonprofit to help it re-apply for tax exempt status, but the foundation would need to exercise expenditure responsibility on any grants made to the organization after June 8, 2011 and before their tax-exempt status is reinstated.
At what point can our foundation make grants to an organization that lost its tax-exempt status if the foundation doesn’t want to exercise expenditure responsibility over the grant?
Foundations can make grants to an organization once its tax-exempt status has been reinstated. However, the foundation should verify the organization’s tax-exempt status by one of the two methods below prior to making the grant:
- Foundations can rely on IRS Publication 78 and the organization’s determination letter, but should also review the revocation list to ensure that the organization has been removed from the list.
- Foundations can rely on the Exempt Organizations Business Master File, but should also review the revocation list to ensure that the organization has been removed from the list.
References
http://www.irs.gov/newsroom/article/0,,id=240239,00.html
http://philanthropy.com/article/IRS-s-Mistakes-Cause/127894/
http://philanthropy.com/article/275000-Nonprofits-Lose-Tax/127854/
http://www2.guidestar.org/rxg/news/publications/revocations-april-2011-report.aspx
http://www.cof.org/templates/311.cfm?ItemNumber=18298&navItemNumber=16117#irs
Relevant IRS publications
Revenue Procedure 2011-33 provides the extent to which contributors may rely on Publication 78 or on the IRS Business Master File extract for purposes of deducting contributions and making grants. IRS may give notice of revocation in the IRB or on the IRS’s website. IRS no longer publishes a paper version of Publication 78.
Revenue Procedure-2011-36 modifies section 6.07 of Rev. Proc. 2011-8, 2011-1 I.R.B. 237, to provide for a reduced user fee for applications for reinstatement of tax-exempt status filed by certain small organizations following automatic revocation of their tax-exempt status under section 6033(j) of the Internal Revenue Code.
Notice 2011-43 provides transitional relief for certain small organizations (those that normally have annual gross receipts of not more than $50,000 in their most recently completed taxable year) that have been automatically revoked because they failed to file an annual electronic notice for taxable years beginning in 2007, 2008 and 2009. The notice provides the criteria that a small organization must satisfy to qualify for the transitional relief and describes how qualifying organizations apply for reinstatement of tax-exempt status and request retroactive reinstatement.
Notice 2011-44 explains how an organization that has had its tax-exempt status automatically revoked for failing to file an annual return or notice for three consecutive years may apply for reinstatement of tax-exempt status and request reinstatement retroactive to the date of automatic revocation.
Announcement 2011-35 indicates that the IRS is required to publish and maintain a list of organizations that have had their federal tax-exempt statuses automatically revoked for failing to file an annual return or notice for three consecutive years. The IRS will publish this auto-revocation list on its website, however, the auto-revocation list will not appear in the Internal Revenue Bulletin.