The Pension Protection Act of 2006
The Pension Protection Act of 2006 (the “Act”) changed the annual reporting requirements for tax-exempt organizations. Under the Act, all tax-exempt organizations (other than churches and church-related organizations) are required to file an annual return with the IRS. Prior to the Act’s passage, small tax-exempt organizations—those with gross receipts of $25,000 or less—were not required to file an annual return. Now, since 2007, even those small tax-exempt organizations must file a Form 990-N annually in order to maintain tax-exempt status.
The Act also imposed a revocation penalty on any tax-exempt organization that fails to file its required annual information return for three consecutive years. This revocation is automatic and can result in severe consequences for both the tax-exempt organization and its supporters. Specifically, the organization will become subject to federal income tax, and will have to re-apply to the IRS to have its tax-exempt status reinstated prospectively. Donors to such organizations will also no longer be able to claim charitable deductions for donations made after the revocation of status.
The Act, passed in 2006, effectively imposed these new requirements on tax-exempt organizations at the beginning of 2007. Thus, the first round of automatic revocations were scheduled to occur after the next three years’ Forms 990 were due (May 17, 2010, for calendar-year organizations). The IRS undertook an unprecedented information campaign to notify small tax-exempt organizations regarding the new filing requirements. Despite these efforts, many organizations still did not comply and their tax-exempt status is now in jeopardy.
One-time filing relief offered by the IRS
The IRS’s relief program seeks to give small tax-exempt organizations another chance at complying with the annual filing requirements. The IRS’s relief program consists of two parts:
- For organizations with gross receipts of $25,000 or less, the IRS extended the filing deadline for the 2009 Form 990-N until October 15, 2010. The Form 990-N is an e-postcard filing, which requires the tax-exempt organization to provide eight information items. If a non-compliant organization files this form by October 15, its tax-exempt status will remain intact. Information regarding filing the Form 990-N is available at http://epostcard.form990.org/.
- For organizations eligible to file a 990-EZ (less than $500,000 in gross receipts and less than $1.25 million in total assets), the IRS is offering a voluntary compliance program (“VCP”). To be eligible to participate in the VCP, an organization must:
- file Forms 990-EZ or 990 for its current and two prior tax periods by October 15, 2010;
- submit a signed checklist agreeing to the terms of the VCP—available at http://www.irs.gov/pub/irs-tege/nonfiler
- submit a check for the compliance fee ranging from $100 to $500, depending on the organization’s 2009 gross receipts.
All of the above must be complete by October 15, 2010, for an organization to retain its exempt status.
The IRS’s relief program does not apply to large public charities required to file Form 990, nor to private foundations required to file Form 990-PF. Exempt status may have already been revoked for any of these organizations with three years’ of unfiled Forms 990—they should consult an attorney as soon as possible to discuss re-applying for tax-exempt status.
A list of tax-exempt organizations that the IRS has identified as being “At Risk” of losing their tax-exempt status is available at http://www.irs.
gov/charities/article/0,,id=225889,00.html. The list includes organizations that have not filed an annual return for 2007 and 2008, and whose 2009 return, due on or after May 17 and before October 15, 2010, has not yet been received. While the IRS intends for this list to be a guide in bringing many tax-exempt entities into compliance, it may be incomplete. Therefore, it is important for all tax-exempt organizations to verify whether they will be subject to revocation. A current director or officer of an organization can contact the IRS Exempt Information Line at (877) 829-5500 to confirm its status.
State law impact
There will also be consequences under state law for organizations that lose their tax-exempt status. Upon an automatic revocation of exempt status, the IRS will also notify the attorney general in the state in which the organization operates or is incorporated. State tax-exemptions may also be impacted. For example, some organizations’ sales tax and franchise tax exemptions are contingent on maintaining federal tax-exempt status.
Due to the severe consequences of revocation of exempt status, all tax-exempt organizations, regardless of their size, should use this opportunity to consult their records to ensure they are compliant with annual filing requirements. If an organization, in its review of its records, determines that it is at risk of losing its tax-exempt status or that it will automatically lose such status, a representative of the organization should seek immediate assistance.