Thursday, October 25, 2012

Year End Deadline for Small Nonprofits

More than 275,000 tax-exempt organizations have lost their exempt status under Section 501 of the Code in the last few years as a result of a fairly recent change in the law. Certain qualifying small organizations that had their exemption revoked have only until December 31, 2012 to take advantage of the IRS’ "transitional relief" that both provides a reduced application fee of $100 (as opposed to the usual $850) and automatically qualifies such organizations for retroactive reinstatement of their tax-exempt status.

The Pension Protection Act of 2006 (the "PPA") required that all tax-exempt organizations, regardless of size, file an annual notice or information return with the IRS, and mandated that those who fail to file for 3 consecutive years (beginning in 2007) automatically lose their exempt status. Those organizations that have lost their exemption must reapply to the IRS to regain tax-exempt status (even if the organization was not originally required to file). The IRS has discretion whether to grant exemption and if granted, whether to retroactively reinstate an organization’s exempt status to the date of revocation if the organization establishes reasonable cause for its failure to file. Prior to the PPA, organizations that normally had not more than $25,000 per year in gross receipts (a number based on a rolling 3 year average) were not required to file any form of annual information return or notice with the IRS. Since the PPA, organizations that normally have less than $25,000 (or $50,000 beginning in 2010) per year in gross receipts (again based on a 3 year rolling average) are required to file an annual information return (the Form 990-N e-postcard). Despite many efforts to notify organizations of this change, the PPA requirements caught many small organizations by surprise.

So many small organizations lost their exemption for failing to file their required annual electronic notices that the IRS issued Notice 2011-43 providing transitional relief for certain qualifying "small organizations." Organizations that qualify will be allowed to pay the reduced user fee and will be treated as having established reasonable cause for failing to file its annual returns for taxable years beginning in 2007, 2008 or 2009. To qualify for the relief, the organization must be a "small organization" - that is it must have average annual gross receipts of not more than $50,000 in its most recent taxable year and the two immediately preceding taxable years. Additionally, the small organization must meet the following criteria: (1) it must not have been required to file an annual information return (i.e., Form 990 or 990EZ) for tax years before 2007; (2) it must have been eligible to file the Form 990-N e-postcard in each of 2007, 2008, and 2009 (both in terms of gross receipts and type of organization); and (3) it must file its application for reinstatement of tax-exempt status (i.e., a new Form 1023, or Form 1024 if organization is other than a 501(c)(3)) no later than December 31, 2012. Organizations seeking this transitional relief must write "Notice 2011-43" at the top of the Form 1023/1024 and on the envelope and must attach a specific statement to its application that essentially confirms that it satisfies the criteria above.

Many of our clients either are small organizations or are active volunteers with small organizations who may have unknowingly been affected by the PPA changes and automatic revocation. Small tax-exempt organizations should check the IRS’ automatic revocation list using the IRS’ Select Check online tool at to confirm they are not on the automatic revocation list. If they are, and they qualify, they should immediately submit a new application for reinstatement using the transitional relief if possible. Additionally, donors should always check the IRS’ current exemption database at the same IRS website to confirm the charity they are giving to is eligible to receive tax-deductible contributions if deductibility of the gift is important. Donors should also be aware that organizations who had their exemption revoked but were reinstated will remain on the automatic revocation list. However, if the charity is now on the list of organizations the IRS recognizes as "eligible to receive tax-deductible contributions" (which may occur if the organization’s exemption was revoked but it successfully sought reinstatement), the gift should be deductible.

If charities or donors have any questions about the automatic revocation and reinstatement process, or about deductibility of a gift, please feel free to call us. However, given the very busy year end we are anticipating, charities seeking reinstatement under the transitional relief must contact us immediately, and no later than mid-November
if they would like our assistance filing for reinstatement.