There’s been a lot of buzz in the nonprofit sector about the new law requiring small nonprofits to file annual informational returns. The IRS will automatically revoke the exemption of organizations that fail to file these returns for three consecutive years. To give these organizations another chance, the IRS has announced a one-time grace period allowing additional time to meet the new law’s requirements.
The annual information return requirement for small organizations is a new provision, enacted as part of the Pension Protection Act of 2006. Before that, small exempt organizations (with gross receipts of $25,000 or less) didn’t need to file informational returns.
The PPA provides that organizations that fail to file a return for three consecutive years will automatically lose tax exempt status. This would require organizations that lose tax-exempt status to reapply for exemption. Any income earned in the interim between the loss of exemption and reinstatement of exemption could be taxable. Churches and integrated auxiliaries of churches are not subject to the new requirement.
Based on the 300,000 small nonprofits that are on the IRS’s revocation list, charity watchdog Guidestar.org estimates that the tax-exempt sector could shrink by up to 25 percent as a result of this new rule. As we near the end of the filing period for third year since the law’s enactment, many small mom-and-pop nonprofits are on the verge of losing tax exemption.
The special filing relief program gives small nonprofit organizations that failed to file required returns for 2007-2009 until October 15, 2010, to file their returns. The relief is not available to organizations with more than $25,000 in gross revenue.
All small exempt organizations should check the list and, if listed, file all necessary returns as quickly as possible. The informational returns are filed on Form 990. Organizations with gross receipts of $25,000 or less (which will probably include most of the organizations at risk) only need to file the relatively short Electronic Notice Form 990-N.