This article comes from the summer 2018 issue of the Nonprofit Quarterly, “Nonprofits as Engines of a More Equitable Economy.”
From the middle of 2010 to the end of 2017, the IRS revoked the tax-exempt recognition of more than 760,000 nonprofit organizations for failing to file Form 990 returns.1 More recently, it has implemented the 1023-EZ process, which makes applying for federal tax-exempt status easier. What effect have these changes had on the numbers of nonprofits in our sector? Are there marked differences in trends vis-à-vis 501(c)(3)s and 501(c)(4)s?
This first-of-its-kind analysis is informed by two key data sources. The first is the Internal Revenue Service Data Book, the annual compendium of IRS statistics published since 1863—specifically, the data contained in Tables 24, 24a, and 25 of the Data Books from 2007 through 2017.2 The second data source is the IRS’s automatic revocation data, downloaded from the IRS website.3 A single ASCII file contains all automatic revocations made since 2010. The IRS updates the bulk file monthly. The version used for this analysis was downloaded in January 2018, and included data for the 2010–2017 fiscal years.
Before 2011, it was impossible to get a sense of the true numbers of federally tax-exempt nonprofits in the United States; this is because there were so many listed nonprofits that never reported to the IRS—either because they were legitimately too small to have to report, or they were defunct, or they were sloppy. No one really knew how many belonged in which category. The Pension Protection Act of 2006, however, changed the reporting requirements by including a provision that requires the IRS to revoke the tax-exempt recognition of any nonprofit that fails to file an annual Form 990 return with the IRS for three consecutive years.4 The IRS was charged with organizing itself to send a written notice of revocation to the last-known address for each nonreporting nonprofit, with revocation happening after the 990 filing deadline passes for the third consecutive year of noncompliance.
The timeline set in place by the 2006 law provided that automatic revocations would begin on May 15, 2010. Using that timeline, almost 400,000 nonprofits—more than 60 percent of them 501(c)(3) charities—were slated to have their exemptions revoked.5 However, the IRS delayed implementation of the revocations from October 15, 2010 (just after the start of the 2011 fiscal year), until the summer of 2011 (the last quarter of the 2011 fiscal year), to make sure that more nonprofits were aware of the law and of their requirement to file.
Many very small nonprofits that had not been required to file a Form 990 or Form 990-EZ in the past were particularly unaware of the new Form 990-N, known as the “postcard” return. The Form 990-N is an electronic form that requires a nonprofit not required to file a 990 or 990-EZ to provide annual updates to basic contact information for the organization. Thus, these smaller groups were at risk of being surprised by the action. To prevent that, the IRS, national infrastructure groups, and the media did broad outreach amplifying the new requirement.
The IRS’s implementation delay gave many organizations the opportunity to bring their filings up to date, but a review of the IRS’s automatic revocation database shows that the FY 2010 and 2011 revocations still affected more than 450,000 nonprofits,6 including 275,000 501(c)(3) public charities and private foundations.7
The IRS posts a list of all automatic revocations to its website, both in a bulk download option and as part of its newly revised “Tax Exempt Organization Search” service, which provides access to basic information about all tax-exempt organizations.8 (The file contains information on automatic revocations only; it does not include any organizations that had their exemption revoked as a result of a review of activities and either an administrative determination by IRS staff or determination by a court.)
The automatic revocation dataset is very simple, containing twelve fields, only four of which are required, as can be seen in the IRS table at top.9
Interestingly, the exemption type (for example, 501(c)(3), 501(c)(6), etc.) field is optional. Fortunately, only 28,300 out of 761,780 records, or about 3.7 percent, do not have an exemption type identified; they are carried in the database with a 0 value, despite there being no such thing as a 501(c)(0) organization.10
How the Action Affected 501(c)(3)s and 501(c)(4)s
Not surprisingly, 501(c)(3) organizations topped the list of revoked exemptions from 2010 to the end of 2017, representing just under 60 percent of the total. Following 501(c)(3) groups were 501(c)(4) social welfare groups, with almost 16 percent; 501(c)(7) recreation clubs, with about 5.3 percent; 501(c)(6) business leagues, with 4.8 percent; and 501(c)(19) veterans’ organizations, with 2.4 percent.11
Chart 1 shows each year’s total of all 501(c) organizations and the corresponding totals of 501(c)(3) and 501(c)(4) organizations that are included in the reported total.
- The total numbers of all 501(c)(3) and 501(c)(4) organizations were at or near their highest l