October 21, 2020; Accounting Today
Happy holidays to all you overloaded nonprofits! You may not be able to fundraise this difficult season.
This year has not been an easy one for nonprofits, especially those that depended upon event fundraising and ticket sales. But now some have another wrench thrown in the works, in that they may have had their tax exemption revoked by mistake—or so the House Ways and Means Committee suspects. Readers can learn more about the revocation process, which has been in place for a decade, in a piece by Michael Wyland, detailing the number of groups involved over that period.
On Monday, the House Committee on Ways and Means sent a letter to Treasury Secretary Steven Mnuchin to insist he address the erroneous removal of thousands of nonprofits from the list of tax-exempt organizations. The problem seems to have occurred when the IRS neglected to integrate a date change. The letter reads:
We write today to find out why the Trump Administration automatically revoked the tax-exempt status of, and sent erroneous revocation notices to, more than 30,000 nonprofit organizations around the country, including nearly 28,000 charities as we enter the most popular time of year for Americans to make charitable contributions. We urge you to investigate this apparent error by the Internal Revenue Service (IRS) and take corrective action immediately. These organizations do critically important work for our communities—especially during this difficult time for our nation—and we must ensure that the IRS is not wrongfully terminating their exempt status.
As you know, the IRS automatically revokes the exempt status of organizations that do not file the required Forms 990 for three consecutive years. Such revocation is effective as of the due date for the filing, which generally is May 15 for calendar year organizations. However, due to the coronavirus pandemic, the IRS extended the filing date this year to July 15. In other words, organizations that would have had their exempt status revoked on May 15, 2020 were given until July 15, 2020 to file and, in doing so, retain their exempt status.
The Ways and Means Subcommittee on Oversight (Subcommittee) was alarmed to learn that, between May 1 and October 8 of this year, there was a twenty percent increase in the number of charitable organizations that had their exempt status automatically revoked, as compared to the same time period for 2019.
They point out that the IRS famously has a substantial backlog of mail and would like to know if that may be a complicating factor.
The IRS’s automatic revocation mechanism is probably fine for sorting out organizations that have wafted off into nonexistence. But despite repeat warnings the first time the process was implemented, some organizations that were still up and functioning managed to miss the warnings that non-filers were in imminent danger. One can only assume that, between the pandemic and the downturn, mistakes were made not only on the nonprofit side, but that of the IRS. The fact that revocations are up so significantly is, indeed, cause for the kind of alarm expressed by the House Committee. and we should thank them for their vigilance and weigh in on the request that the process be reviewed quickly, possibly suspending all the revocations in question until that is done.—Ruth McCambridge