Deadline for filing 990

If the number of nonprofits registered with the IRS shrinks by 20 percent this year, don’t blame it on an ailing economy. A simpler explanation is available: thousands of small nonprofits may not meet a new filing deadline, causing revocation of their tax exempt status and removal from the IRS list.

Most nonprofits with fiscal years of January 1–December 31 and revenue under $25,000 had 3 years—or until May 17 of this year—to file form 990-N or lose their federal tax exemption. Active organizations that do not file will face fees and lost time as they reapply for their exemption unless reasonable cause is shown for not filing.

But the true story behind any large drop in registered nonprofits may prove to be that long-defunct organizations are finally being removed from the IRS list. An unknown number of inactive organizations are thought to be on the list because, unlike larger organizations that must annually file Form 990 or Form 990-EZ1, small organizations with receipts under $25,000 never had to file annual documents with the IRS. With no further IRS contact ever required, they would remain on the list indefinitely even after ceasing operation unless someone thought to update their status with the agency.

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Consequently, the total number of active nonprofits registered with the IRS was long thought to be misleading. Addressing this blind spot in its regulatory system, a provision in the Pension Protection Act of 2006 gave small organizations a three year window to start annually filing the newly created Form 990-N, commonly known as the e-Postcard.[1] That deadline is now only days away for organizations operating on the calendar year.

The public won’t know exactly how many organizations were removed from the list until the IRS starts releasing the information in January 2011, but to get a sense of the large numbers that may drop off the IRS rolls, begin with over 1.5 million?the total universe of nonprofit organizations of any size registered with the IRS in April 2010. Forty percent of those are small organizations that under the 2006 provision are now required to file 990-N2. Approximately 343,000 of those met the filing deadline as of May 1, leaving over 340,000 or 21 percent of all registered nonprofits that have not filed—and that may need to reapply for tax-exemption. (214,000 of these organizations will lose their tax-exempt status on May 18th, 2010. The remaining organizations operate on different fiscal years and have some additional time.)

How many of those 340,000 groups are still active is an open question. The National Center for Charitable Statistics (NCCS) at the Urban Institute attempted to contact a random sample of 100 organizations that had not filed in the past three years and was only successful in reaching 25 of the organizations. Many organizations have been on the IRS list for decades; 47,000 of them were incorporated before 1950 and over 40 percent were registered sometime before 1980.

While some of the organizations may have ceased to exist long ago, it’s also easy to see how active organizations may have never heard of the requirement. The list of non-filers includes 30,000 sports and recreation clubs, 15,000 student fraternity and sorority groups, 17,000 community service clubs, 17,000 veterans’ organizations, and 8,000 parent teacher groups. Although the IRS used a variety of mediums and outreach methods to publicize the filing deadline, direct communications to these organizations were sent to the last address on file with the IRS. Because most organizations of this size are run by volunteers with addresses at the home of the board president or treasurer, the notices may have never reached the necessary person if no one voluntarily updated their address file with the IRS after a change in leadership.

The cost will be significant for those that lose their exemption and need to reapply. They will have to pay the standard application fee of $400 or $850 depending on anticipated gross receipts. A new IRS Web-based application system in the works would provide a cheaper $200 online application option. But assuming only a quarter of the organizations that have not filed are in fact still operating and will have to reapply before the online application is available, it would drain between $127 million and $272 million dollars from the nonprofit sector just to have their status’ reinstated.

Organizations that missed the deadline will have their status’ revoked immediately and will not be permitted a filing extension. Those that were never notified of the change and missed the deadline may want to make a case for retroactive reinstatement of their tax status, which the law provides if reasonable cause can be shown for failure to file.

While speaking at the Urban Institute’s annual Form 990 Meeting in May of this year, Lois G. Lerner, director of the exempt organizations division of the I.R.S, stated that organizations that had received two or three notification letters, but did not find the time to file the 990-N would not considered a reasonable cause, but each case will be handled individually. Lerner also mentioned that the IRS will be “extremely careful” in notifying the public that an organization has lost its tax-exempt status. In fact, between May 2010 and January 2011, only the IRS will know the organizations whose status has been revoked. Donations to organizations that missed the deadline will remain tax deductible until public notification of the revocation is given on the IRS website.

Time will show just how many inactive nonprofits were lingering on the IRS rolls. The best thing organizations can do is to see if they need to come into compliance by visiting the Urban Institute’s National Center for Charitable Statistics searchable database of organizations that are required to file but have not. If they find they are on the list, an officer from the organization should file Form 990-N through an approved IRS 990-N e-file provider here. Those who know of small nonprofits with receipts under $25,000 in their community are encouraged to notify the organization’s officers of the requirement so that they can take immediate steps to address the situation.

[1] Organizations not required to file a Form 990 include churches, integrated auxiliaries of churches, conventions or associations of churches, 501(c)(1) government organizations, black lung trusts, and instrumentalities of states or political subdivisions.

Jeff Narabrook is the public policy assistant at the Minnesota Council of Nonprofits; Katie L. Roeger is the Assistant Program Director of the National Center for Charitable Statistics at the Urban Institute; Thomas H. Pollak is the Program Director of the National Center for Charitable Statistics at the Urban Institute.