Archive for the ‘Non-profit Organizations’ Category

Once we have completed the charity formation process our nonprofit clients come to us and ask, now what? Obtaining IRS and FTB approval for tax-exempt status is just the tip of the iceberg, and we believe that the key to successfully maintaining favorable tax-exempt status is to ensure that proper written governance policies and procedures are adopted and followed from the get go. These policies and procedures provide for the segregation of duties, control of personnel and assets, execution of transactions, and record keeping requirements. Having these internal oversight procedures in place is important for two main reasons:

1)  When governance issues and problems arise (as they inevitably do), the procedures can help the charity deal with the problem so that the chances of it escalating and rising to the level of an investigation by the IRS, the Attorney General (“AG”), or other governmental agencies are reduced, and

2)  If a government agency such as the IRS or the AG initiates an audit or investigation of the charity, and the charity is able to demonstrate that it adopted well written governance policies and procedures far in advance of the problem and that the Board of Directors and officers have made a good faith effort to comply with them, then the organization’s chances of coming out of the investigation with it’s tax-exempt status in tact are increased.

And if these reasons are not enough, in many states (including California), having certain written governance policies in place is required by law! Whistle blower protection and prohibitions on document destruction are required under the federal Sarbanes-Oxley Act of 2002, and in California, the establishment of governance policies is required under the California Nonprofit Integrity Act of 2004.

In subsequent blogs we will describe what policies the IRS and the AG requires charities to adopt in connection with the following governance issues:

1. Good record keeping
2. Due diligence
3. Duties of loyalty and conflicts of interest
4. Private inurement
5. Private benefit
6. Code of ethics
7. Whistleblower policy
8. Compensation practices
9. Transparency
10. Disclosure statements

Stay tuned for our upcoming blogs on these and other subjects of interest to all charities, and as always, feel free to contact us for further information regarding these topics.

The Requirement

All tax-exempt organizations must file Form 990, 990-EZ, 990-N or 990-PF with the IRS annually.  If the nonprofit organization is other than a church, or certain other excepted entity, and normally has gross receipts of $25,000 or less, it must electronically file Form 990-N, Return of Organization Exempt From Income Tax.  If an organization has gross receipts less than $1,000,000 and total assets at the end of the year less than $2,500,000, it may choose to file Form 990-EZ, Short Form Return of Organization Exempt From Income Tax, instead of Form 990.  For exempt organizations having gross receipts more than $1,000,000 and total assets more than $2,500,000, Form 990 (as revised for 2008) must be filed.  The deadline for filing Form 990 (or one of its versions) is the 15th day of the 5th month after the organization’s accounting period ends (i.e., May 15 for calendar year filer).

The Consequence of Not Fulfilling The Requirement

Tax-exempt organizations that do not satisfy annual 990 filing requirements for three consecutive years automatically lose their tax-exempt status.  If an organization loses its exemption, it will have to reapply to regain its tax-exempt status.  Any income received between the revocation date and renewed exemption may be taxable.

The Relief – For Small Organizations Only

The IRS announced on July 26, 2010 that it is providing one-time relief for small organizations (i.e. organizations with gross receipts less than $1,000,000 and total assets at the end of the year are less than $2,500,000) that have filing due dates on or after May 17, 2010 and before October 15, 2010 to return to compliance and retain their tax-exempt status even though they failed to file for three consecutive years.  This one-time relief benefits only Form 990-N (e-Postcard) and Form 990-EZ filers.  Tax-exempt organizations required to file Form 990 or Form 990-PF are ineligible and their exempt status is automatically revoked if they fail to file for 3 consecutive years.

Small organizations required to file Form 990-N simply need to go to the IRS website, supply the eight information items called for on the form, and electronically file it by October 15, 2010.  Tax-exempt organizations eligible to file Form 990-EZ must file their delinquent annual information returns by October 15, 2010 and pay a compliance fee.

The IRS issued a list of organizations for which the IRS does not have a record of a required annual filing for 2007 and 2008, and whose 2009 return, due on or after May 17 and before October 15, 2010, has not yet been received.  In California alone, the list of nonprofit organizations at risk of losing their tax-exempt status because they failed to file for 2007, 2008, and 2009 is 1,162 pages long; with an average of 30 organizations per page, that means that approximately 35,860 California tax-exempt organizations may automatically lose their tax exempt status if they do not file From 990-EZ or Form 990N by October 15, 2010.  However, the list may also include organizations that were required to file Form 990 or Form 990-PF.  As stated above, these organizations are not eligible to take advantage of this one-time IRS filing relief to bring them into compliance.

Not included on the list but still at risk of automatically losing their tax exempt status?  Subordinates in group rulings for which the parent has not filed a required group return; very small section 501(c)(3) public charities not required to file an application for exemption; and other section 501(c) organizations not required to file an application for exemption.

The Lesson to be Learned

If you are a small tax-exempt organization (i.e. your gross receipts are less than $1,000,000 and total assets at the end of the year are less than $2,500,000), and you have not filed your 990-N or 990-EZ for the past 3consecutive years, you must file the applicable version of Form 990 by October 15, 2010 at the latest to avoid automatically losing your tax-exempt status.  For questions about annual filings for tax-exempt organizations, or nonprofits in general, please contact us.