The IRS has granted an extension of time through October 15, 2010, for small exempt organizations to file Form 990-N to avoid automatic revocation of tax-exempt status. It has also announced a voluntary compliance program for filers of Form 990-EZ to permit them to act by the same deadline to avoid revocation.

Background

The Pension Protection Act of 2006 included a provision intended to clear out the IRS’s database of dormant exempt organizations – it stated that any exempt organization that does not file a tax return for three consecutive years will automatically lose its tax-exempt status. After that, if it still wants to be exempt, the organization will have to file a new exemption application and pay the user fee.

The same law also imposed a new requirement to file annual tax returns on exempt organizations with annual gross revenue of $25,000 or less. Previously, these organizations were generally not required to file annual returns. This change does not apply to private foundations because they have always been required to file annual returns, regardless of revenue. It also does not apply to churches and some church-related organizations, as they remain exempt from the filing requirement. The new rule does, however, affect most small public charities and also some non-charitable exempt organizations such as social clubs, labor organizations and trade associations.

The good news for these small organizations is that they may file a simple electronic return called Form 990-N, with only a minimum of information required. But the bad news is that many of these organizations never heard about the changes since tax returns were not on their radar screen.

Early in 2010, the IRS and tax practitioners became aware that automatic revocation was looming for many of these small organizations. Revocation occurs automatically after three consecutive years of non-filing, and since the new requirements became effective in 2007, the third year of consecutive failure to file would be 2009. For a calendar year organization, this meant that if no return was filed by May 17, 2010 (the date is usually May 15, but this year it was a Saturday), it would lose its tax-exempt status.

The IRS started a publicity campaign and practitioners followed suit. As May 17 approached, a mad scramble began for small exempt organizations to file the required Form 990-N. The form can only be filed electronically, and in some cases, when the organization tried to file, the IRS would not accept the return because the tax identification number was no longer in the IRS’s database of exempt organizations.

Relief for Form 990-N Filers

The May 17 deadline came and went, and there was speculation that the IRS would try to provide some further relief to organizations that missed the deadline. Until recently, it was not clear whether that was going to happen. On July 27, the IRS issued a news release announcing a one-time relief measure, extending to October 15 the deadline for organizations to file their Form 990-N and thereby avoid revocation of their tax-exempt status. But the IRS made it clear – this is a one-time relief measure, not to be repeated.

Any organizations in this situation should file Form 990-N as soon as possible, and not wait for the deadline, just in case their tax identification number is not in the IRS database. If that should occur, a phone call to IRS Customer Account Services at 1.877.829.5500 should fix the problem, but it will take some time to update the database – hence the importance of not waiting until close to the deadline.

Relief for Form 990-EZ Filers

In the same news release, the IRS announced a voluntary compliance program (VCP) for 990-EZ filers. This group consists of most exempt organizations (other than private foundations or sponsors of donor-advised funds) with annual gross receipts under $500,000 and total assets under $1.25 million. These organizations, too, may take action by October 15, 2010, to preserve their exempt status.

For these organizations, the process is not quite as simple. They have to file the past three years’ delinquent returns (2007, 2008 and 2009), submit a signed checklist agreeing to certain terms and pay a small compliance fee ranging from $100 to $500. Still, it is a valuable reprieve for an organization that might otherwise face revocation of tax-exempt status.

Out of Time, Out of Luck

Organizations required to file Form 990 or 990-PF do not qualify for this relief, so if they failed to file for three consecutive years, they are out of luck. The IRS says it cannot “undo” an automatic revocation.

An organization that suffers revocation should file a new exemption application. If approved, its exempt status will resume as of the date it files the new application and it will have to file a regular tax return (Form 1120 in the case of a corporation) for the intervening period.

The organization may, however, ask to have its tax-exempt status restored retroactively to the date of automatic revocation. This will require an explanation of “reasonable cause” for failing to file returns for three consecutive years. The outcome will depend on whether the IRS finds the explanation persuasive.

Making a List and Checking It Twice

The IRS has published on its website lists of exempt organizations in danger of losing their tax-exempt status because of not having filed returns for three years. These lists are organized state-by-state in alphabetical order. They include larger exempt organizations that are not eligible for either of the relief provisions, as well as smaller organizations that still have time to act. The IRS points out that the list is not exhaustive, so the fact that an organization is not listed on the website does not mean it is not in jeopardy.