Gcsv2011 federal tax status revoked- kristen gronbjerg

Federal Tax-Status Revoked!2011 Governor’s Conference on Service and

VolunteerismIndianapolis, October 13, 2011

Kirsten A. GrønbjergSchool of Public & Environmental Affairs (SPEA) and

Center on Philanthropy at Indiana University

www.indiana.edu/~nonprof

Federal tax-status revoked!

• 275,000 nonprofits just lost their IRS tax-status

• What happened?• Who lost their status? • Why? Overview of federal and state

regulations• How do you make sure it doesn’t happen

to you?

For full details, see IRS Exempt Status Initiative: Indiana Nonprofits and Compliance with the Pension Protection Act of 2006 by Kirsten Grønbjerg, Kellie McGiverin-Bohan, Kristen Dmytryk & Jason Simons. SPEA and Ct. on Philanthropy at IU, July 1, 2011 (www.indiana.edu/~nonprof)

http://www.indiana.edu/~nonprof


What happened? IRS announcement on June 9, 2011….

Tax-exempt status revoked for 275,000 nonprofits

Including 6,152 in Indiana 3,381 on “active” IRS list, 2,771 from earlier IRS

listings

Why did the IRS do this to so many nonprofits? They failed to meet new IRS reporting

requirements!! Blame the Pension Protection Act of 2006

Many new rules increase transparency and accountability (new Form 990)

Entirely new reporting requirement for “non-filers” (Form 990-N)


New reporting requirements

• All must now file annually, unless…• Church or its integrated auxiliary; convention or association

of churches; entity included in group return, government entity..

• If fail to file 3 years in a row lose exemption• New Form: 990-N (e-postcard for “non-filers”)

• If revenues less $50,000 8 questions; online

• All other exempt entities• Most: revised Form 990-EZ, 990, 990-PF, or 990-BL

(“filers”)• More transparency & accountability detail• Different revenue/asset threshold levels

• Other: Form 5500 (employee benefit trust), Form 1065 (religious orders)


Timeline of IRS events• Jan 1, 2007 – start the 3 year clock!• May 17, 2010 – deadline (initial)• But “one-time” extension to October 15, 2010

• June 30, 2010 – released “at risk” list• 324,000 nationally• 6,950 in Indiana• Including 108 of our respondents special initiative

• October 15, 2010 – final, final deadline• June 9, 2011 – the other shoe

dropped!


Who lost their status? (active only)

• Non-filers (small?)• 14% vs. 9%

overall• 95% of revoked

NPs



• Non-filers (small?)• Recent ruling

dates• 1990 or later• More than half of

all revoked NPs



• Non-filers (small?)

• Recent ruling dates

• Not primarily c3s but…• Cemeteries• Social welfare

groups• Business groups• 24% of all

revoked NPs



• Non-filers (small?)• Recent ruling dates• Not primarily c3s• Unconnected

groups• “Central” – no

group exemption• Independent or

auxiliary without group exemption

• 80% of all revoked NPs

Group exemptions


Why did they fail to report?

Were they defunct, careless, out-of-touch, confused?

Answer: Look at results of our special initiative• Focus: 108 nonprofits on June 2010 “at-risk” list• Had participated in at least one of our nonprofit

surveys

• Alert them to the risk as “thank you” for participating• If able to contact: explain how to avoid revocation• If not: find new contact information and try to reach

again• Also, check to see if incorporated in state and if

current • Check IRS listings to see if avoided revocation


What happened to “our” group?

• Some filed in time – 38%• More than for all “at-risk” Indiana

nonprofits – 22%

• Some were likely defunct – 31%• Confirmed dead – 17%• Didn’t maintain incorporation –

14%

• Some unable to determine – 5%

• But many still alive – 27%• We had direct contact – 11%• Have maintained incorporation –

16%• 43% of those that lost status


So why didn’t they file?

• Defunct? Yes, some were (about one-third)• Careless? Yes, some knew, but still didn’t file

• 38% of those we had direct contact with, didn’t file (11% of all)

• Out-of-touch? Yes, many were surprised when told• Have never had to do anything once got exempt status• Out of the loop – new, small, not closely linked to other

nonprofits• Very likely that they didn’t know about the new

requirements

• Confused? Yes, some/many were confused• “This doesn’t apply to us” or “we file forms” or “we get

money from the government”


Why so much confusion/ignorance?

Many good reasons – nonprofit legal status is complex

DISCLAIMER: The following does NOT constitute

legal advice. Consult your own legal counsel for specific circumstances

that may apply to your organization.


Federal tax-exempt status

• Request employer identification number (EIN) – 1st step• Form SS4• Type of entity: can check church or other nonprofit

organization• Reason: can check hired employees or banking purposes

• Request federal tax-exempt status – 2nd step ($400-$850 fee)

• Form 1023 – if wish status under subsection 501(c)(3)• Not required if less than $5,000 in revenues, a church,

government, or subsidiary of other reporting organization

• Form 1024 – all other subsections of 501(c)• Not required if home owners association, block club, political

party or subsidiary of other reporting organization, or if don’t mind paying taxes



• Request employer identification number (EIN) – 1st step

• Request federal tax-exempt status ($400-$850 fee)• If exempt status granted• Included on Exempt Organizations Master File (~BMF)• All must now file annual report (Form 990 or variants) • Must withhold taxes if have employees and file other required

forms

• Some may receive tax-deductible gifts (sect. 170 of tax code)• 501(c)(3): charit able, religious, education al, scientific, literary,

testing for public safety, fost ering national or inter na tion al amateur sports competition, preventing cruelty to children or ani mals ………….

• But also for some purposes only: veterans groups (c19, c23), fraternal organizations under lodge system (c8, c10), and cemeteries (c13)



• Request employer identification number (EIN) – 1st step

• Request federal tax-exempt status ($400-$850 fee)

• Special issues for 501(c)(3) exempt entities • Must not engage in partisan politics or substantial

lobbying• Some are “public charities”• Have purposes specified in tax code and/or meet “public

support” test

• Otherwise “private foundations” or “failed public charities” • Less generous tax benefits to donors, but more control by

donors• Must meet “pay-out” requirement and pay excise tax on

assets


State incorporation, tax exemption

• State incorporation – voluntary• Establishes organization as legal entity• Rights and responsibilities under state law

governance structure, protects name, enter into contracts, liability issues

• May incorporate in several states (“foreign”)• Periodic (annual) reports and fees to maintain

status

• Exemption from state and local taxes • Aligned with, but not identical to IRS

requirements• Exemption from income, sales, and/or property

taxes• May require ongoing filing and/or reporting


Other state/local regulations

• Register/file with state officials (limited in Indiana)• Many differences among states in whether require

registration related to soliciting charitable donations and/or holding charitable funds, endowments or trusts; managed by state charity officials (see Unified Registration Statement: www.multistatefiling.org)

• May need to register in non-domiciled states if solicits or receives donations from those states (“Charleston Principles”)

• Some states: professional fundraiser, consultants, or solicitors must register (including Indiana)

• Some states: register if engage in charitable gaming/gambling (including Indiana: Indiana Gaming Commission)

• Register/file with local gov’t: permits, land use, etc…..

http://www.multistatefiling.org/


Enforcement issues

• Federal level• Internal Revenue Service – adherence to tax-exempt

regulations, employee tax-withholding, excise taxes, etc…• Federal Election Commission – if involved in partisan

politics• Federal Trade Commission – for issues involving charity

fraud, fraudulent solicitations (consumer protection issues)

• State level• Attorney General – can take legal action on behalf of

general public (including donors): governance issues (duty of care), fraudulent solicitations, “do not call” issues

• Local level – permits, police matters (embezzlement, abuse….)


Revoked! What happens next?

• Seek retroactive reinstatement of exempt status (15 mo.)• Demonstrate reasonable cause for not filing• Certify took all possible action to meet requirements• Document new procedures in place to prevent future

mishap

• Submit new application for exempt status• Pay fee: est. $600,000 - $1 million in IRS fees, plus other

costs• If small: reduced fee ($100) if re-apply by Dec. 31, 2012

• Become for-profit• File Form 1120 and pay federal income taxes on net

revenues

• Dissolve • But must preserve intent of charitable assets


What can you do?

• If nonprofit organization• Recognize different types of legal status• File required forms and reports• Keep informed about regulations and reporting

requirement• Get connected to networks – and inform others in your

networks

• If consultants, educators, trainers• Help insure that nonprofit board members, staff,

volunteers and the general public understand regulatory systems

• If federal, state, local officials and regulators• Communicate using all available media• Make as extensive outreach as possible

Gcsv2011 federal tax status revoked- kristen gronbjerg

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