Form 990

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Tax-exempt organizations that have had their tax-exempt status automatically revoked because of failure to file required annual returns for three consecutive years can follow new procedures for seeking reinstatement of their tax exemptions.  The IRS released these procedures in Revenue Procedure 2014-11 on January 2, 2014.  The Revenue Procedure, which is the first IRS guidance on this topic since 2011, outlines three procedures that organizations may use to apply for reinstatement.

First, under a “Streamlined Retroactive Reinstatement Process,” small organizations eligible to file a short form (Form 990-EZ) or postcard return (Form 990-N) may have their tax-exempt status retroactively reinstated to the date of revocation, provided that they have not previously had their exemptions automatically revoked.  Under this procedure, organizations must complete and submit Form 1023 (Application for Recognition of Exemption Under Section 501(c)(3)) or Form 1024 (Application for Recognition of Exemption Under Section 501(a)) not more than 15 months after revocation.

Earlier this year the IRS issued drafts of the 2013 Form 990, Return of Organization Exempt From Income Tax, and 2013 Form 990 Instructions.   Although there were no major changes to the Form 990, there were several changes and clarifications in the draft instructions, including:

  • Short Period Returns.  The draft instructions clarify that a short period return cannot be filed electronically unless it is appropriately designated as an initial return or final return.
  • Change in Accounting Method.  The draft instructions provide that an organization that files Form 990-N (electronic postcard) must report its accounting changes on Form 990, Form 990-EZ or Form 1128.
  • Documentation.  The draft instructions clarify what documentation must be attached to Form 990 to support a name change, or by an organization that has terminated, dissolved, merged or had its exemption revoked by the IRS.
  • Public Support Test.  The draft instructions clarify when an organization can exclude from Schedule B contributors that fall below the greater-than-$5,000/2% threshold.  In order to limit the contributors an organization reports on Schedule B, an organization must complete the “support tests” in Schedule A, Part II.

IRS Exempt Organizations group has sent out more than 1,300 questionnaires to self-declared Section 501(c)(4) social welfare organizations; 501(c)(5) labor, agricultural or horticultural organizations; or 501(c)(6) business leagues.  The questionnaires are part of IRS efforts to increase voluntary compliance, learn more about self-declared exempt organizations, and determine whether self-declared exempt organizations are complying with applicable tax-exempt law.  The questionnaires are directed to organizations that are not recognized by the IRS as tax-exempt, but claim exemption under Section 501(c)(4), (5) or (6) and filed a Form 990 for tax years beginning in 2010 or 2011.  Unlike most Section 501(c)(3) organizations, these types of exempt organizations are not required to apply to the IRS for recognition of exemption.

At the end of January, 2013, the IRS Exempt Organizations Group (“EO”) released its annual report, highlighting EO’s 2012 accomplishments and outlining its priorities for 2013.  This year’s report was significantly more detailed and informative than last year’s report and workplan.  Some accomplishments and priorities of interest are described below, with something for nearly everyone in the tax-exempt sector.

2012 Highlights:

  • Exchange of Information with States.  EO continued to see an increase in the number of referrals from state charity regulators and tax agencies regarding potential exempt organization tax law violations.  In FY 2011, EO received 104 referrals from 19 different states.  Some of the most common issues that are referred to the IRS from the charity regulators involve private benefits and inurement, nonfilers, political activities by § 501(c)(3) organizations, employment tax issues and organizations not operated as required by their exempt status.  Conversely, under recently expanded authority, the IRS is allowed to disclose to certain state charity regulators significantly more information about exempt organizations, including proposed and final revocations of tax exemption for § 501(c)(3) organizations, proposed and final notices of deficiency for Chapter 42 excise taxes, § 501(c)(3) exempt organizations applications in process and proposed or final denials of these applications.  At present, only eight state tax and charity agencies in seven states have met the requirements to receive these disclosures; nonetheless, these agencies received approximately 27,000 disclosures in FY 2011.
  • Hospital Community Benefit Reviews.  As we have previously noted, EO is required under the Affordable Care Act to review the community benefit activities of all tax-exempt hospitals every three years.  This work continued in the past year.  EO will use the information from the reviews for research, reporting and compliance purposes, as well as to identify areas where additional guidance, education or Form 990 changes are needed.

The IRS continues to implement the “three years and you’re out” rule for Form 990 non-filers added by the Pension Protection Act of 2006 (the “PPA”).  That legislation amended Section 6033 of the Internal Revenue Code to provide that exempt organizations required to file a Form 990-series return (i.e., a Form 990, Form 990-EZ or Form 990-N) that do not file the return for three consecutive years will have their tax-exempt status automatically revoked going forward.  Organizations subject to automatic revocation are required to file exemption applications with the IRS to regain exempt status, even if they were not originally required to file an application for recognition of exempt status.  Further, exempt status will not be restored retroactively unless the IRS finds there was reasonable cause for the failure to file.

On July 25, 2012, the Oversight Subcommittee of the House Committee on Ways and Means, led by Congressman Charles W. Boustany Jr., MD (R-LA), heard testimony from the IRS and experts in the tax exempt community on the growing complexity of non-profit organizational structures, tax issues concerning unrelated business income and the redesigned Form 990. The hearing was the second in a series examining compliance and transparency issues facing non-profit organizations.

Treasury just released the 2011–2012 Priority Guidance Plan. The Plan lists 317 projects that are priorities for Treasury resources through June 2012. Included in these projects are 13 projects directly related to Exempt Organizations. Many of the other projects such as the 66 employee benefits, executive compensation and employment taxes may affect Exempt Organizations.
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The IRS today has released a draft version of the form that small businesses and exempt organizations will use to calculate the small business health care tax credit when they file income tax returns next year. The IRS also announced how eligible exempt organizations — which do not generally file income tax returns — will claim the credit during the 2011 filing season.
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Small not-for-profit organizations at risk of losing their tax exemption because of their failure to file the Form 990-N or Form 990-EZ for the 2007, 2008, and 2009 taxable years can preserve their status by filing these returns by October 15, 2010. The IRS announced yesterday a one-time relief program for these organizations that will give them a “pass” until October 15, 2010.
Two types of relief are available for small exempt organizations — a filing extension for the smallest organizations required to file Form 990-N and a voluntary compliance program (“VCP”) for small organizations eligible to file Form 990-EZ.
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It is essential that all public charities understand the basic rules surrounding their exemption. Indeed, achieving tax-exempt status is only half the battle – once an organization has established that it is tax-exempt, it must set up the proper checks to ensure that it meets ongoing compliance obligations. Plainly, certain activities can jeopardize an organization’s tax-exempt status or subject it to penalties. Because the IRS revised its Compliance Guide for Public Charities and we are in such a highly regulatory environment, we thought it would be helpful to discuss some of the basic rules surrounding tax exemption.
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