IRS Revokes Tax-Exempt Status of Many Nonprofits

On June 8, 2011, the Internal Revenue Service (IRS) announced that approximately 275,000 nonprofit organizations automatically lost their tax-exempt status because they did not file legally required annual reports for three consecutive years. While agency officials said they believe that the vast majority of tax-exempt organizations are in compliance with the new filing requirements, and that most of the organizations that failed to comply are defunct, the IRS is providing further assistance to existing organizations with applying for reinstatement of their tax-exempt status.

Under the Pension Protection Act (PPA) of 2006, most organizations that have been granted tax-exempt status are required to file an annual information return or notice with the IRS using Forms 990, 990-EZ, 990-PF, or 990-N. The law imposed a filing requirement for the first time in 2007 for very small organizations (with annual gross receipts of $25,000 or less through 2009, or $50,000 or less starting in 2011), but these groups are permitted to file using the 990-N "e-postcard." The law automatically revokes the tax-exempt status of any organization that does not file required returns or notices for three consecutive years; in this case, for 2007, 2008, and 2009. Nonprofits that are not on the list because they have met the filing requirements may want to contact donors, funders, and other constituents, assuring them that their organization is in good standing with the IRS, and that their donations will remain tax-deductible.

IRS officials said they made extensive efforts to inform nonprofit groups of the changes in the law through multiple outreach and education avenues, including mailing more than 1 million notices to organizations that had not filed. In 2010, the IRS published a list of at-risk groups and gave smaller organizations an additional five months to file required notices and come into compliance. During this extension period, 50,000 organizations filed. The 275,000 nonprofits on the list represent more than 17% of the 1.6 million organizations previously listed as tax-exempt in IRS Publication 78.

"The IRS has gone the extra mile over the past several years to help make tax-exempt groups aware of their legal filing requirement and allow them additional time to file," said IRS Commissioner Doug Shulman. "Still, we realize there may be some legitimate organizations, especially very small ones, that were unaware of their new filing requirement. We are taking additional steps for these groups to maintain their tax-exempt status without jeopardizing their operations or harming their donors."

The IRS has issued guidance on how organizations can apply for reinstatement of their tax-exempt status, including retroactive reinstatement, and offered transition relief for tax-exempt organizations with annual gross receipts of $50,000 or less for 2010. The relief allows these small organizations to regain their tax-exempt status retroactive to the date of revocation, and pay a reduced application fee of $100 rather than the typical fees of $400 or $850, provided they file by December 31, 2012. To receive retroactive reinstatement, a nonprofit must re-file Form 1023 or 1024, and demonstrate reasonable cause for failure to file an annual return. These reinstatement procedures are not, however, available to organizations that lost their exempt status as a result of an IRS examination.

The list of organizations whose tax-exempt status has been revoked is available on the IRS website, and includes each organization's name, Employer Identification Number (EIN), and last known address. The list also includes the effective date of the automatic revocation, and the date it was posted. The IRS said it will update the list monthly to include additional organizations that lose their tax-exempt status. Publication 78, Cumulative List of Organizations, is also being updated to reflect the changes.

The IRS assured that the listing should have little or no impact on donors who previously made deductible contributions to organizations whose tax-exempt status has been automatically revoked because donations made prior to the list's publication remain tax-deductible. However, organizations that are on the list and are not subsequently reinstated are no longer eligible to receive tax-deductible contributions, and the income they receive may be taxable. An organization that loses its tax-exempt status could, for example, be subject to corporate income taxes at the Federal level, and may be liable to pay state and local taxes, including property and sales taxes.