Hundreds of nonprofits face loss of tax-exemption

July 19, 2010
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The Cannon Township Historical Society is on the list.

So are the North Hills Classical Academy, the Grand Rapids AIDS Resource Center and the Lake Macatawa Shoreline Association, as well as 4H groups and high school band and athletic boosters from Holland to Rockford.

They are among more than 500 nonprofits in Kent and Ottawa counties, nearly 200,000 across the nation, that are in danger of losing federal tax-exempt status because they missed a May deadline to file a six-question online report with the Internal Revenue Service.

Small nonprofits — those with annual gross receipts of less than $25,000 — that missed the deadline could revert to for-profit status, owing taxes, facing corporate filing requirements and losing federal tax exemptions for donors, said local nonprofit experts. They would need to apply again for tax-exempt status, which carries a $400 fee and possibly months of waiting.

“Technically, your exempt status is revoked as of May 17,” said accountant Peggy Bishop, partner-in-charge of the Nonprofit Industry Team at Beene Garter. “The risk of losing your tax-exempt status means you are now a for-profit organization. You’re basically treated just like a regular business.

“What the IRS is saying right now is go ahead and file it now, even though it’s late. You go on this website and you answer about six questions and you’re done. It’s not even 10 minutes to do this and it takes no level of expertise.”

A July report from the Urban Institute’s National Center for Charitable Statistics said that 18 percent of the 1.6 million nonprofits in the U.S. face the loss of tax-exempt status after missing the deadline for three years. An estimated 714,000 organizations were small enough to fall under the 990-N requirement.

In Michigan, 20 percent of 23,361 small nonprofits are non-filers. In Kent County, 421 nonprofits are on the endangered list; in Ottawa County, the number is 126.

In the past, the IRS did not require these small nonprofits to submit a tax form, Bishop said. Now they must fill out the online-only 990-N at

The report said that some of the affected organizations are defunct, while others are unaware of the new regulation, which was part of the Pension Protection Act of 2006. The IRS conducted an “unprecedented” campaign to inform small nonprofits by using mailings and publicity, but some are still in the dark, the report stated.

Arlene Augustine, treasurer of the Cannon Township Historical Society, said she’d never heard of the new e-postcard requirement. The organization’s volunteers run the Cannon Township Historical Museum, publish a newsletter and meet occasionally.

“I thought we had filed everything,” Augustine said. “What are you supposed to do if you’re not online?”

Then there are organizations like the Grand Rapids AIDS Resource Center.

Kent County Health Department Deputy Health Officer Bill Anstey said his recollection is that the center disappeared because state funding dried up and new treatments turned Acquired Immune Deficiency Syndrome into more of a chronic, albeit serious, disease.

“(The center) kind of just dissolved,” Anstey said. “The best we can recall, it’s been at least 10 years.”

Jeffrey Power, a lawyer at Warner, Norcross and Judd, said the IRS was concerned that small nonprofits were unregulated, that their numbers were inflated by defunct organizations and wanted to give the public at least basic information about active groups.

The law requires that, starting with 2008 filings for the 2007 tax year, nonprofits with gross receipts under $25,000 must file online Form 990-N, known as the e-postcard, by the 15th day of the fifth month following the close of their tax year. A tax year that ends Dec. 31, Power said, puts the first filing deadline of the year in May. Deadlines roll throughout the year, depending on a nonprofit’s individual tax year. Those that close the tax year on June 30, for example, have a Nov. 30 deadline.

Those that failed to file for three years automatically lose tax-exempt status, Power said.

“It’s become a draconian penalty,” he said. “I don’t know that there is any legislative attempt to change this nor is there anything in the service (IRS) which is moving along which would lighten the penalty.”

The requirement does not apply to private foundations or churches and their affiliates.

Another provision impacts the current tax year and eases the filing burden for slightly larger nonprofits, Power said.

For the current tax year, with filing deadlines in 2011, nonprofits with gross receipts in the range of $25,000 to $50,000 that now must file the 990-EZ form will be able to file using the simpler e-postcard.

Also starting with next year’s filings, nonprofits with gross receipts up to $200,000 and whose assets are no more than $500,000 will be able to file a 990-EZ instead of the regular 990 form.

These changes should reduce the financial and administrative burden, Power said, because filing a 990, which was revised two years ago, generally requires a tax professional.

In the meantime, Bishop said she is awaiting further guidance from the IRS for small nonprofits that missed the deadline and now are in limbo.

“The little ones, they are all very good-hearted people. They just don’t always know what’s required of them, in many instances,” Bishop said. “You get somebody who is in their position for a year and then somebody new comes in, and there’s just no continuity.”

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