Tuesday, August 10, 2010

Understanding the Government’s Crackdown on Form 990-N Filers

Much has been written about the government’s crackdown on small charities. Websites are replete with information about the Form 990-N filing requirement for nonprofits with gross receipts of $25,000 or less.

Sadly, much of the reporting has been less than accurate—and that is being very polite. Here are a few examples that are reflected on the Internet today by four different highly respected organizations:
  • “Most faith-based organizations are not required to file Form 990.” Highly confusing. This statement would be true only if churches are included in the definition of “faith-based organizations.” When the term “faith-based organizations” is used, the reference is usually to parachurch organizations exclusive of churches.
  • “What organizations are exempt from filing Form 990? Faith-based organizations.” False—same reason as above.
  • “Certain organizations are not required to file Form 990. This includes religious organizations.” False. There is no general exemption from filing Form 990 for religious organizations.
  • “Charitable organizations other than churches that do not file a tax return with the IRS for three consecutive years now automatically lose their exempt status.” Close, but not quite. This is almost true but not quite. There are charitable other than churches that are not subject to this requirement, i.e, religious orders and integrated auxiliaries of churches.
So, it is no wonder there is confusion about how to comply with the law concerning Form 990-N. ECFA requires its members to comply with the law (Standard 4), but since ECFA members must annually have $$50,000 or more of gross receipts, the Form 990-N does not directly apply to ECFA members. However, some of our members provide assistance to other ministries which have $25,000 or less of annual gross receipts. Thus, this is an important issue for those member organizations.

Here are the short-strokes on this issue:
  • Certain small (gross receipts of $25,000 or less during tax years beginning in 2007, 2008, and 2009) tax-exempt organizations that fail to satisfy annual filing requirements for three consecutive years are at risk of losing their tax-exempt status if they have not filed for 2007, 2008 and 2009.
  • The “drop-dead” deadline initially set for May 17, 2010 has been delayed until October 15, 2010
  • The latest announcement from the IRS is reflected on their website: http://www.irs.gov/charities/article/0,,id=225705,00.html
  • Certain religious organizations are exempt from filing Forms 990, 990-EZ and 990-N. As described in the instructions for Form 990 (http://www.irs.gov/pub/irs-pdf/i990.pdf), those exempted from the filing requirement are:
    • A church, an interchurch organization of local units of a church, a convention or association of churches, or an integrated auxiliary of a church as described in Regulations section 1.6033-2(h) (such as a men’s or women’s organization, religious school, mission society, or youth group).
    • A church-affiliated organization that is exclusively engaged in managing funds or maintaining retirement programs and is described in Rev. Proc. 96-10, 1996-1 C.B. 577.
    • A school below college level affiliated with a church or operated by a religious order described in Regulations section 1.6033-2(g)(1)(vii).
    • A mission society sponsored by, or affiliated with, one or more churches or church denominations, if more than half of the society’s activities are conducted in, or directed at, persons in foreign countries.
    • An exclusively religious activity of any religious order described in Rev. Proc. 91-20, 1991-1 C.B. 524.
    • An entity under a group exemption. If you represent such an entity, it is wise to confirm your organization is listed on the annual Form 990 or other filing made by the organization representing the group. Otherwise, the filing of the Form 990-N may be appropriate.
Final thoughts. Some organizations that believe they are exempt from the Form 990-N filing requirement are really subject to the filing of Form 990-N. Conversely, some who think they are subject to the filing are really exempt. How do you know whether your organization is subject to the filing or exempt from it? Consult your tax advisor.