gcsv2011 federal tax status revoked- kristen gronbjerg
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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)
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)
www.indiana.edu/~nonprof
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)
www.indiana.edu/~nonprof
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!
www.indiana.edu/~nonprof
Who lost their status? (active only)
• Non-filers (small?)• 14% vs. 9%
overall• 95% of revoked
NPs
www.indiana.edu/~nonprof
Who lost their status? (active only)
• Non-filers (small?)• Recent ruling
dates• 1990 or later• More than half of
all revoked NPs
www.indiana.edu/~nonprof
Who lost their status? (active only)
• Non-filers (small?)
• Recent ruling dates
• Not primarily c3s but…• Cemeteries• Social welfare
groups• Business groups• 24% of all
revoked NPs
www.indiana.edu/~nonprof
Who lost their status? (active only)
• 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
www.indiana.edu/~nonprof
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
www.indiana.edu/~nonprof
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
www.indiana.edu/~nonprof
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”
www.indiana.edu/~nonprof
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.
www.indiana.edu/~nonprof
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
www.indiana.edu/~nonprof
Federal tax-exempt status
• 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)
www.indiana.edu/~nonprof
Federal tax-exempt status
• 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
www.indiana.edu/~nonprof
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
www.indiana.edu/~nonprof
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…..
www.indiana.edu/~nonprof
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….)
www.indiana.edu/~nonprof
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
www.indiana.edu/~nonprof
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
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