Filing that 990 So You Can Stay Tax-Exempt

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Before delving any further into the oft-misunderstood world of 990s, here are a few of the more salient though little-known facts about them:

In a 2012 study of the 990 forms that had been filed between 2001 and 2006, Identity Founder (as reported in The Chronicle of Philanthropy) found that one in five tax-exempt organizations had included Social Security numbers on them—even though SS numbers are not required by the IRS. However, and this is the scary part, the IRS is required to make the returns publicly available; naturally, though, the Service but does not have the authority to redact Social Security numbers. Meaning . . . Yes. Whoever puts their Social Security number on a 990 has now made it available to anyone and everyone—over the Internet and everywhere else, as nonprofit organizations are required to make their IRS Form 990 (and their exemption application) available for public inspection during regular business hours.

There are over 1,616,000 tax-exempt nonprofits in the U.S.

Since 2011, more than 500,000 nonprofits across the country have automatically lost their tax-exempt status for having failed to file a 990 form three years in a row.

So if you’re a nonprofit, or planning to file as a nonprofit, the first thing you should know is, despite being able to classify yourself as tax-exempt—i.e., you do not have to pay federal taxes—most nonprofits still must file an informational return with the IRS. That annual report is a Form 990. Which actually comes in several forms: 990, 990-EZ, 990-N, and 990-PF.

And which form you need to file depends on the filing year and the gross receipts of your organization. All 501(c)(3) private foundations file a 990. Nonprofits with gross receipts of more than $50,000 file Form 990 or 990-EZ; nonprofits with gross receipts of less than $50,000 file Form 990-N; and private foundations file Form 990-PF.
The 990 was essentially designed for transparency—to allow the IRS and the general public to evaluate a nonprofit’s operations. The form includes the nonprofit’s mission and information about its programs and finances.

The key to the 990s is to realize that not all nonprofits are created alike. Ergo, not all nonprofits are required to file annual returns. Which ones are truly exempt? Most faith-based organizations, religious schools, and missions or missionary organizations; subsidiaries of other nonprofits (ones covered under a group return that are filed by the parent organization); many government institutions; and state institutions that provide essential services.

The first thing to do, before you even check with the IRS as to whether or not your organization needs to file a return, is to think about filing a 990 just in case. Organizations that have not yet been recognized as exempt still have a duty to file a Form 990. And the duty to file begins on the date of your incorporation. Even if the customer-service agent at the IRS tells you, Hey, you’re fine. You’re a nonprofit. No need to file that 990. Don’t believe them (unfortunately). Better to be on the safe side and file anyway. Better yet, check with us at Integrity Accounting. We know the rules. We know who qualifies as tax-exempt and who doesn’t. And we can file that 990 for you.

Because, even when you do know you need to file that 990, many nonprofits forget to do so. Or they file late.

For most nonprofits, that date to file is nigh: May 15th, for many. (Technically, it’s due on the 15th day of the 5th month after the end of the organization’s taxable year. Usually, then, May 15.) And many nonprofits forget to file. We won’t let that happen. And the failure for not filing is costly. If an organization fails to file a 990 three years in a row, the IRS will automatically revoke its tax-exempt status. (Hence, that figure above, which is a whole lotta lost nonprofits.) The IRS, as pointed out by Cullinane Law Group attorney Mollie Culllinane, a Texas Super Lawyer who specializes in nonprofit law, has no appeal process for automatic revocations due to failure to file. Without this status, your organization could be subject to paying income taxes.

Other penalties are just as severe. Organizations with revenues over $1 million can be dinged for as much as $50,000, and ones with revenues below $1 million can be held accountable for $10,000. While organizations may request two three month extensions, in the words of charitylawyerblog.com columnist and nonprofit law expert Ellis Carter has pointed out, no organization should assume that they’ll get a pass or an extension or that any penalty will be abated or forgiven. Even organizations that have just been created or those with zero revenue, they need to file a Form 990.

And if you’re the head of your nonprofit and your goal is to file a 990 yourself, thinking you’ll be saving your nonprofit a little money—that’s one of the downfalls of many a nonprofit. You forget. You get behind. You fail to file. Then, Wham! There goes your tax-exempt status.

Other pitfalls, as again pointed out by charitylawyerblog.com’s Carter: using your state’s form for nonprofit article of incorporation, which usually does not include the provisions that the IRS requires. Misclassifying your employees. Pulling bylaws off the Internet or off other organizations. Forming an LLC (the IRS will not view an entity with private owners as operating for exclusively tax-exempt purposes. And failing to file 990s for that startup period. As stressed by Carter, if you’re filing as a nonprofit, the IRS recognizes you as such from that moment you file. Even if it’s a short year, even if you bring in no revenue. And as Carter says, “If you don’t file 990s while you are waiting for tax-exempt status, the IRS may revoke an exemption immediately upon granting it.”

These are only some of the reasons—some of them obvious, some not so obvious—why you need to file a 990. And why you’d be doing yourself and your nonprofit a favor by talking to us here at Integrity Accounting. We will help you figure out just how tax-exempt you really are, and whether or not you are required to file that 990.