Small Charities Face October Deadline on Tax Status

Tens of thousands of small charities will soon lose their tax-exempt status under federal law if they fail to meet a deadline for filing a simple eight-item informational tax form that would take them as little as five minutes to complete.

The consequences are significant for organizations that fail to file the new form with the Internal Revenue Service by October 15. And the deadline could have ripple effects throughout the nonprofit world, as organizations and the IRS will likely have to work for months to restore lost exemptions.

After the IRS announces early next year which small groups have had their exemptions automatically revoked under the law, organizations will have to reapply to the tax agency for new exemptions by filing some complicated paperwork, pay a fee of up to $850, and wait as their paperwork is processed.

During that time, groups will be liable for potentially costly income taxes on money they receive from donors for the period in which they were not exempt.

What’s more, donors will not be able to take charitable-contribution deductions on their tax returns for their gifts to such groups until the organizations regain their exemptions, which will probably cause many donors to pull back on their gifts.

Lois G. Lerner, who oversees the IRS office that monitors charitable organizations, said the tax agency has general advice for any small charity that is confused about whether it needs to submit Form 990-N, also known as the e-Postcard.

“File, file, file, and we can work this out with you later,” Ms. Lerner said. Under the law, she said, “if you don’t file, we don’t have any ability to do anything but publish your name on the automatically revoked list.”

She added: “This isn’t one where you can come in and make an argument with me. By order of the law, it just happens.”

The flurry of paperwork for the IRS comes after Congress passed a law in 2006 to help the tax agency keep better track of active organizations of all sizes and figure out which charities no longer exist. The law gave organizations with annual revenue of $25,000 or less three years of tax-filing deadlines to comply, which is why the situation has become so perilous for many organizations now.

‘White Hats’ in Peril

Some observers said they anticipate an eventual wave of complaints to the government from “white-hat wearing” organizations such as Little Leagues that never heard about the filing deadline and will wind up losing their tax-exempt status.

“People are going to be caught by surprise: There are going to be a lot of smaller organizations that are going to realize they’ve lost their tax-exempt status when their local newspaper publishes that fact, and that’s going to result in a lot of negative feedback,” said Marc Owens, a Washington lawyer who used to manage the IRS’s nonprofit branch.

If many thousands of groups face such a crisis, Mr. Owens said Congress could consider passing a new law that would allow any small organization that existed in 2006 to immediately regain its exemption by filing a Form 990-N, rather than going through the complicated, expensive process of reapplying for tax-exempt status.

“That would help the IRS by getting the forms turned in while taking away the sting from the organizations and help them comply,” Mr. Owens said.

Nobody knows for sure how many charities could soon lose their status because they fail to file their forms on time.

The IRS has released the names of 321,091 tax-exempt organizations that have not yet filed the required forms by their due date of October 15 and thus could be in jeopardy of losing their tax-exempt status as a result of the 2006 law. (An unknown number of these groups have closed their doors over the years, and the IRS will formally remove them from its books.)

Human-services organizations make up the largest share of the types of small groups that have not filed their returns—27 percent—according to the Urban Institute’s National Center for Charitable Statistics.

Mr. Owens worries that the IRS’s office that works with tax-exempt groups may not have enough staff members and money next year to cope with an influx of applications from organizations that have just lost their exemptions as well as handle the more-predictable number of applications from newly formed groups seeking an exemption for the first time.

“The IRS doesn’t have a lot of extra resources sitting around,” said Mr. Owens. “It is fully committed in any given year, so when something like this comes around, it could really distort its efforts to do its normal work.”

He added: “It could be a bit of a stretch. The IRS might have to pull revenue agents off audits, and those resources are pretty thin as it is.”

But Ms. Lerner of the IRS said that the tax agency has had more than three years to plan for the time when a greater number of applications for exempt status would be received. The IRS is prepared if necessary to “shift resources around” to cope without problems, said Ms. Lerner.

Reaching Out

Ms. Lerner said she has high hopes that numerous tax-exempt organizations will file their forms by their deadline.

“It’s not over until it’s over, and we are continuing to push to get the word out,” she said.

Ms. Lerner said the October 15 deadline is so important that she has personally responded to a plea from her own office—made to volunteers, donors, and friends of small charities—to remind organizations of the filing deadline.

“I’m no different than anybody else,” said Ms. Lerner, who is a donor to two small local charities in the Washington metropolitan area (a shelter for older pets and a rescue and foster organization for golden retrievers) and recently contacted them as a private citizen.

“I said to them, ‘I’m sure you guys are up to speed, but, just in case, could you please take a look?’” Ms. Lerner said. “I got responses back from both of them that, Yes, they had filed their appropriate forms and they were on target.” She added: “I did the reachout. I hope everybody will.”

Under the 2006 law, organizations that never had to regularly file returns in the past—those with revenues of $25,000 or less—must now file a return that requires basic information, such as a mailing address and the name of a principal officer.

While the first deadline for groups was May 17, so many organizations failed to file that the IRS extended the deadline to October 15.

The IRS also moved from May 17 to October 15 the filing deadline for slightly larger groups that qualify to fill out the Form 990-EZ but have failed to do so for the past three years as the law now requires.

These groups may now catch up by paying a fee of up to $500 and taking other steps to comply with the new law.

For details on all aspects of the filing deadlines for tax-exempt organizations, go to the IRS’s web site.