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As of May 15, the IRS can declare that any nonprofit that has not filed a Form 990 for three years is no longer a tax-exempt entity.  If a 501 (c)(3) has had its finances managed by another 501(c)(3) and the larger 501(c)(3) has filed a consolidated Form 990 for the past three years without mentioning that it is the fiscal agent for the smaller nonprofit, is the smaller nonprofit going to lose its tax-exempt status because it has not filed separately for three years?

Probably yes.  The IRS is required to revoke the exempt status of any 501(c) nonprofit organization, not just charities exempt under section 501(c)(3), if it has not filed a required tax return for three years.  Those organizations with annual revenue normally under $25,000, and therefore exempt from filing Form 990 or 990-EZ, are now required to file the “electronic postcard” Form 990-N.  (See Ready Reference Page:  “Small Nonprofits Must File E-Postcard to Retain Exemption”) Since churches are not required to file a tax return they will not be affected by this new rule.

For calendar year organizations, the first return was due on May 15, 2008.  This is now the third year, and failure to file in 2008, 2009, and 2010 will cause loss of exemption.  Some suggest that as many as a quarter of all exempt organizations will fail to file when required.  The IRS seems likely to establish some sort of procedure for organizations to regain their status, but it would be a whole lot easier to file on time and avoid having to recover later.

Comments from our Readers

Regarding the requirement to file a Form 990 (N, EZ, or the full form), the May 15, 2010 date only applies for EOs with fiscal years that match the calendar year. For an EO with a July 1-June 30 fiscal year, for example, it has until Nov 15, 2010 to file its first return. --B.W. via e-mail

5/5/2010