The IRS famously changed the rules in 2006 to require tax-exempt organizations to file some form of Form 990 even if they have zero revenue. Typically, small and new organizations with revenues below $50,000 will file Form 990-N. Form 990-N is a simple online form that requests only eight pieces of information. Failure to file for three consecutive years will result in automatic revocation of tax-exempt status.
In spite of all of the publicity and information about the not so new stricter filing requirement, we keep seeing organizations lose their exemption for failure to file. Failure to file is often due to a failure to understand the following facts:
- Organizations that have not yet been recognized as exempt still have a duty to file a Form 990.
- The duty to file begins on the date of incorporation.
- The first tax year is typically a short tax year from the date of incorporation to the end of the organization’s tax year.
- An organization needs to file even if it has zero revenue.
- Churches are exempt from filing Form 990; however, many other types of religious organizations do have a duty to file.
- Organizations under a group exemption have a duty to file. Parent organizations have the option to file a consolidated return for all subordinates however it is far more common for subordinates to file their own returns.
We have had multiple clients tell us they called the IRS and were told they did not have to file until they got their tax-exempt status. SO WRONG! Unfortunately, for groups that take a long time to apply, we have seen the IRS grant exemption and immediately revoke it for failure to file during the time the organization’s status was pending. Sadly, you can’t rely on information provided by the customer service employee answering the phone at the IRS.
Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide.