As part of the Pension Protection Act passed in 1996, Congress added a new penalty for tax-exempt organizations that fail to file their annual return for three years in a row. Formerly, the only penalty was a monetary penalty. The new law has upped the ante to impose the ultimate penalty: loss of exemption. The penalty applies to organizations that fail to file Form 990, Form 990-EZ, as well as the Form 990-N. Form 990-N is a relatively new form that must be filed by tax-exempt organizations whose revenues normally fall below $25,000.
Organizations that have their status revoked may apply for reinstatement based on reasonable cause for the failure to file. The first three year period is 2007 through 2009, which means that once the 2010 filing deadline passes for these forms (May 17, 2010 for tax-exempt organizations with calendar fiscal years), organizations that failed to file their Form 990s forms for those three years will automatically lose their tax-exempt status.
Theoretically, the new penalty could result in a significant reduction in the number of tax-exempt organizations since hundreds of thousands of organizations listed in the IRS’ business master file were, until the introduction of Form 990-N, not required to file an annual return with the IRS. It is likely that a number of these organizations may not have understood the new filing requirement and will be caught off guard by the new automatic revocation penalty. Organizations that may have failed to file an annual return for the past three years should do so as soon as possible to avoid automatic loss of tax-exempt status.