Tax-Exempt Does Not Mean Exempt From Filing Tax Returns
Originally published in CPA Practice Advisor
May 15 was the filing deadline for nonprofits operating on a calendar year that are required to file Form 990-series information returns. Many nonprofits mistakenly believe that they are not required to file returns with the IRS, particularly if they have minimal gross receipts or no net income. What should you do if one of your nonprofit clients missed the filing deadline?
Determine If and When Your Nonprofit Client Is Required to File a Return
First, determine whether your client is required to file a return. Although the law mandates that most tax-exempt organizations, including small organizations with limited funds, file annual Form 990-series information returns or notices with the IRS, not all nonprofits are required to file. Nonprofits that are exempt from filing include churches and certain church-related or affiliated organizations, certain governmental organizations and governmental units and certain political organizations. Exercise caution in determining whether your client is exempt from filing. Not all nonprofits that have religious or political activities are exempt. For a detailed list, visit: https://www.irs.gov/charities-non-profits/annual-exempt-organization-return-who-must-file
If your client is not required to file, then there is nothing more you need to do. Keep in mind, however, that if at any time your client stops meeting the requirements for exemption from filing, for example, because of a change in activities or governance, or a change in the law, it will become subject to tax filing requirements in that year.
Second, determine when your client is required to file such return. The Form 990-series returns must be filed, or an extension requested, within 4 months and 15 days of the close of the organization’s fiscal year.
Determine Whether Your Nonprofit Client Has Failed to File for Multiple Years
Organizations that fail to file required information returns for three consecutive years will have their tax-exempt status automatically revoked, effective as of the due date of the third required filing. If you are aware that your client has failed to file for multiple years, you should ascertain whether your client has lost its tax-exempt status. You can find out through IRS EO Select Check: https://apps.irs.gov/app/eos/.
If your client’s tax-exempt status has been revoked, it may wish to have its tax-exempt status reinstated. This requires submitting a Form 1023, Form 1023-EZ or Form 1024 (as applicable), Application for Exemption, including the appropriate user fee. Reinstatement of tax-exempt status may be retroactive if the Application for Exemption is filed within 15 months of revocation or the nonprofit has reasonable cause for failure to file. See Revenue Procedure 2014-11 for detailed instructions on how to reinstate tax-exempt status.
Regardless of whether the IRS has revoked your nonprofit client’s tax-exempt status, you will need to file late returns for all unfiled years, because the statute of limitations remains open indefinitely for years in which there was a failure to file a required return. Filing late returns for all unfiled years is necessary to protect your client’s tax-exempt status.
If you are unable to obtain retroactive reinstatement of tax-exempt status for your client, you will need to file the appropriate tax return for a taxable entity (i.e., if the nonprofit is a corporation: Form 1120; if it is a trust: Form 1041) for all years the nonprofit was not exempt from tax.
What to File
Small nonprofits with average annual gross receipts of $50,000 or less may file an electronic Form 990-N (e-Postcard), which requires minimal information. Nonprofits with average annual gross receipts above $50,000 must file a Form 990-EZ or 990 depending on their receipts and assets. If either gross receipts equal or exceed $200,000 or total assets equal or exceed $500,000 the Form 990 is required. Private foundations must file Form 990-PF, regardless of the amount of gross receipts or assets.
Although an automatic six-month filing extension is generally available, if your client did not file the Form 8868 by May 15, or 4 months and 15 days after the close of the client’s fiscal year, the extension is unavailable.
You should also check for applicable state tax filing requirements. In addition, many state’s Attorney General or other nonprofit regulatory agency require certain annual filings, which may include a copy of the applicable Form 990.
An automatic penalty is imposed on late-filed Form 990-series returns. The penalty is $20 per day the return is late, capped at the lesser of $10,000 or 5% of gross receipts for the year. For nonprofits having gross receipts above $1,020,000, the penalty increases to $100 per day, capped at $51,000 or 5% of gross receipts.
If the nonprofit received a notice from the IRS regarding an unfiled return, and the nonprofit fails to file by the due date specified on the notice, a penalty of $10 per day, up to $5,000, will be imposed on the individuals responsible for failure to file.
A 0.5% penalty, up to 25% of unpaid tax, will be imposed on late payment of any unrelated business income tax owed by the nonprofit, as well as investment income excise tax owed by a private foundation client. In addition, interest will accrue on these unpaid taxes, until paid.
Reasonable cause may be asserted to mitigate penalties, so you should ascertain whether your client can present facts and circumstances that demonstrate reasonable cause for filing late. Additional penalties may be imposed for willful failure to file. The best protection from these additional penalties is filing delinquent returns as soon as possible.
 Note – this article is intended to address assisting new or existing nonprofit clients that have missed the filing deadline through their negligence. This article does not provide guidance with respect to issues that may arise if your existing nonprofit clients missed the filing deadline as a result of your action or inaction.