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A quick look at recent IRS releases

Not-for-profits must pay careful attention to all IRS releases regarding tax-exempt entities. If you don’t comply with the rule changes and guidance issued, your not-for-profit could end up wasting a lot of time — and even lose its tax-exempt status. Two recent IRS actions merit your attention.

1. Form 990 rules finalized

On Sept. 8, 2011, the IRS released final rules for the redesigned Form 990. Also known as “Return of Organization Exempt From Income Tax,” this is the form most not-for-profits must file annually.

Form 990 was overhauled in 2008, and many of the finalized rules have been in effect since then. These include:

•    Revised threshold amounts for reporting compensation,
•    Elimination of the advance ruling process for new not-for-profits, and
•    Implementation of a five-year public support computation period.

If you’re unsure about how the revised Form 990 might apply to your organization, contact your tax advisor.

2. Reinstatement guidance issued

In 2011, approximately 275,000 not-for-profits lost their tax-exempt status because they had failed to file annual reports with the IRS for three consecutive years. Although most not-for-profits on the automatic revocation list likely ceased operations, that still leaves thousands that forgot or were unable to file. This past June, the IRS published guidance to help organizations desiring reinstatement.

If your organization is among them, you’ll likely want to seek a retroactive reinstatement to the date your tax-exempt status was revoked. Otherwise, donations since the revocation date will be considered taxable to your organization and your donors won’t be able to deduct them. To get the process started, file one of these forms within 15 months of the revocation date:

•    Form 1023, “Application for Recognition of Exemption Under Section 501(c)(3),” or
•    Form 1024, “Application for Recognition of Exemption Under Section 501(a).”

You’ll need to include several support documents with your form, such as a statement that provides reasonable cause for failing to file the required forms (for example, your nonprofit is staffed entirely by volunteers); a statement that describes safeguards you’ve put in place to prevent such oversights in the future; tax returns for the years during and after the consecutive three-year period; and a legally binding declaration signed by an authorized person, such as an officer or director. The IRS has released two notices for guidance on the reinstatement process. These notices are Notice 2011-44 and  Notrice 2011-43, and they can be found on the IRS website: www.irs.gov.

It’s critical that you follow the IRS’s guidance to the letter. Contact your tax advisor for a detailed explanation of the reinstatement process, as well as special rules and possible transitional relief for not-for-profits with gross annual receipts of less than $50,000.

For more information contact Jane Pfeifer at jpfeifer@cshco.com.