October 25, 2014


Preparing for stricter 990 filing requirements

Lynne Leavitt

Lynne Leavitt

From neighborhood baseball leagues to local senior centers, thousands of small nonprofits across the country are at risk for stiff penalties or even loss of their federal tax-exempt status. 

Such organizations may not be aware of the recent IRS changes that are responsible for this situation. 

A critical redesign of the IRS form known as the 990 now requires nonprofits to reexamine their tax reporting procedures to make certain that anyone filing forms on the organization's behalf is aware of the new tax provisions.

The new 990 filing requirements went into effect at the beginning of 2008 for tax-exempt organizations with gross revenues of $1 million or more. 

A 990-EZ, or short form, was required of all other nonprofits with revenues over $25,000. 

A progressive lowering of the gross revenue threshold over the past three years has caused significant concern among nonprofit personnel and their financial advisors. 

In 2009, the threshold for filing the new 990 long form dropped to $500,000 in nonprofit gross revenues. In 2010, the 990 form is required from nonprofits earning $200,000 or more. 

Fees for simply preparing the revised 990 form can easily reach $6,000, a cost that could represent a significant expense to a small nonprofit. 

The 990-EZ form, which costs substantially less and saves a considerable amount of time, can only be used by nonprofits under the standard form 990 gross income threshold. 

Nonprofits with gross revenues under $25,000 are required to file an electronic Form 990-N (e-Postcard) online. 

On July 26, 2010 the IRS announced that it is providing a one-time relief for organizations grossing less than $1 million that have tax filing dates before October 15, 2010 and that have failed to correctly file in the past three years, allowing them to retain their tax-exempt status.  

This one-time exemption only applies to organizations required to file Form 990-N and Form 990-EZ.

Adding to the challenges now faced by nonprofits, the IRS has hired an additional 100 tax examiners whose job is to audit nonprofit returns in order to ensure compliance with the new requirements. 

Clearly, the IRS is not taking the new filing requirements lightly - it has already revoked the tax-exempt status of many nonprofits for non-compliance. 

When such organizations lose their tax-exempt status, they must shoulder the time and expenses of reapplying. 

In the interim, any income earned during that process could be taxed, and donations to the group would not be tax deductible to the donor.

The IRS rationale for imposing these strict new requirements on nonprofits is simple: Past abuses, such as inflated salaries and unsound conflicts-of-interest have raised public concern over governance of these organizations. 

On the other hand, a nonprofit with gross revenues under $500,000 may have a volunteer board and the staff may not have the necessary expertise to keep up with esoteric tax-filing requirements, and their accountants may not possess the necessary skills and expertise required. 

The new Form 990 is designed to promote transparency and disclosure, thus making the nonprofit's operations open to public scrutiny. 

The questions posed are extremely detailed, and will require organizations to draft new disclosure policies and procedures in order to meet filing requirements.

For most nonprofits, the key to staying in compliance and retaining the trust of watchful donors is to become familiar with IRS requirements and to take appropriate measures to ensure that IRS filings are as accurate and detailed as possible. 

This may mean seeking out a tax accounting firm with extensive nonprofit experience.  In view of the implications for nonprofits who fail to meet the IRS expectations, such action may be the best investment that organizations could make.

Lynne Leavitt, CPA with Brakensiek Leavitt Pleger LLP, has more than 25 years of accounting and tax knowledge with extensive experience assisting nonprofit organizations with all of their financial-service needs.


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