The clock is ticking. Now more than ever, nonprofit leaders should take steps to ensure that their exempt organization’s annual Form 990s are timely filed. Failure to do so could lead to the automatic loss of the organization’s exempt status and land the organization in a mire of unprecedented IRS backlog.
With few exceptions, organizations recognized as exempt from federal income taxes are required under the law to file Form 990, or one of its derivatives, on an annual basis. (Notably, churches, other religious institutions, and certain other organizations are not required to file.) In 2009, the reporting law changed, making automatic revocation of tax-exempt status the penalty for failure to file annual Form 990s for three consecutive years. When such revocation occurs, an organization may apply for reinstatement by filing a new IRS Form 1023 application with the IRS’ Exempt Organizations division.
The National Taxpayer Advocate has tracked the impact of the 2009 law on the caseload faced by the IRS Exempt Organization division. The statistics are sobering. According to the report, the backlog of reinstatement applications has grown each year. The Exempt Organization’s “inventory backlog now stands at about 66,000 cases, more than the number of routine applications it usually receives in an entire year, four times the 2010 level, and more than triple the 2011 level.” This unprecedented backlog, not surprisingly, has resulted in increasing delays in the agency’s processing of application. The report states, “According to the “Where is My Exemption Application?” page on IRS.gov, applications that need development take 18 months to be assigned to a reviewer, up from the nine months cited in last year’s Annual Report and the seven months cited in the 2011 Annual Report.”
It may be that the new streamlined procedures for reinstatement, discussed on this blog earlier this month, may mitigate some of the agency’s backlog (seehttp://wagenmakerlaw.blogspot.com/2014/01/irs-releases-streamlined-reinstatement.html ). Such an outcome, however, is by no means assured. Nonprofit leaders should thus work with qualified accounting firms with experience in filing Form 990s to ensure that such annual reports are timely filed. Organizations that have been automatically revoked should contact a law firm with experience in advising nonprofits as soon as possible. Failure to file an application for reinstatement could result in significant tax and penalty liabilities for the organization. Absent such reinstatement application, the organization will be taxed as an ordinary corporation and be responsible for filing IRS Form 1120 corporate returns. The longer a revoked organization waits to apply for reinstatement, the greater its potential tax liability will be.