One Form Missing, Ministry Owes $1,000s

By Raul Rivera

What would you do if you were told that your ministry could potentially owe thousands of dollars in penalties and fines before you actually applied for its 501(c)(3) tax-exempt status? Moreover, to make it worse, it was because of a simple misunderstanding on your end that could have been avoided. 

Some of you can imagine the panic and disbelief of the situation and are relieved that it is not your actual situation. This was, however, the situation one of our clients found themselves in not too long ago. For privacy purposes, I will refer to our client’s organization by the pseudonym “ABC Ministry.”

Keep reading and I will tell you what happened.

A common story for many ministries

Initially, ABC Ministry started out as a ministry wing of its church. In 2008, ABC Ministry became incorporated with its state but decided not to move forward in applying for its 501(c)(3) status with the IRS because ABC assumed it was still just a ministry under the church’s covering and tax-exempt status.

However, when ABC Ministry officially incorporated, the act alone established it as a separate entity from the church. Additionally, ABC Ministry was operating on its own budget bringing in donations between $48,000 and $96,000 per year.

ABC Ministry did not realize that it should have been filing Form 990s each year with the IRS. Therefore, it was not until ABC Ministry came to us for help with its 501(c)(3) application that ABC realized the mistake. There were seven years worth of Form 990s that ABC needed to back file with the IRS. 

This is a costly mistake because the IRS imposes a penalty of $20 per day for each day the Form 990 is late. Thus, with seven years worth of late Form 990s, you can do the math and quickly realize the costliness of ABC’s mistake.

Thankfully, the story does not end here. I will share with you what happened with ABC Ministry, but first, there are some things you need to know about Form 990 so this does not happen to you.

Here is what you need to know about Form 990

The requirement to file Form 990 comes to us from section 6033(a)(1) of the Internal Revenue Code, which states,

“[E]very organization exempt from taxation under section 501(a) shall file an annual return, stating specifically the items of gross income, receipts, and disbursements, and such other information for the purpose of carrying out the internal revenue laws . . . .”

Therefore, if you operate any kind of ministry or regular nonprofit organization, then you must file Form 990 on a yearly basis. This includes, but is not limited to, organizations such as outreach ministries (CDCs), traveling evangelistic ministries, after school youth centers, daycares, transitional housing programs, holdings corporations, and many more.

Only churches are exempt from having to file Form 990 on a yearly basis with the IRS. However, while churches are indeed exempt from having to file the Form 990s that we are talking about in this article, there is another type of Form 990 that churches are subject to. This will be addressed in another article coming out this Thursday. 

(Recommended reading: “How to Simplify All of Your Church’s Filing Requirements”)

Throughout the remainder of this post we will be addressing Form 990 requirements as they pertain to ministries and other charitable organizations. However, if you are a pastor or church leader, do not be quick to discard this post, thinking that this does not pertain to you; for as Solomon wrote in the book of Ecclesiastes, “There is a time for everything.” The truth of the matter is that there may soon come a time when God leads you and your church to begin a separate ministry.

Only churches are exempt from having to file Form 990 on a yearly basis with the IRS.

When is the deadline to file and what happens if I miss the deadline?

According to the IRS, your Form 990 must be filed by the 15th day of the 5th month after the end of your organization’s accounting period. For many organizations this is simply May 15th.

Now, we already know about the $20 per day penalty for each late 990. This applies to organizations whose gross receipts are less than $1,000,000 annually. There is a higher fee for organizations who gross receipts exceed $1,000,000. (You can read more about that here.)

Another issue with not filing your ministry’s 990s arise when you do not file them for three consecutive years. By taking a further look at section 6033, it tells us that organizations which fail to file Form 990 for three consecutive years will receive an automatic revocation of their tax-exempt status.

This is true even if your ministry has not yet applied for its 501(c)(3) tax-exempt status. In this instance, it will end up costing your ministry more in the long run. That is why we encourage every ministry to begin making it a practice to file Form 990 as early in the life of the ministry as possible.

3 simple steps to keep your ministry on track with Form 990

You do not have to be caught off guard with an automatic revocation or astronomical penalties. You can, however, be equipped to handle the Form 990 filing requirements successfully and protect your ministry’s tax-exempt status by using the following guidelines.

1. Determine if your organization is required to file Form 990. 

Remember, churches do NOT have to file 990 tax returns. However, all Christian, non-church ministries are required. Private foundations are always required to file a particular 990 for private foundations no matter how much they receive in donations.

2. Determine what type of 990 you are responsible for filing. 

There are several variations for the Form 990 annual informational return. They are listed below:

• 990-N (the e-Postcard): A 990-N is an electronic notice. Organizations with gross receipts of normally $50,000 or less will file this electronic notice.
• Form 990-EZ: Form 990-EZ is also referred to as the short form. Organizations with gross receipts of normally more than $50,000 but less than $200,000, and whose assets are valued at less than $500,000, are required to file this form.
• Form 990, also know as the long form: Organizations whose gross receipts are on average $200,000 or greater, and whose assets are valued at $500,000 or greater, are required to file Form 990.

3. Know your deadline for filing Form 990. 

All 990 filers are required to submit their returns by the 15th day of the 5th month of their fiscal year. For most organizations, their fiscal year coincides with the calendar year (January - December). If your fiscal year ends on December 31st, then your Form 990 will be due by  May 15th. If your fiscal year ends June 30th, then you will be required to file your Form 990 by November 15th of the same year.

What happened to the ministry in our story

Thankfully, ABC Ministry did not have to end up paying the late penalties for its late 990s. This is because the IRS says that the penalty only applies if the organization is unable to provide a reasonable cause for filing late. Our CPA was able to draft an abatement letter explaining ABC’s genuine misunderstanding and requesting forgiveness of its mistake.

As a result, ABC Ministry was able to move forward receiving its 501(c)(3) tax-exempt status and it also signed up for our KeepRIGHT Program so it concentrates more on the ministry and not worry about missing another 990 filing.

What you can do today

Understanding the world of nonprofit compliance, tax law, and all that is required of you is a difficult task in and of itself. This is especially so when you are managing and operating multiple organizations, but it does not have to be that way.

Perhaps you are a pastor of a church and this post does not directly relate to you at this time, but you know someone who would benefit. If that is the case, I encourage you to share this post with that person and even invite him/her to attend one of our conferences with you.

If, on the other hand, you need assistance either determining which Form 990 you should use or assistance meeting the deadline by May 15th, please give our office a call at 877-494-4655 and one of our highly trained staff members will be glad to serve you and your ministry.

Handpicked articles for you:

• “Why Some Pastors Compromise Their Sermons”
• “What To Do When It’s Time to Reclassify Your Ministry”
• “Are You Funding the Mission or the Missionary?” 

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