Surprise of the Year: 1000's of Ministries Lose Tax Exemption

By Raul Rivera

Many Americans that made tax deductible contributions after May 15th, 2010 will get a big surprise when they find out that those contributions were in fact not tax deductible.  This news comes to them because on June 8th, 2011, the IRS was forced by law to automatically revoke the tax exempt status of 275,000 organizations effective as of May 15th, 2010.

On June 8th, the IRS released a list of over 275,000 organizations that lost their tax exempt status.  The reason the IRS revoked their status was because these ministries failed to file 990 tax returns for three consecutive years beginning with tax year 2007.

In August of 2006, Congress passed a law that requires all non-profit organizations to file a 990 tax return every year regardless of how big or small the organization might be.      In the past, any organization whose gross income was less than $25,000 did not have to file a return.  Now regardless of income, every organization (except churches) have to file either a 990N, 990 EZ, 990 (long form) or a 990PF.  I will explain later which form you are supposed to file.

What happens if my organization is on the list?

The law clearly states that any organization that gets their tax exempt status revoked has to file federal income tax returns and pay taxes for the previous three years.  That may be a bad consequence, but it gets worse.  Not only will the organizations have to file tax returns, they also lose their ability to receive tax deductible contributions.  This can have serious consequences because many organizations that have had their exempt status revoked continue to receive contributions thinking they are tax deductible for their givers. 

7 Consequences apply to an organization that has its tax exempt status revoked.

1.    It has to file federal income tax return form 1120 and pay taxes on its net income, with penalties and interest.

2.    It has to file state income tax returns and pay taxes on its net income, with penalties and interest.

3.    Because of the loss, many organizations that have sales tax exempt status will have to pay back to the state the sales taxes that it was exempt from paying, with penalties and interest.

4.    It can no longer accept tax deductible contributions.

5.    Donors may file civil lawsuits against the corporation, president, and board members personally, claiming negligence and failure to carry out their fiduciary duties.

6.    It will have to reapply to reinstate its status. 

7.    It will have to explain to its donors why they lost their tax deductions.

Can the IRS reinstate tax exempt status?

In order for an organization to get back its tax exempt status, it will have to file a new form 1023.  This is still a better option than filing an 1120 tax return and having to explain to donors that the contributions they have made after may 15th, 2010 were not tax deductible and that they have to amend their tax returns and pay penalties and interest.  It is more than likely that many will hold pastors personally responsible for their tax reassessments and demand refunds with interest.  The IRS has issued guidelines that allow organizations to reapply to get back their tax exempt status; in some cases they will allow an organization to reapply and get a retroactive approval.

How do I know if my organization is on the list?

The IRS has published the list on its website and it can be searched by state at http://www.irs.gov/charities/article/0,,id=240099,00.html.  Please click the state where your ministry is located or was located at the time that you received your tax exempt approval.  If you need help, we will be happy to search the list for you.

What should I do if my ministry is on the list?

Though it may take your breath away, do not ignore it.  Procrastination is not an option.  Please call us at 770-638-3444 and speak with one of our consultants.  We will be happy to explain your options and help you to rectify the issue.

---