I am on the board of a charity group here in Harvey County. A few months ago we learned of the risk of losing our non-profit status because of new IRS regulations. I just learned that apparently we still dropped the ball and have not completed the paperwork to comply with these regulations. Is there anything we can do at this point?
The answer to this question in general is “yes,” there are still things that you can do to try and protect or regain your nonprofit status. Regarding background on the subject, The Newton Kansan published a previous article by Cristina Janney that did an excellent job explaining the nightmare for nonprofits resulting from the new rule changes.
One can access this article online at http://www.thekansan.com/features/x336130018/Charities-non-profit-status-jeopardized.
In short, due to 2006 Internal Revenue Service (IRS) code changes, many nonprofits that have previously not done so must now seek an IRC tax exempt designation, also known as an IRC 501(c)(3) designation. This code provision refers to a special designation that makes an organization a charity rather than a corporation. Small charities must also file an annual 990 form that includes information on income, expenses, and assets.
Charities that are not in compliance risk losing nonprofit status. This is an especially big deal to cash flow to charities because individuals wishing to donate can no longer deduct their gifts to charities that lose nonprofit status when filing their personal tax returns.
A real problem can also emerge when a nonprofit needs to apply for an employer identification number (EIN). When this process is initiated, the IRS may seek information on previous records for the organization.
The IRS may eventually target back taxes on income for all years prior to the 501(c)(3) designation. This will be assessed at the corporate tax rate.
A number of solutions to this problem exist. If an organization has good records, it may be able to file returns for years prior to the 501(c)(3) designation to correct the problem. This, however, realistically rarely presents itself as a solution for most small charities having not previously recognized any need for keeping these records.
More realistically, a charity can hire a representative to negotiate the matter with the IRS. A qualified individual may also help the charity complete a 1023 application. This application—which can be backdated to the year of formation of the charity, depending on available records—can serve to bring the charity into compliance and preserve nonprofit status.
In a nutshell, this is certainly a major problem facing a number of small charities nationwide and locally but solutions do exist. A tax attorney, an accountant, or someone qualified in resolving these matters can help.