Sunday, April 25, 2010

One Quarter of All Nonprofits May Lose Their Charitable Status With the I.R.S. This May

As many as one quarter of 1.6 million American nonprofits, including trade associations and membership groups, will lose their official "charity" status with the Internal Revenue Service, at midnight on May 15, and thereby lose their tax exemption status.  They will lose their ability to raise tax free donations.  Amazingly, this equates to approximately 25% of all nonprofits being in jeopardy of losing their tax breaks.  Why?  Three years have passed, this May, since the Pension Protection Act of 2006 passed, and because of a tax filing requirement included in the law; charity organizations that gross $25,000 or less that have failed to file with the I.R.S.three consecutive years, now, are in jeopardy of having their tax exempt status revoked by the I.R.S.

The I.R.S.wants to avoid revoking charitable statuses if it can.  In 2007, the I.R.S. mailed well over a half a million letters to American nonprofits that gross $25,000 annually, or less, and those that gross above this amount that had not filed, warning them.

The Pension Protection Act of 2006 is a federal law designed to reform pension laws, thereby better protecting American pensions, that officially became law August 17, 2006.  It also reforms other things.  It reforms the Tax Court, the Federal Mine Health and Safety Act of 1977, and it also modifies tariffs and duties on imported goods.  It is Title XII, Provisions Relating to Exempt Organizations, of the Pension Protection Act of 2006, though, that effects nonprofits, as pushed for by Senator Chuck Grassley (R - Iowa), then chairman of the Senate Committee On Finance.

The law does many things in regards to the nonprofit sector.

As of 2008, tax exempt organizations which gross $25,000 annually, or less, must file an I.R.S. Form 990-N (or electronic post card), when low or non-grossing charitable organizations were not required to, before.  All nonprofit organizations that gross $25,000 or more must file I.R.S. Tax Form 990 with the I.R.S., annually.  The law requires that the I.R.S. revoke tax exemptions of recognized charitable organizations that fail to file the Form 990-N three consecutive years.

Also, controlling organizations must report income from loans with the controlled organization and also report all transfers between it and the controlled organizations. 

Private foundation and excess penalty taxes are doubled.

Donor advised funds, supporting organizations, and credit counseling organizations are subject to requirements.

Applicable exempt organizations are subject to new reporting requirements when they acquire life insurance contracts structured to give the exempt organization and private investors an interest in that contract.  These exempt organizations include Tribes and employee stock ownership plans as well as the usual charitable organizations.

The law requires, too, that donors now keep record of each cash donation either in the form of a canceled check, a receipt from the charity (which also includes a thank you letter in response to the contribution, that states "no goods or services were received in lieu of this contribution" in it), or a credit card statement.

The law provides some good for nonprofits, too.

Donors may transfer IRA assets as donations, avoiding the early withdrawal penalty, to nonprofit organizations, without having to account for the funds as income and, as such, no income tax is incurred on these transfers. Anyone seventy and a half years old, can donate up to $100,000 of an IRA without any penalty. Also new in the law, remarkably, is that a donation of taxidermy arts are to now be considered charitable contributions.  

To understand the context of where the nonprofit aspects of the law came from, at the end of July, 2006 Senator Grassley wrote an opinion piece, "Strengthening the nonprofit sector" for The Hill in which he states, "I advance public policies that treat taxpayers fair and square. That to-do list includes my efforts to ensure the nation’s tax laws strengthen Americans’ long-standing tradition of charitable giving and protect taxpayers from subsidizing wrongdoers who misuse nonprofits for their own good."  Further down the piece he writes, "Just as Congress has acted in the public interest to protect shareholders and workers from corporate mismanagement, so too must Congress demand transparency, accountability and good governance from the nonprofit sector. Nonprofit organizations must earn the privilege to keep their tax-exempt status. Tightening the rules and regulations governing the nonprofit sector will help repair the breach of trust that threatens to tarnish even the most reputable charities in America."

Senator Grassley must not have been familiar with the requirements that the Sarbanes Oxley Act of 2002 already provided (and still provides), which requires nonprofit's board members, (along with for profit board members) by law, to be personally accountable for their organizations' accounting, oversight, and reporting.  It already did what he indicated, in his op-ed piece, he was demanding on behalf of the American people.

I have reiterated, again and again, in this blog the importance of professionalism and best practices in all nonprofit operations (no matter the age or the size of the organization), so I understand his concerns.  No one wants anyone using a charitable status to hide or enable wrong doing, in our communities.  Requiring, though, that nonprofits "must earn the privilege to keep their tax-exempt status", as he states in his op-ed piece, is remarkable considering that these organizations, by virtue of having to raise support (in the form of donations) regularly face real scrutiny.  If any nonprofit can not raise enough to cover its expenses and planned goals, it folds and closes, as a for profit company does if it fails to generate enough profit.  In other words, just like with for profit businesses, nonprofit organizations' successes or demise are dictated by its value to the community, its reputation, and how relevant its work and successes are.   If a nonprofit does not provide real, efficient, effective results in the community, or if a nonprofit is not reputable or operates less than ethically, then the public does not have to donate to it.  What's more, like in the for profit sector, if the media is turned onto the poor or even illegal operations of a nonprofit - the press can inform the public who, once informed, may donate in lesser amounts and less often.  For example, see my post, City of Redmond Offers to Bail Out Redmond Humane... 

There is no provision, inherent to being an officially recognized charity, that protects a nonprofit organization from its own demise, if the people operating it doom it to failure.  So, stating that a charitable organization must "earn the privilege to keep" its status is excessive in the least, and perhaps the words of an inexperienced and not fully informed federal representative, at the worst.  Anyone who has actively worked for a nonprofit organization, especially a well run one, for an extended period of time knows that for the most part these organizations neither have it easy, nor exist to bilk Americans.  Most nonprofits operate in the best way that their leadership knows how, and this gets to the heart of the issue that Grassley and I can apparently agree on: nonprofit organizations operate most effectively when they operate professionally and ethically - but getting nonprofit organizations operating as such is likely more a function of the informed making sure that uninformed people volunteering with and working for nonprofits learn and then practice professional nonprofit best practices.  Encouraging better professional standards and ethics in nonprofit operations and less to do with generalizing that all nonprofits must be viewed suspiciously, less they repeatedly prove their worthiness.  The nonprofits with less than ethical or honest intentions should be ferreted out and detected, but perhaps proactively, not by damning an entire professional sector through generalizations.  What a waste of resources it is for nonprofit organizations, that already notoriously have few resources at their disposal, to have to supposedly annually re-prove their worthiness of their federally designated status through anything beyond simply reporting annually. 

If you are the executive of a nonprofit in peril, this May, of losing its official nonprofit designation, contact the I.R.S. immediately to avoid the loss of your organization's status.  You may find ways to contact the I.R.S. on their web site through their Contact IRS tab at the top of their site.

Otherwise, if you are new to the nonprofit sector as a volunteer or staff member, welcome.  If you have no knowledge of them, learn about nonprofit best practices and modern professional paradigms.  Receive mentoring from the best.  Take a recommended class or read a reputable book (I've had picked each book in my Amazon store, to the right, or check with your local library for the titles I've included, there).  First volunteer with or work for a really reputable, successful, efficient nonprofit in order to get exposure to how the best of the best run as organizations, and then take that expertise, skill set, and professionalism with you as your volunteer or professional career grows through your work with other nonprofits.  This is one proactive way to improve the sector.

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