New federal filing requirement for small nonprofits looms; deadline Oct. 15

Hundreds of nonprofit organizations in Rhode Island could lose their federal tax-exempt status due to regulations that for the first time require nonprofits, even those with budgets of less than $25,000 a year, to file information with the IRS every year.
Nonprofits that have not filed with the IRS in the previous three years face automatic revocation of their tax-exempt status beginning next year. However, the IRS has set Oct. 15 as the deadline for a one-time, filing-relief program, generally for the smaller nonprofits. They would still have to file annually for tax-exempt status beginning next year.
The IRS is waiting until 2011 to start sending revocation letters in order to provide more time to file because many groups – particularly all-volunteer organizations without paid staff – may not be aware of the new regulations.
Jill Pfitzenmayer, director of the Initiative for Nonprofit Excellence at the Rhode Island Foundation in Providence, told Providence Business News last week she and her staff are in the process of alerting the nonprofits that she works with about the revised IRS regulations. “But there are only a handful of organizations that we have involvement with,” she noted.
Pfitzenmayer said the foundation is posting on its website (www.rifoundation.org) information about the revised filing requirements from both the IRS and GuideStar USA Inc., a research group based in Washington, D.C., that gathers data about nonprofits nationwide.
There are 7,209 nonprofits in various categories registered with the secretary of state in Rhode Island, according to Pfitzenmayer, but this figure does not necessarily reflect the actual total because some nonprofits are not required to file with the state. According to GuideStar, there are 6,327 nonprofit groups listed as 503(c)(3) in the state and 390 listed as 503(c)(4).
The IRS has compiled a list of the nonprofits in Rhode Island that are in jeopardy of losing their tax-exempt status. The 40-page list includes approximately 1,440 nonprofits throughout the state and, as Pfitzenmayer noted, most of those in jeopardy are small, all-volunteer groups without paid staff.
The list covers a wide spectrum of organizations, including Little Leagues, veterans organizations, Knights of Columbus chapters, fraternal order of police associations, school groups, history, drama and art societies. Some 25 local chapters of the American Federation of State, County and Municipal Employees are listed, as are 19 American Legion posts. Some groups on the list are no longer in existence. For instance, the Leroy Center for the Cultural and Performing Arts in Pawtucket was formed to save the Leroy Theater, razed years ago to make way for a drugstore and fast-food eatery.
A key reason for the new annual reporting requirement is to keep better track of which nonprofits are active and which are not, according to the IRS and GuideStar. “The increased transparency will lead to a more accurate picture of the nonprofit sector, as almost all active organizations will be reporting,” GuideStar said.
The latter noted that, according to estimates, there are close to 2 million tax-exempt groups nationwide, but “the majority” of these groups never filed with the IRS before. As of July, GuideStar said, 355,000 nonprofits across the country faced revocation of tax-exempt status for failure to file with the IRS in the last three years.
In Rhode Island, word is spreading about the new reporting requirements. A random check by PBN of two local nonprofits – Friends of the North Smithfield Public Library and Friends of the Lincoln Public Library – revealed that both organizations filed the required IRS forms last week, according to the directors of the two libraries.
Organizations that lose tax-exempt status will be required to reapply for it, according to GuideStar, and in the interim will not be able to accept tax-deductible contributions and may be required to pay federal income taxes, incurring penalties for failure to do so. Grant-makers in many cases cannot provide funding to a group that is not an IRS-certified nonprofit. Pzitenmayer noted that the Rhode Island Foundation “always checks” the nonprofit status of grantees.
The remedy, for those nonprofits with annual budgets of less than $25,000, involves the filing of Form 990-N, which can only be done online (epostcard.form990.org). Pfitzenmayer said the filing is simple and takes only minutes. Organizations with annual revenue above $25,000 may have to pay a fee to retain the exemption or reapply for it, if various IRS deadlines have not been met; larger nonprofit groups in general are not eligible to take part in the one-time relief program. •