News and analysis
June 08, 2011

275,000 Groups Lose Tax Exemptions After Failing to File Paperwork With IRS

Richard White/Chronicle of Philanthropy


The Internal Revenue Service said today that 275,000 nonprofits have lost their tax-exempt status because they did not file legally required documents for three consecutive years. That move trims the number of tax-exempt groups by about 14 percent.

Many of the groups that lost their exemptions are charities, and donors to those organizations cannot claim a charitable deduction for gifts to the groups after the IRS makes the list official.

Most of the organizations knocked off the charity rolls are believed to be defunct, the IRS said, but groups that are still operating may now apply to get their charity status back.

“During the past several years, the IRS has gone the extra mile to help make tax-exempt groups aware of their legal filing requirement and allow them additional time to file,” said Douglas Shulman, the Internal Revenue Service Commissioner, in announcing the revocations. “Still, we realize there may be some legitimate organizations, especially very small ones, that were unaware of their new filing requirement. We are taking additional steps for these groups to maintain their tax-exempt status without jeopardizing their operations or harming their donors.”

Donors who previously made contributions to groups that lost their exemptions do not have to worry, the IRS said.

The IRS action came after Congress passed a law in 2006 to keep better track of groups that have tax-exempt status. The law gave organizations with annual revenue of $25,000 or less three years of tax-filing deadlines to comply. Organizations must file annual informational returns, though small groups must simply provide a few basic pieces of information.

‘Sense of Dread’
The IRS posted the names of the groups that lost their status, and those that were warned previously that they had not filed the proper paperwork were eagerly awaiting its release to see which groups would end up on the final list. Kristy Spires, chief financial officer at the Grand Aerie Fraternal Order of Eagles, in Grove City, Ohio, was among those who were waiting and worrying.

The fraternal order includes 3,600 organizations that each files its own paperwork with the IRS. When the IRS last fall released the names of groups that had not filed properly, Ms. Spires said the order contacted each of its member groups that was at risk, but she still worried that many were not able to file in time.

“I have a sense of dread in my stomach. We’ve been waiting and waiting for the list. We worked and worked to get our groups filed, and until I see [the automatic revocation list], I won’t know,” Ms. Spires said. “We estimate we provide about $40-million to charity a year. Even if they revoke 20 percent of our organizations, it will have put a dent on the good work that we do in society. It’s groups like ours that help families whose homes have burned down or helped firefighters who were injured and can’t work and help take care of their families.”

Getting Reinstated
Organizations that are affected by today’s action can ask the IRS to reinstate their tax-exempt status retroactively. Applying can cost as much as $850, but the fee will be reduced for small groups that can prove they had good reason not to comply with the paperwork rules.

“It looks like the IRS is bending over backward to allow for retroactive re-establishment of tax-exempt status,” said Marcus S. Owens, a Washington lawyer who formerly headed the Internal Revenue Service’s tax-exempt division.

While he said it was clear that the agency was looking to help small groups, he said it was less clear whether large organizations had much chance of getting their tax status back retroactively.