Tax Filing Gets Easier for Small Nonprofits

by Nossaman LLP
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The IRS has released a new, interactive Form 990-EZ (Short Form Return of Organization Exempt From Income Tax) to make the annual chore of return filing even easier for “small” tax-exempt organizations, and help them avoid common mistakes.

What are the advantages of a Form 990-EZ, and when can we use it?

A “standard” Form 990 (Return of Organization Exempt From Income Tax) is difficult to prepare given its size and complexity. Many accounting firms do not handle these returns because the firms lack the necessary experience and skill, and those firms that do handle these returns tend to charge high fees that many nonprofits cannot afford. Form 990-EZ is shorter and easier to prepare, and does not require the skill set needed to file a standard Form 990.

Tax-exempt organizations with less than $200,000 of gross receipts and less than $500,000 in assets at the end of the year are not just permitted, but required to file Form 990-EZ.

Although many large exempt organizations are required to file Form 990-series information returns electronically, the IRS encourages all exempt organizations to consider filing electronically (including Form 990-EZ). The IRS prefers electronic filing in order to reduce the paperwork it must process and store. Also, the IRS in announcing the new Form 990-EZ last month noted that the error rate for paper Form 990-EZ was 33 percent whereas the error rate for electronic filings was only 1 percent.

So what does the new 990-EZ do?

Consistent with the IRS’ desire that an organization file Form 990-EZ electronically, the updated version includes 29 “help” icons (in the form of blue question marks) which describe key information that the preparer might need. By clicking on these icons, the preparer can link though pop-up boxes to helpful information elsewhere on the IRS web site. By accessing and reading these pop-ups, the preparer can better avoid common mistakes when filling out the form and filing their return.

The icons and underlying links work on any device with Adobe Acrobat Reader and Internet access, and can be filed electronically or printed and mailed.

The IRS cautions that the new help icons do not replace the Form 990-EZ instructions. Preparers should read and follow these instructions, and treat the help icons as an additional tool.

The IRS’s efforts to make an interactive, easy-to-use Form 990-EZ parallel the agency’s efforts to create a simpler Form 1023-EZ (Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code) for “small” charities that are exempt under Internal Revenue Code (“Code”) section 501(c)(3).  Form 1023-EZ is much shorter than the standard Form 1023 (Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code), and 501(c)(3)s can use the simpler form only if they are confident they will not have more than $50,000 in annual gross receipts over 3 years and that their total assets are no more than $250,000. The preparer must file the Form 1023-EZ electronically, and if he or she prepares it properly the organization usually receives the IRS letter confirming tax-exempt status in 1 or 2 weeks.  (The turn-around time for a standard Form 1023 is often 60 or 90 days, even if the IRS examiner has no follow-up questions.)

Why and when do we have to file?

The Code requires an annual information return for most tax-exempt organizations, including those under Code section 501(c)(3) (charitable, scientific, and educational organizations), section 501(c)(4) (social welfare organizations), section 501(c)(6) (business leagues), and section 527 (political organizations). The “standard” Form 990 return is voluminous and complex, and the organization must disclose information from the top down regarding its finances, source of donations, activities, and transactions with management and third parties. The Form 990-EZ asks for much of the same information. This high level of disclosure is the price that a nonprofit must pay for obtaining and keeping its tax exemption.

If an exempt organization’s annual gross receipts are $50,000 or lower, then the organization may be able to file (electronically) an even simpler form, Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required to File Form 990 or Form 990EZ

The exempt organization must make available any Form 990 for inspection by any member of the public who requests it. However, the organization (other than a section 527 political organization) may redact the names of contributors before furnishing the return. As a practical matter, few people will ask a section 501(c)(3) organization for a copy of its Form 990 tax return because these returns are posted online anyway by the IRS and by various information services such as Guidestar (at http://www.guidestar.org/).

The Form 990 is due by the 15th day of the 5th month following the close of an exempt organization’s taxable year. Therefore, for a nonprofit using a calendar year, the return is due by May 15 of the following calendar year. A nonprofit may obtain an automatic 3-month extension (by filing Form 8868 (Application for Extension of Time To File an Exempt Organization Return) with the IRS before the original due date, and an additional 3-month extension by filing Form 8868 with the IRS before expiration of the first 3-month extension and demonstrating “reasonable cause” for the extension.

Keeping up-to-date on these returns is important.  Late returns can result in penalties and interest, and an organization that fails to file required Forms 990, 990-EZ or 990-N for 3 consecutive years will automatically lose its tax-exempt status effective on the filing due date (without extensions) of the 3rd consecutively-missed year. Reinstating tax-exempt status is possible, but arduous. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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