How to Notify the IRS If You Decide to Terminate Your Nonprofit
Find out which forms and what information you'll need to file with the IRS.
In recent years, many nonprofits have closed their doors. Terminating a nonprofit can be done in several ways:
- you can formally dissolve or liquidate your nonprofit by filing the required documents with your secretary of state or other state official
- you can simply sell or otherwise dispose of all of your nonprofit’s assets, if any, and stop doing business, or
- you can merge with another nonprofit in an attempt to form an economically stronger entity.
You need not obtain IRS approval to end your nonprofit, but you are required to notify the IRS if it stops operating as an independent entity. This is done by filing a final Form 990, 990-EZ, or e-Postcard (990-N). Moreover, nonprofits that file Form 990 or 990-EZ must describe in detail what was done with their assets, if any, by filing Schedule N, Liquidation, Termination, Dissolution, or Significant Disposition of Assets, with their final return.
The reason that the IRS is so interested in what your nonprofit does with its assets upon termination is that one of the basic conditions for receiving tax-exempt status from the IRS is that you dispose of your assets in a certain way when your nonprofit terminates. Specifically, any assets left after a nonprofit's debts and other liabilities are paid must be given to another nonprofit or used for another exempt purpose. They may not be given to members of the nonprofit--directors, officers, or employees--or any other private individuals. This requirement is ordinarily set forth in a nonprofit's articles of incorporation or other governing instruments. The IRS wants to make sure that no individual personally benefits from a nonprofit's termination.
Which Form to File
Which form to file depends on your nonprofit’s gross receipts and assets.
Nonprofit Annual Gross Receipts
Form to File
Gross receipts “normally” $50,000 or less
Gross receipts $50,001 to $199,999
Total assets less than $500,000
Gross receipts $200,000 or more
Total assets $500,000 or more
When the Return is Due
If you are terminating your nonprofit or effectively going out of business by merging with another nonprofit or selling all your assets, you will need to file a final information return four months and 15 days after the date of your nonprofit's termination.
Information You Must Disclose
Form 990 filers should check the “Termination” box in the header area on page 1 of the return and answer “yes” to the question whether the organization liquidated, terminated, or dissolved (line 31 of Part IV) and, if applicable, to the question whether the organization engaged in a significant disposition of net assets (line 32 of Part IV).
Form 990-EZ filers should check the “Termination” box in the header area on page 1 of the return and answer “yes” to the question whether the organization liquidated, terminated, dissolved, or substantially contracted (line 36 of Part V).
If you file the e-Postcard (Form 990-N), answer “yes” to the question about whether your nonprofit has terminated or gone out of business. This form is completed online at http://epostcard.form.org.
After you’ve indicated on the 990 or 990-EZ that you are terminating your organization or transferring assets, you’ll need to file Schedule N: Liquidation, Termination, Dissolution, or Significant Disposition of Assets.
The information required on Schedule N includes a description of the assets distributed upon termination, any transaction fees paid, the date of distribution, the fair market value of the assets, and information about the recipients of the assets, including their EINs.
Schedule N also asks a series of specific questions, including:
- Question 2: Whether an officer, director, trustee, or key employee of your nonprofit is, or is expected to be, involved in the organization your nonprofit has merged with or transferred its assets to. If you answer ‘yes’ to any of the questions, you will need to provide the name of the person involved and an explanation of the circumstances.
- Question 3: Whether your nonprofit has distributed its assets in accordance with its governing instruments. If your nonprofit is incorporated, your articles of incorporation should require all assets remaining after debts are paid to be distributed to another nonprofit or for some other nonprofit purpose. If you answer “no” here, you must explain in Part III. This is the most important question on the form.
- Questions 5 and 6: Whether your nonprofit complied with your state's laws requiring notification of dissolution and payment of creditors.
Attachments to Your Return
You will need to provide a certified copy of your articles of dissolution or merger, resolutions, and plans of liquidation or merger along with your Form 990 or 990-EZ. You may also need to provide any other relevant documentation. To learn more, see Nolo's section on Form 990.