Most small nonprofits must now file an "e-postcard": IRS Form 990-N. Experts fear that, by failing to file this simple form, as many as 500,000 small nonprofits will automatically lose their tax-exempt status as of May 15, 2010. That's right -- up to half a million nonprofit businesses may be required to pay federal income taxes to the IRS. And it won't just affect the nonprofits themselves; donors won't be able to take a tax deduction for contributions made to nonprofits that fail to file Form 990-N.
How could this happen? Until tax year 2007, nonprofits with annual gross receipts under $25,000 did not have to make any yearly filings with the IRS. But in 2008, the IRS introduced a new form just for small nonprofits: Form 990-N (called the Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required To File Form 990 or 990-EZ).
Congress passed this tax filing requirement in response to concerns that smaller nonprofits were not keeping the IRS up to date on new business addresses and changes to other key information. In fact, the IRS suspects that thousands of small nonprofits have closed their doors without notifying the agency. The new 990-N should allow the IRS to maintain an up-to-date database of basic information on all active nonprofits. This will help the IRS meet its administrative goals, but it will also come in handy for donors who want to make sure they are giving money to recognized nonprofits.
Who Must File Form 990-N?
All nonprofits with gross receipts "normally" under $25,000 must file Form 990-N (this requirement began in tax year 2007). Your receipts will satisfy the "normally" requirement if they averaged $25,000 or less in the prior three consecutive tax years, including the year in which the return would be filed. For tax year 2010, the $25,000 threshold for filing will go up to $50,000, so more small nonprofits will be eligible to file the e-postcard in 2011.
How to File Form 990-N
Filing Form 990-N is so simple that, technically speaking, the IRS doesn't even consider it to be a tax return. It should take you no more than ten or 15 minutes to complete. You don't even need to pay for a postage stamp to mail it to the IRS, because it must be sent electronically -- paper copies of the form will not be accepted. This is why the IRS calls the form an "e-Postcard."
Form 990-N is filed online through a website operated by the Urban Institute, a large nonprofit that has helped the nonprofit community with IRS compliance issues for many years. You do not need any special software, just access to the Internet and an email address for your nonprofit. Once you log on to the Urban Institute's website at http://epostcard.form990.org/ (or go to www.irs.gov and search for "990-N"), you will be asked to create an account before you can access the system. You'll need your nonprofit's employer identification number (EIN) to do this.
You then complete an online form that asks for your nonprofit's legal name, address, website address (if any), EIN, name and address of a principal officer (usually the president, vice president, secretary, or treasurer), and tax year (either the calendar year or a non-calendar fiscal year). You will also be asked whether your nonprofit has terminated or gone out of business.
After the form is completed, you just need to click the "Submit Filing to IRS" button. The IRS will notify you by email once your e-Postcard is accepted or rejected. If it's rejected, the IRS email will contain instructions on who to contact to resolve the problem. If your Form 990-N is accepted, you can see a copy by clicking the "view" button. Be sure to print out a copy for your own files. For more information on filing Form 990-N (e-Postcard) see the IRS website at www.irs.gov/charities/article/0,,id=169250,00.html.
What If You Don't File Form 990-N?
The IRS is really serious about getting all small nonprofits to file Form 990-N. If you don't file the form for any single year, the IRS will merely send your nonprofit a reminder notice. But if you fail to file your Form 990-N year after year, things will get tougher. If your nonprofit is required to file Form 990-N but fails to do so for three consecutive tax years, it will automatically lose its tax-exempt status on the filing due date of the third year. For example, if your first Form 990-N is due on May 15, 2008 (for tax year 2007) and you do not file in 2008, 2009, or by May 15, 2010, your nonprofit will lose its tax-exempt status on May 15, 2010. The IRS will not send additional notices once your tax-exempt status is automatically revoked.
If your nonprofit loses its tax-exempt status, you'll have to apply for a federal tax exemption all over again. That means filing IRS Form 1023 again and paying the hefty filing fee that comes with it (not to mention the headache of all that unnecessary paperwork).
Many nonprofits that may have been affected by the new Form 990-N filing requirements are no longer open for business. But thousands of active nonprofits will lose their tax exemptions by failing to follow the new filing rules. Make sure your nonprofit isn't one of them. If you haven't filed a Form 990-N in 2008 or 2009 (assuming your nonprofit was in existence in 2007), make sure to file one by May 15, 2010 -- and continue to file a Form 990-N at least once every three years after that.
For more information on filing nonprofit tax forms, see Every Nonprofit's Tax Guide: How to Keep Your Tax-Exempt Status and Avoid IRS Problems, by Stephen Fishman (Nolo).