Nonprofits must file their annual returns each spring. Otherwise, they run the risk of losing their tax exempt status with the Internal Revenue Service. Unbeknownst to some charitable institutions, nonprofit status is not the equivalent of tax exempt status.
According to the IRS, nonprofit status is regulated by state laws. This typically affects an organization’s property and incomes taxes. Tax exempt status on the federal level is not automatically applicable to charities that qualify for nonprofit status on the state level. A nonprofit has to meet certain constraints outlined by the Internal Revenue Code to be considered exempt from income tax on the federal level.
Currently, federal law states that if a nonprofit organization does not file annual return information for three consecutive years, they are automatically stripped of their tax exempt status whether or not they qualify as a nonprofit in their state. The amount of funding received doesn’t matter; every organization must report. This is a problem for many organizations that are not familiar with proper filing processes.
The Indiana Daily Student reported that in 2011, roughly 584,000 charitable institutions across the U.S. saw their tax exempt statuses vanish into thin air, without any warning from the IRS. Fewer than 51,000 of those groups have seen their status restored by the IRS.
Making it easier on charities
In response to this damaging process, Senators Dan Coats and Ben Cardin, of Indiana and Maryland respectively, proposed legislation earlier this month that would help nonprofits prevent this from happening, thus avoiding an incredibly complicated and inconvenient process of reestablishing their standings with the federal government. Called The NOTICE Act, The Journal Gazette reported that the legislation requires the IRS to send a warning to any nonprofit organization that its tax exempt status will be revoked if it does not file returns. Should a charity not receive a notice but subsequently does file its returns, the IRS would be able to reinstate tax exemption to that charity.
On February 12, 2015 the legislation passed the U.S. Senate Finance Committee, and is now on its way to the full Senate. Coats, who co-authored the bill and was on the committee that initially approved it, claimed that while the IRS’s existing system was initially designed to help the government remove outdated and obsolete organizations from its database. However, this revocation process ended up unfairly targeting and penalizing smaller organizations that didn’t have a full understanding of filing guidelines. Many charitable programs in Indiana supported Coats’ bill, including licensed tax officials.
Adopt helpful software
Nonprofits that want to simplify their tax season and annual reporting efforts should adopt an association management software platform. This will allow them to monitor financial data in a more efficient manner. Paperless and digital applications are more accurate and helpful than entering information manually into spreadsheets. Come tax time, a comprehensive collection of data will make reporting annual returns a much simpler process. Plus, it will assist in protecting nonprofits from fees or having to reapply for their tax exempt status with the federal government, should Coats’ law fail to pass.