This document was created by an individual or individuals who submitted a proposal so he / she / they may present at the Office of Faith-Based and Community Initiative’s 2011 Conference on Service and Volunteerism (GCSV11). This proposal was approved by the Indiana Commission on Community Service and Volunteerism (ICCSV) and other community partners. Sharing this document is a courtesy extended by the OFBCI to conference attendees who may want to reference materials covered at the GCSV11, and the OFBCI in no way not responsible for specific content within.

1. Federal Tax-Status Revoked!
2011 Governor’s Conference on Service and Volunteerism
Indianapolis, October 13, 2011
Kirsten A. Grønbjerg
School of Public & Environmental Affairs (SPEA) and
Center on Philanthropy at Indiana University

2. Federal tax-status revoked!
• 275,000 nonprofits just lost their IRS tax-status
• What happened?
• Who lost their status?
• Why? Overview of federal and state regulations
• How do you make sure it doesn’t happen to you?
For full details, see IRS Exempt Status Initiative: Indiana Nonprofits
and Compliance with the Pension Protection Act of 2006 by Kirsten
Grønbjerg, Kellie McGiverin-Bohan, Kristen Dmytryk & Jason Simons. SPEA and
Ct. on Philanthropy at IU, July 1, 2011 (www.indiana.edu/~nonprof)
www.indiana.edu/~nonprof

3. What happened?
• IRS announcement on June 9, 2011….
• Tax-exempt status revoked for 275,000 nonprofits
• Including 6,152 in Indiana
• 3,381 on “active” IRS list, 2,771 from earlier IRS listings
• Why did the IRS do this to so many nonprofits?
• They failed to meet new IRS reporting requirements!!
• Blame the Pension Protection Act of 2006
• Many new rules  increase transparency and accountability
(new Form 990)
• Entirely new reporting requirement for “non-filers” (Form 990-N)
www.indiana.edu/~nonprof

4. New reporting requirements
• All must now file annually, unless…
• Church or its integrated auxiliary; convention or association of
churches; entity included in group return, government entity..
• If fail to file 3 years in a row  lose exemption
• New Form: 990-N (e-postcard for “non-filers”)
• If revenues less $50,000 8 questions; online
• All other exempt entities
• Most: revised Form 990-EZ, 990, 990-PF, or 990-BL (“filers”)
• More transparency & accountability detail
• Different revenue/asset threshold levels
• Other: Form 5500 (employee benefit trust), Form 1065 (religious orders)
www.indiana.edu/~nonprof

5. Timeline of IRS events
• Jan 1, 2007 – start the 3 year clock!
• May 17, 2010 – deadline (initial)
• But “one-time” extension to October 15, 2010
• June 30, 2010 – released “at risk” list
• 324,000 nationally
• 6,950 in Indiana
• Including 108 of our respondents  special initiative
• October 15, 2010 – final, final deadline
• June 9, 2011 – the other shoe dropped!
www.indiana.edu/~nonprof

6. Who lost their status? (active only)
• Non-filers (small?)
• 14% vs. 9% overall
• 95% of revoked
NPs
www.indiana.edu/~nonprof

7. Who lost their status? (active only)
• Non-filers (small?)
• Recent ruling dates
• 1990 or later
• More than half of all
revoked NPs
www.indiana.edu/~nonprof

8. Who lost their status? (active only)
• Non-filers (small?)
• Recent ruling dates
• Not primarily c3s
but…
• Cemeteries
• Social welfare
groups
• Business groups
• 24% of all revoked
NPs
www.indiana.edu/~nonprof

9. Who lost their status? (active only)
• Non-filers (small?) Group exemptions
• Recent ruling dates
• Not primarily c3s
• Unconnected groups
• “Central” – no group
exemption
• Independent or
auxiliary without group
exemption
• 80% of all revoked
NPs
www.indiana.edu/~nonprof

10. Why did they fail to report?
Were they defunct, careless, out-of-touch, confused?
Answer: Look at results of our special initiative
• Focus: 108 nonprofits on June 2010 “at-risk” list
• Had participated in at least one of our nonprofit surveys
• Alert them to the risk as “thank you” for participating
• If able to contact: explain how to avoid revocation
• If not: find new contact information and try to reach again
• Also, check to see if incorporated in state and if current
• Check IRS listings to see if avoided revocation
www.indiana.edu/~nonprof

11. What happened to “our” group?
• Some filed in time – 38%
• More than for all “at-risk” Indiana
nonprofits – 22%
• Some were likely defunct – 31%
• Confirmed dead – 17%
• Didn’t maintain incorporation – 14%
• Some unable to determine – 5%
• But many still alive – 27%
• We had direct contact – 11%
• Have maintained incorporation – 16%
• 43% of those that lost status
www.indiana.edu/~nonprof

12. So why didn’t they file?
• Defunct? Yes, some were (about one-third)
• Careless? Yes, some knew, but still didn’t file
• 38% of those we had direct contact with, didn’t file (11% of all)
• Out-of-touch? Yes, many were surprised when told
• Have never had to do anything once got exempt status
• Out of the loop – new, small, not closely linked to other nonprofits
• Very likely that they didn’t know about the new requirements
• Confused? Yes, some/many were confused
• “This doesn’t apply to us” or “we file forms” or “we get money
from the government”
www.indiana.edu/~nonprof

13. Why so much confusion/ignorance?
Many good reasons –
nonprofit legal status is complex
DISCLAIMER:
The following does NOT constitute legal
advice. Consult your own legal counsel for
specific circumstances that may apply to
your organization.
www.indiana.edu/~nonprof

14. Federal tax-exempt status
• Request employer identification number (EIN) – 1st step
• Form SS4
• Type of entity: can check church or other nonprofit organization
• Reason: can check hired employees or banking purposes
• Request federal tax-exempt status – 2nd step ($400-$850 fee)
• Form 1023 – if wish status under subsection 501(c)(3)
• Not required if less than $5,000 in revenues, a church, government, or
subsidiary of other reporting organization
• Form 1024 – all other subsections of 501(c)
• Not required if home owners association, block club, political party or
subsidiary of other reporting organization, or if don’t mind paying taxes
www.indiana.edu/~nonprof

15. Federal tax-exempt status
• Request employer identification number (EIN) – 1st step
• Request federal tax-exempt status ($400-$850 fee)
• If exempt status granted
• Included on Exempt Organizations Master File (~BMF)
• All must now file annual report (Form 990 or variants)
• Must withhold taxes if have employees and file other required forms
• Some may receive tax-deductible gifts (sect. 170 of tax code)
• 501(c)(3): charit-able, religious, education-al, scientific, literary, testing
for public safety, fost-ering national or inter-na-tion--al amateur sports
competition, preventing cruelty to children or ani­mals ………….
• But also for some purposes only: veterans groups (c19, c23), fraternal
organizations under lodge system (c8, c10), and cemeteries (c13)
www.indiana.edu/~nonprof

16. Federal tax-exempt status
• Request employer identification number (EIN) – 1st step
• Request federal tax-exempt status ($400-$850 fee)
• Special issues for 501(c)(3) exempt entities
• Must not engage in partisan politics or substantial lobbying
• Some are “public charities”
• Have purposes specified in tax code and/or meet “public support” test
• Otherwise “private foundations” or “failed public charities”
• Less generous tax benefits to donors, but more control by donors
• Must meet “pay-out” requirement and pay excise tax on assets
www.indiana.edu/~nonprof

17. State incorporation, tax exemption
• State incorporation – voluntary
• Establishes organization as legal entity
• Rights and responsibilities under state law  governance
structure, protects name, enter into contracts, liability issues
• May incorporate in several states (“foreign”)
• Periodic (annual) reports and fees to maintain status
• Exemption from state and local taxes
• Aligned with, but not identical to IRS requirements
• Exemption from income, sales, and/or property taxes
• May require ongoing filing and/or reporting
www.indiana.edu/~nonprof

18. Other state/local regulations
• Register/file with state officials (limited in Indiana)
• Many differences among states in whether require registration
related to soliciting charitable donations and/or holding charitable
funds, endowments or trusts; managed by state charity officials (see
Unified Registration Statement: www.multistatefiling.org)
• May need to register in non-domiciled states if solicits or receives
donations from those states (“Charleston Principles”)
• Some states: professional fundraiser, consultants, or solicitors must
register (including Indiana)
• Some states: register if engage in charitable gaming/gambling
(including Indiana: Indiana Gaming Commission)
• Register/file with local gov’t: permits, land use, etc…..
www.indiana.edu/~nonprof

19. Enforcement issues
• Federal level
• Internal Revenue Service – adherence to tax-exempt
regulations, employee tax-withholding, excise taxes, etc…
• Federal Election Commission – if involved in partisan politics
• Federal Trade Commission – for issues involving charity fraud,
fraudulent solicitations (consumer protection issues)
• State level
• Attorney General – can take legal action on behalf of general
public (including donors): governance issues (duty of care),
fraudulent solicitations, “do not call” issues
• Local level – permits, police matters (embezzlement, abuse….)
www.indiana.edu/~nonprof

20. Revoked! What happens next?
• Seek retroactive reinstatement of exempt status (15 mo.)
• Demonstrate reasonable cause for not filing
• Certify took all possible action to meet requirements
• Document new procedures in place to prevent future mishap
• Submit new application for exempt status
• Pay fee: est. $600,000 - $1 million in IRS fees, plus other costs
• If small: reduced fee ($100) if re-apply by Dec. 31, 2012
• Become for-profit
• File Form 1120 and pay federal income taxes on net revenues
• Dissolve
• But must preserve intent of charitable assets
www.indiana.edu/~nonprof

21. What can you do?
• If nonprofit organization
• Recognize different types of legal status
• File required forms and reports
• Keep informed about regulations and reporting requirement
• Get connected to networks – and inform others in your networks
• If consultants, educators, trainers
• Help insure that nonprofit board members, staff, volunteers and
the general public understand regulatory systems
• If federal, state, local officials and regulators
• Communicate using all available media
• Make as extensive outreach as possible
www.indiana.edu/~nonprof