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Form 990 and Annual Compliance for Nonprofits

Your dream has become a reality. The cause that is your passion has been transformed into a functional organization. While extensive efforts have been undertaken to bring the organization up to par with the standards expected of a quality organization within the nonprofit sector, you must pay diligent attention to compliance issues if the organization is to remain reputable, and in good standing with state and federal agencies.

A tax exempt organization’s annually mandated filing with the IRS is the Form 990. As of the 2007 fiscal year all organizations are required to file, regardless of revenue; however the required version of the form will differ based upon the year’s total receipts. The filing is due on the 15th day of the 5th month after the fiscal year end. For example, if the fiscal year ends December 31, the 990 is due on May 15th. Although most exempt nonprofits will have no annual federal tax obligation, failure to file your return in a timely fashion will nonetheless result in late filing penalties.

If a Form 990 is not filed on time, the IRS may assess a penalty in the amount of $20 per day each day, up to 5% of your gross income for that year or $10,000, whichever is less. Organizations with gross receipts of over $1,000,000 may be fined $100 per day. The IRS may penalize organization managers who do not comply with written demand for the filing.

The Pension Protection Act of 2006, which made the 990 filing mandatory even for small nonprofits, also implemented a rule requiring the IRS to revoke the exempt status of any nonprofit that is required to file an annual return (Form 990, 990-N, 990-EZ, or 990-PF) but has failed to do so for three consecutive years. Revocations are mandatory and automatic under the law. Since this process has been in effect, close to half a million nonprofits have had their tax exempt status revoked for non-compliance.

Many nonprofits are unsure of what forms they should file. The IRS currently has three forms: the 990-N, 990 EZ, and the 990.  To put these forms in a perspective most individuals can understand: the 990-N could be likened to the 1040-EZ, the 990 EZ would be like the 1040-A, and the 990 would be the 1040.  Most individuals who have ever filed their taxes know that each form becomes more difficult as you progress through them.  Each 990 form has specific guidelines to determine which form the organization may file.

 

 Financial Activity Filing Requirement
Gross receipts normally < $50,000

Note: Organizations eligible to file the e-Postcard may choose to file a full return

990-N (e-Postcard)
Gross receipts < $200,000 and Total assets < $500,000 990-EZ
Gross receipts > $200,000 or Total assets > $500,000 990
Private foundation (regardless of financial activity) 990-PF

 

The 990-N is an electronic filing that can only be filed by 501(c) organizations that normally have gross income (all income before any expenditure) under $50,000 per year. It is a fairly simple filing, submitted online through a registered preparer, and does not require detailed financial data.

While the 990-N is the minimum requirement for organizations under $50,000 in annual income, many small organizations choose to voluntarily file the 990-EZ instead of the 990-N in an effort to be transparent. Your 990 is more than just a mandatory filing- it is the face of your organization and an opportunity to show the public that your organization is so well run that it deserves more financial support.

The 990-EZ itemizes financial data for public inspection, while the 990-N does not. Also, many states require a Form 990 to be filed along with annual solicitation renewals and will not accept the 990-N to meet this requirement. Further, major donors and foundation grant makers often rely on are view of Form 990-EZ or 990 in order to make giving decisions. Finally, the 990-N system will not recognize the EIN# of organizations whose tax exemption is not active, and thus those organizations will need to use the Form 990-EZ to meet the annual filing requirement.

Outside of IRS compliance, some states, though not all, will require annual state level tax return filings. In addition to state tax considerations, in most states the organization must file an annual report with their state each year to remain an active corporation. While these forms typically require a minimal amount of information, failure to file may lead to an administrative dissolution of the corporation.

A final state level compliance issue to remain abreast of is concerned with charitable solicitation registration requirements. Such laws have been implemented in most states in an effort to protect consumers, and the statutes require charitable organizations to register and become licensed prior to the initiation of any solicitation activities. These registrations typically require annual renewal, and come with stiff penalties for violations. If an organization will solicit in more than one state, a valid registration must be in place in each state where representatives will seek donations.

To remain in full compliance, administrators must be aware of all forms and schedules that must be filed, Fortunately, CharityNet USA is here as a trusted partner to assist you with identifying all required compliance filings and preparing these filings for regulatory agencies, so that you can focus on fulfilling your invaluable mission!

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