IRS Exempt Status Initiative: Indiana Nonprofits and Compliance with the Pension Protection Act of 2006
Briefing 2011: No. 1
Kirsten A. Grønbjerg, Project Director
Kellie McGiverin-Bohan, Kristen Dmytryk, Jason Simons
Our report looks at what we can learn about nonprofits that have had their exempt status revoked by the IRS. We do so by examining their characteristics as reported in the IRS Business Master File (BMF) of exempt entities published in April 2010, that is, just before the original filing deadline of May 17, 2010.
In early August of 2010 we launched a special initiative to contact some of the 6,950 Indiana nonprofits that were at risk of losing their federal tax-exempt status because of a change in federal reporting requirements. They were among the more than 321,000 exempt organizations nationally that had missed a May 17, 2010 deadline for filing with the Internal Revenue Service (IRS) and still had not done so by June 30, 2010. Most were small, exempt organizations that were required to file an entirely new form (990-N) for the first time.
On June 9, 2011, the IRS released a long-awaited list of exempt organizations that had failed to file one of the required forms by the respective deadlines. Nationally 275,000 nonprofits had their tax-exempt status revoked, including 6,152 Indiana nonprofits. In all, 9 percent of Indiana nonprofits on the April 2010 BMF had their tax exempt status revoked.
We also take special look at 108 Indiana noncompliant, “at-risk” nonprofits, which had previously participated in one or more Indiana Nonprofits: Scope and Community Dimensions surveys since 2002. Because they had supported our project efforts, we sought to alert them to the new reporting requirements. By late July, 2010 when we started our initiative, 19 percent had either already filed the new form or were known to us to be defunct from our prior project work. We were able to contact 30 percent of the 108 nonprofits directly and another 28 percent indirectly by the October 15 deadline, but could not reach the final 23 percent.Based on the final June 2011 revocation list, it appears that 38 percent of our 108 nonprofits maintained their tax-exempt status. Another 17 percent are defunct. However, we believe that at least 27 percent were still in existence by the end of 2010. They account for 43 percent of the 67 nonprofits on our list which had their exempt status revoked by the IRS. Quite possibly, some of these may still be operating without knowing that their exempt status has been revoked.
Our report reveals several key findings about the 6,152 Indiana nonprofits that had their tax-exempt status revoked by the IRS because they failed to meet the new filing requirements mandated by the Pension Protection Act of 2006.
- Some 9 percent of Indiana nonprofits that were included on IRS published lists of tax-exempt organizations in April 2010 (before the May 17, 2010 deadline for meeting the new filing requirements) lost their tax-exempt status. Other estimates of 17 percent nationally exaggerate the loss because almost half of the revoked nonprofits had already been omitted from the published list of exempt entities by April of 2010.
- Cemeteries, social welfare (advocacy) nonprofits, and business groups had the highest revocation rates. Losses were also disproportionately high for human service and environmental/animal nonprofits; for small nonprofits; and for those that had obtained their exempt status fairly recently. Charities had revocation rates that were slightly below the overall average.
- Fraternal societies operating under the lodge system, veterans groups, and other nonprofits with close connections to national or regional headquarter organizations were most successful in avoiding revocation of their tax exempt status, given relatively high percentages that had been at-risk of losing their tax exempt status.
- Many nonprofits that lost their exempt status were undoubtedly defunct. However, follow-up work with a small group of Indiana nonprofits that have participated in one or more surveys conducted as part of the Indiana Nonprofit Sector project shows that perhaps up to two-fifths of the revoked nonprofits are still alive. These nonprofits will now have to go through a cumbersome and expensive process of getting their exempt status reinstated. Otherwise, they must disband, begin to file corporate tax returns and pay relevant income taxes on net earnings, or continue to operate below the IRS radar screen.
- Many of the nonprofits that were at risk of losing their exempt status and/or lost it appear to be confused about differences in legal status at the federal and state levels and by the complexity of nonprofit regulations.
We are grateful to the many Indiana nonprofits that have participated in various phases of our research and hope this initiative and report is of use to them. We are also grateful for assistance provided by Jacob Knight, Katherine Novakoski, and Virginia Simpson. We also thank Beth Gazley, Leslie Lenkowsky, Al Lyons, members of the Project Advisory Board and several anonymous reviewers for their comments and suggestions.