Recent press coverage of the Form 990-N requirement for small charities has caused grantmakers to ask whether they should modify their due diligence procedures for grantmaking. As reported by the press, many charities with less than $25,000 in annual gross receipts may be at risk of losing their tax-exempt status for failing to file with the IRS. The filing, Form 990-N, was created in response to a new requirement in the Pension Protection Act of 2006 stipulating that small organizations not required to file Forms 990 or 990-EZ need to annually report certain basic information to the IRS. There are no financial penalties for a charity that fails to file the Form 990-N. However, failure to file the form for three consecutive years will result in revocation of the organization's tax-exempt status.
May 17, 2010 marked the end of the first three-year period for filing Form 990-N, and thus the first time that smaller charities faced the loss of tax exemption for failure to file the form. As a result, the Council's legal department has been receiving questions regarding whether grantmakers' due diligence procedures need to be changed to check the continued charitable status of their smaller grantees. Assuming a grantmaker already has adequate due diligence procedures in place to verify the continuing charitable status of potential grantees prior to making a grant, no new procedures are required. The same general safeguards for grantmakers in place prior to the Form 990-N requirement still apply. Specifically, the IRS will allow grantmakers and other donors to rely on an organization’s letter of determination until the IRS publishes notice of revocation. The IRS announced that it will publish a list of revoked organizations on its website (www.irs.gov/charities) and that the revoked organizations will be removed from Publication 78. However, as expected, the IRS did not announce revocations for failure to file immediately after May 17 but instead plans to take some time to post the list of revoked charities to ensure that the agency does not inadvertently revoke an organization's tax-exempt status. In addition, IRS Commissioner Douglas Shulman announced that the IRS will issue guidance on how small charities that may have missed the filing deadline can complete the missed filing and maintain their charitable status.
The Council expects that most of the revocations will be of organizations that no longer exist. If your grantees have been filing Form 990 or 990-EZ or if they have filed the Form 990-N, they aren’t at risk of revocation. In addition, the Form 990-N requirement did not change the fact that churches, their integrated auxiliaries (a category that includes many church schools), and conventions or associations of churches are not required to file the Form 990. Therefore, grantees in these categories are not affected by the new requirement.
For more information, see the IRS resources on this topic. The IRS website also allows you to search Form 990-N filings.