Most people who work in the nonprofit sector are familiar to some degree with the Form 990—the information return that many exempt organizations are required to file with the IRS annually. However, newer nonprofits can be caught off-guard by the requirement that the Form 990 be filed even before the nonprofit has received its determination letter. And even more seasoned nonprofit professionals may be surprised by the steep penalties that can come with late filing.
Background on Form 990. To back up a bit, the Form 990 filing requirement applies to most nonprofits that are exempt under Section 501(a) of the Internal Revenue Code—meaning 501(c)(3) charities and private foundations, 501(c)(4) social welfare organizations, 501(c)(6) trade associations and more. There are some exceptions, including churches and governmental organizations. In addition, there is the shorter 990-EZ and a 990-N postcard filing available in addition to the full Form 990, and an organization’s eligibility to file either of the shorter forms depends on its gross revenues. In a nutshell:
- An organization with gross receipts of $50,000 or less can file the 990-N (except for supporting organizations, which must file either a 990-EZ or 990);
- An organization with gross receipts under $200,000 AND total assets less than $500,000 can file 990-EZ (though sponsoring organizations of donor-advised funds and certain organizations with controlled subsidiaries must file a full 990 regardless of receipts or assets); and
- A private foundation must file form 990-PF regardless of receipts or assets.
Wrinkles for New Organizations. However, many organizations may assume that the 990 filing requirement doesn’t kick in until their exempt status is established and recognized in a determination letter, although the 990 instructions provide otherwise. Those instructions indicate that an organization that claims exempt status under section 501(a) but hasn’t not yet established that status by receiving a determination letter should file the appropriate form of 990. If filing either the full 990 or 990-EZ, the organization should check the box for “Application Pending.”
With IRS processing delays taking longer and longer, it is likely that many organizations will have at least one tax year end before they receive their letter and may find themselves in the position of having failed to file a timely return—which can mean penalties. The late filing rules are based on gross receipts, and can run up to $10,000, or 5 percent of an organization’s gross receipts (whichever is less), for organizations with gross receipts under $1 million. While it is possible to get the penalties abated by establishing reasonable cause, an organization can’t necessarily count on this.
Finally, it is worth noting that there is some interplay between the rules on auto-revocation and applying for exempt status that can create headaches. Some organizations that existed for multiple years before applying—and that didn’t file 990s for those early years—found that when they applied for recognition of exempt status, they received notice of auto-revocation for failure to file information returns three years in a row. Their application was then treated as a request for reinstatement of exempt status, which meant they might only be recognized as exempt from the mailing date of the application (instead of retroactive to formation). The IRS has tried to work around this administrative inconvenience by requiring all organizations to apply for recognition of exemption within 27 months of their formation date in order to have retroactive exempt status recognized. While 501(c)(3) organizations have long been subject to the 27-month limitation by statute, other exempt organizations aren’t—and it is very common for organizations seeking 501(c)(3) exemption who did not meet the 27-month requirement to file for 501(c)(3) status from the mailing date, and for 501(c)(4) status for the time period from formation to mailing date. While it is still possible to request retroactive exemption, organizations in this situation should consider consulting with an adviser on the best course to pursue.