Crisis Looming for Small Tax Exempts: IRS Taxpayer Advocate

Tax-exempt organizations face three filing-based problems as they head into the 2008 filing season, according to Nina Olson, National Taxpayer Advocate at the IRS. Olson, speaking at an American Law Institute-American Bar Association-sponsored event on November 29, 2007, also recommended solutions that she hoped the federal government will consider to rectify the problems.

Among the issues were:

1. automatic revocation of exempt status of small tax-exempts failing to submit electronically their e-Postcard information
2. the failure of many Form 990 filers to attached Schedules A or C to their returns
3. the unreasonably low $25,000 gross receipts cut off for requiring an annual Form 990 from tax-emept organizations

E-postcard

Small tax-exempt organizations whose gross receipts are $25,000 or less will be required to file electronically Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required To File Form 990 or 990-EZ in 2008. Organizations that do not file the e-Postcard will have their tax-exempt status revoked.

"We have a crisis looming. There is no reasonable cause exception. It is summary revocation," Olson warned. Olson reported that most of the addresses the IRS has on file for small tax-exempt organizations are invalid. Exempt organizations should be allowed a certain amount of time after the revocation to report to an IRS office and complete an e-postcard, according to Olson. By doing so, their tax-exempt status would be reinstated without them having go through the time-consuming process of re-applying for exempt status, she added.

The IRS is using the new Form 990-N (e-Postcard) because it will help the agency keep in touch with very small charities that it has "tended to lose contact with in the past," said Thomas J. Miller, technical advisor for the IRS. Miller also clarified that Form 990-N does not apply to churches.

Form 990

Olson reported that the most common error found with respect to Form 990, Return of Organization Exempt From Income Tax, filings was the failure of taxpayers to attach a Schedule A or C. Olson recommended that the IRS should include in several places on the Form 990 a statement reminding taxpayers to attach the Schedule(s). Including a statement in the instructions alone would not be sufficient, she added, since the instructions are lengthy and her experience has been that most taxpayers do not read the instructions. Olson remarks were based on the fact that the IRS abated a large number of delinquency penalties for filing errors assessed against exempt organizations in 2006.

Filing Threshold

Exempt organizations whose gross receipts are more than $25,000 are required to file Form 990, or Form 990-EZ, Short Form Return of Organization Exempt from Income Tax. The $25,000 threshold amount was established in 1982, Olson observed. Since the cost of living has skyrocketed since 1982, Olson advocates that the threshold should be raised to $50,000 and indexed for inflation.

Posted December 11, 2007.