Nonprofit 411: What to expect when you’re expecting to be recognized as an exempt organization

By Charles Fayerweather, Partner, Hemenway & Barnes LLPFayerweather_Charles_260x360

If you start a new tax-exempt organization you certainly do not expect to have the IRS revoke your tax-exempt status before they have recognized you as tax exempt in the first place. But that is what is happening to some new organizations. It is due to the combination of the relatively new IRS rule that automatically revokes tax-exempt status if filings are not made for three years, and recent IRS delays in processing applications for recognition of exempt status– which sometimes exceed that three year period.

To avoid having this happen to your organization, it is important to understand that your filing obligations start when your organization is established, not when it is recognized by the IRS. Many organizations mistakenly believe that until they have received a determination letter from the IRS they are not tax-exempt and should not be making the annual filings required of all tax-exempt organizations. Or they believe that so long as they remain small they do not need to make annual filings. Both of those beliefs are incorrect.

A tax-exempt organization must commence annual filings with the IRS as soon
as it is “established.” Generally, “established” means the date that a
corporation is formed; or the date that a trust is funded with any assets, even
very small amounts; or, if different, the earlier date that the tax-exempt
organization says that it was established when filing to obtain a taxpayer
identification number, or filing Form 1023 or Form 1024 to obtain recognition of
exempt status.

In all cases (except for certain religious organizations that are excused from
annual filings) some variation of IRS Form 990 must be filed within five and a half
months (or 11 ½ months if an extension form is filed) after the end of the
organization’s first fiscal year, even if that first fiscal year is a “short year.”

For example, if your organization is formed in October, 2014 with a fiscal year
ending December 31, 2014, your first Form 990 is due May 15, 2015 (or
November 15, 2015 with an extension). Thereafter, filings will be made on those
same dates in each year. The only question is what form to file. Organizations
expecting to be classified as private foundations should file Form 990-PF
regardless of what revenues they have. Organizations expecting to be classified
as public charities should file Form 990 or Form 990-EZ, unless they have gross
revenue of less than $50,000, in which case they may file Form 990-N (ePostcard),
which is an online-only filing. Failure to file any version of Form 990 for three years will result in automatic revocation of exempt status, which will invalidate any pending application for recognition of exempt status. Failure to file Form 990, Form 990-EZ or Form 990-PF, as appropriate, also can result in penalties of up to $50,000 for each late return.

Most required state filings also must commence as soon as an organization is
established. Failure to make any required filings (Form PC in Massachusetts) with
an attorney general’s office could make it illegal for the organization to solicit
funds in that state and could cause other problems for the organization’s
charitable activities. For a corporation, failure to make any required filings with a
state Secretary of State Corporations Division may result in automatic revocation
of corporate status.

Thanks for our title is given to, “What to Expect When You’re Expecting,” Heidi Murkoff and
Sharon Mazel, © 1984, Workman Publishing Company.
Copyright © 2014 Hemenway & Barnes LLP

This advisory is provided solely for information purposes and should not be construed as legal
advice with respect to any particular situation. This advisory is not intended to create a lawyer-client relationship. You should consult your legal counsel regarding your situation and any specific legal questions you may have.