How come we never had to file anything with the IRS before?

Dear homeschool leader,

Did you just hear the shocking news that all nonprofit organizations have to start filing annual returns with the IRS?

You may be wondering, “What changed? We never had to file anything before!” And you’d be right.

For many years the IRS had a problem: nonprofit organizations were not giving them annual information returns (Form 990EZ or Form 990). The IRS let small organizations (under $25,000 per year was considered small) get by without doing any annual filings, but the IRS couldn’t tell if an organization failed to file an annual return because

  1. The organization had died or
  2. The organization had less than $25,000 in income and wasn’t required to file a return or
  3. The organization was large and just not filing a return with the IRS. IOW, they were not playing nice and the IRS didn’t like that!

The IRS found some nonprofits are not following the rules and (gasp!) complained to Congress.

Congress passes the Pension Protection Act in 2006.

Photo credit: kakisky from morguefile.com

So the IRS got Congress to pass the Pension Protection Act in 2006. It required two things from nonprofits:

1. All small organizations (revenues of less than $25,000 per year) had to start filing an electronic form to the IRS every year. What the IRS called the 990N or their “e-postcard.”

and

2. All tax-exempt organizations that didn’t file an information return for three consecutive years will automatically lose their tax-exempt status. I call it the “3 strikes and you’re out” rule.

 

So here’s the timeline:

2006: Pension Protection Act requires annual electronic notice from all small nonprofits.
2007, 2008, 2009 were the first years that the annual notification requirement was in place.
2010: The first automatic revocations take place. The “3 strikes, you’re out” rule.

Word about the new required annual filing has been slow to get out. After all the IRS doesn’t have a big marketing budget. They sent letters, created press releases and even created a YouTube video, but a lot of small nonprofits were still in the dark.

Slowly, a lot of small organizations learned that their tax exempt status had been revoked and they didn’t even know about it! I guess the IRS got an earful of complaints because they (finally) created a system where small nonprofits could get their tax exempt status reinstated.

IRS created a “streamlined” reinstatement process for nonprofits

The process is outlined in IRS Revenue Procedure 2014-11 that came out in January 2014. Yes, that’s 2014. Eight years after the whole reporting requirement was enacted by Congress. We never claimed the IRS was speedy, did we?

The IRS loves paper and so the Rev Proc 2014-11 requires nonprofits to send the IRS a lot of paper. They have to file the rather long Application for Tax Exemption (Form 1023 or 1024) and probably file their annual information returns (Form 990) way back to 2008.

I’m not quite sure what’s streamlined about this, but I guess to a turtle, a snail is speedy!

So that’s why you are wondering if the IRS has some sort of new reporting requirement. It’s not really new, it’s 8 years old, but maybe you’re just now hearing about it.

What to do now

  • Brush up on the Form 990N and start filing it now!
  • Search the IRS list of revoked organizations to see if your nonprofit is listed there.
  • Read Rev Proc 2014-11 if you like reading IRS jargon to see what paperwork you need to file with the IRS to get your tax exempt status reinstated.
  • Or better yet, arrange a phone call to talk over your situation with me, HomeschoolCPA, Carol Topp. I’m pretty good at understanding homeschool organizations and can help you know where you stand with the IRS and what to do next.

Thanks to Peter B. Nagel over at  http://www.cobar.org/index.cfm/ID/20108/subID/26452/CORP for providing the history of the IRS rules.

Carol Topp, CPA

 

 

 

Video: Annual IRS fiings for homeschool organizations

A short video on annual IRS filings for homeschool organizations.

I explain the annual IRS information return, Form 990.
See what you think:

For more information on the Form 990-N, read this 990-N FAQ page

Think your group’s tax exempt status was revoked? I can help. Read more here…

 

Carol Topp, CPA

Do you have to file to be tax exempt every year?

TaxQuestions
Once you file a support group as a 501(c)(7) social club, does the group have to file this exempt paperwork every year?
Susan R
Susan,
An organization applies only ONCE for tax exempt status.
But, tax exempt organizations must file an annual reporting of their continued existence, Form 990/990EZ or the online 990N every year with the IRS.
It’s a little like passing your drivers license test once, but you must renew your license every couple of years.
Most homeschool organizations file the online 990N and not the longer 990/990EZ because their annual gross income is under $50,000.
If you fail to file the 990/990EZ/990N for three consecutive years, your group’s tax exempt status is automatically revoked! Then you may end up owing taxes. 🙁
Additionally, some states require annual filings as well. Visit Hurwit and Associates to see what your annual filing requirements in your state might be. Pick your state in the drop down menu on the right sidebar.
I hope that helps!
Carol Topp, CPA

Homeschool group offering field trips is lost and confused!

Boys on field trip
We offer field trips, parties, meetups, and classes to homeschoolers.  Each person pays us the fee for the field trip or class, and we pay the venue.  We do not charge membership fees.  Most of our income comes from the chaperone tickets.
I am so lost.  When I took over this business, my predecessor told me that I did not need to file any paperwork at all.  I think I was supposed to file a postcard.  We “grossed” under $10K every year, but more than $5k.  I guess my goal is to be in compliance with any laws.
Jackie

 

Jackie,

Thank you for contacting me.

I looked at your website and I am amazed at the creative things that homeschool parents come up with to help others!  Neat stuff! 🙂

Now it’s up to me to try and figure out where you fit into the IRS nonprofit  structure.

Your group might be classified as a social club.
See this article and chart on how the IRS defines a social club.
http://homeschoolcpa.com/wp-content/uploads/2009/09/HomeschoolGroupsAs-SocialClubs.pdf

The advantage of a social club is that you do not have to apply for tax exempt status with the IRS. Social clubs can “self declare” their tax exempt status. Your previous leader was correct there, even if she didn’t know why!

The IRS does ask that all tax exempt organizations file the Form 990N, ePostcard, annually.
Carol Topp, CPA

IRS has streamlined procedure to get tax exempt status reinstated.

Bloomberg News The Internal Revenue Service building in Washington, D.C.

Good news for nonprofits that didn’t know they needed to be filing annual returns with the IRS (Form 990) and lost their tax exempt status.

The IRS has a new streamlined  program to give retroactive reinstatement of tax-exempt status if the organization applies within 15 months after the later of the date of the revocation letter, or the date on which the IRS posted the organization’s name on a revocation list.

Nonprofits must reapply for tax exempt status within 15 months of when tax exempt status was revoked, but at least the IRS will reinstate back to the date it was revoked. They used to only reinstate nonprofits back to the postmark of the application leaving a gap when the poor nonprofit had to file and pay taxes!

This happened to several homeschool groups. They either didn’t know about the required IRS annual reports (Form 990), or missed a deadline and had their tax exempt status revoked. A few of them had a gap of several months (or years) of when they were not tax exempt and had to file and pay corporate income taxes.

For more details on the new IRS program: http://www.accountingtoday.com/news/IRS-Offers-Ways-Groups-Regain-Tax-Exempt-Status-69160-1.html?taxpro

http://www.davisbrownlaw.com/davis-brown-tax-law-blog-article.aspx?id=1859

If you like reading IRS documents: IRS Revenue Procedure 2014-11

What does this mean for your homeschool group?

1. Start filing the Form 990N. EVERY nonprofit is required to be filing this annual information return with the IRS. Read this blog post. Failure to file for 3 consecutive years means your tax exempt status is automatically revoked!

2. If you received a letter from the IRS for not filing the Form 990, contact me about getting your tax exempt status reinstated. I can prepare the application or review what you prepare.

 

Carol Topp, CPA

 

IRS requires homeschool support group to have “organizating documents”

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(Background: Lisa’s homeschool support group decided to officially declare tax exempt status as a 501(c)(7) social club. Lisa called the IRS to be added to their database so that she could file the annual Form 990N as the IRS requires of all nonprofit organizations.)

Carol,

I just spoke with the IRS about being entered into their database.  I am frustrated.  The first question she asked me was whether we have an organizing document. After I said we don’t, but are self declaring 501c7 status, she informed me that unless we have an organizing document, we don’t have standing with them and are not considered an exempt organization, so we wouldn’t file a 990N.

Lisa in PA.

 

Lisa,

How extremely frustrating the IRS can be!

Organizing documents are:

  • Bylaws
  • Articles of Association for unincorporated organizations.
  • Articles of Incorporation for organizations that decide to form a nonprofit corporation in their state.

Most homeschool support groups do not incorporate in their state. They remain unincorporated associations. (Sounds nice and official, doesn’t it?)

Homeschool co-ops or other large groups frequently incorporate as nonprofit corporations in their state and go on to apply for tax exempt status with the IRS.

Read more about nonprofit incorporation:

Your homeschool support group  won’t ever send the IRS your “organizing documents” since you are self-declaring tax exempt status as a social club and do not have to file a Form 1024 to apply for 501(c)(7) status.

But it’s still a good idea for a homeschool support group to have bylaws and Articles of Association. They spell out the foundation of your group’s purpose, membership, and how the board is chosen.

Your homeschool support group could create bylaws or “Articles of Association” (I added a sample to my Sample Documents page) as your organizing documents.

Your board should vote to approve the bylaws or Articles of Association, but you don’t have to file the document with the state or the IRS.
Then call the IRS again, hope for another person this time, and see if you can get into the IRS database.

 

Carol Topp, CPA

 

IRS Form 990-N FAQ

990N

What’s a 990-N?

Since 2010, the IRS has required all nonprofit organizations file an annual information return. (all means all nonprofits, except churches) The IRS Form 990-N is a simple, online form that all nonprofit organizations with annual gross revenues of less than $50,000 must file every year. That means your homeschool group (unless you are under the ministry of a church).

When is the 990-N due?

The Form 990-N is due 4 1/2 months after the end of your fiscal year, so May 15 for groups that run on a calendar year.

What  does the Form 990-N ask?

The Form 990-N is very simple. It is only 6 questions. No financial information is given.

A. Calendar year or tax year dates
B. Check if gross receipts are $50,000 or less
C. Name and address of organization
D. Employer Identification Number (EIN)
E. Website
F. Officer name and address

How do I file the Form 990-N?

It is filed online at the IRS.gov website IRS.gov/990N

We’re not a 501(c)(3)yet. Do we still need to file the Form 990-N?

Yes, you do. Start filing the Form 990-N even before you file for 501(c)(3) tax exempt status. File a 990-N even if you are a self declared 501(c)(3) social club.

File the Form 990-N even if you are exempt from applying for tax exempt status because your annual gross revenues are under $5,000 or because your are a self-declaring 501(c)(7) Social club (like most homeschool support groups).

Read more about tax exempt status for support groups here: Homeschool Groups As Social Clubs

Since you have not applied for 501(c)(3) status, you are not in the IRS database, so you need to call the IRS Customer Account Services at 1-877-829-5500 and be added to their database so you can begin filing the Form 990Ns. It typically takes 6 weeks after you call to be added to the IRS database.

What happens if I file the 990-N late?
The IRS will send you a reminder notice if you do not file your 990-N on time, but the IRS does not assess a penalty for late filing.

What happens if I fail to file the Form 990-N for three consecutive years?
If you fail to file for three consecutive tax years, you will lose your tax exempt status. This will  occur on the filing due date of the third year.  If you lose your tax exempt status, you must reapply for tax exempt status. This means filing the Form 1023, the new shorter 1023-EZ or 1024. (I can help with that. Contact me) and paying the IRS filing fees.  You may owe taxes for the period when you were not tax exempt.

The IRS requires that all organizations who lose their tax exempt status file the Form 1023/1023-EZ/1024 even if they were exempt from filing the form before.

That means doing the paperwork and paying the IRS filing fee ($275 , $400 or $850).

We’ve never filed any forms with the IRS. Why now?

Before 2006, small nonprofits with annual gross receipts under $25,000 did not have to make any yearly filings with the IRS. But in 2006, Congress and the IRS introduced a new form, the 990-N. The IRS needed to clean out their database of nonprofit organizations, many who had old addresses or were closed. The Form 990-N keeps the IRS and donors up-to-date on tax exempt status of small organizations.

Will we owe back taxes or penalties?

There may be a period of time when your organization was not tax exempt. The IRS may expect you to pay income tax for that period. (I can help with filing your tax returns. Contact me) Fortunately, the IRS is not assessing penalties for late filing of Form 990-N.

I have never heard of this before and now I think we’re in trouble! What should I do?

1. Stay calm. Everything will be OK.

2. Read my blog posts on Form 990N.

3. Discuss the situation with your board.

4. Consider arranging a phone call with me, Carol Topp, CPA to discuss the next step and your options. Contact me

I hope that helps!

Carol Topp, CPA

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Confused over IRS dollar thesholds for tax exempt filing status

GirlThrowsMoney

Carol,

Two local CPAs we’ve talked with are confused about the $5,000 threshold that you speak of.
They talk of a $25,000 threshold. They both seem to think we don’t need to do anything if we are under $25,000. Can you explain?

Melissa M

 

Melissa,

The $5,000 threshold is the threshold for filing a Form 1023 application. IOW, if your gross income is under $5,000 you do not have to file the application; your group is automatically tax exempt.

It is found in the instructions to Form 1023 on page 1 under “Form 1023 not necessary.”
http://www.irs.gov/pub/irs-pdf/i1023.pdf

 

The $25,000 that the CPAs mentioned is an  old figure. It was raised to raised to $50,000 in 2010.

It is the threshold for organizations to file an annual Form 990EZ instead of the simpler 990N (electronic postcard). See http://www.irs.gov/Charities-&-Non-Profits/Annual-Electronic-Filing-Requirement-for-Small-Exempt-Organizations–Form-990-N-%28e-Postcard%29

 

I am quickly learning that even if you are under the $5,000/year threshold the IRS expects all nonprofits to be filing the 990N every year. I’ve had several nonprofit clients that failed to do this and it is holding up their tax exempt status approval.

Unfortunately,  there is no longer any truth to: “If you’re under $XXX, you don’t have to file anything.”
The rules changed back in 2010 and the IRS is enforcing them!

I hope that helps!

Carol Topp, CPA

 

 

Homeschool group waiting to file for 501(c)(3) status..what are they?

The important part

I am working with three friends to start a homeschool co-op this fall.  I purchased your book and read over your website.  I can see we may need your services in the near future.  For now, however, I just have one question that I couldn’t seem to find an answer to in your material.

 I would like to apply for non-profit status with my state and the IRS.  However, fees are discouraging right now.  If we are charging parents to drop off for instruction 2 days a week and all that money is going right back into rent, materials, etc and no profit is made, can we just start doing that before we apply and then “save” money to apply for non-profit?

And then if the answer is yes, what are we until then for tax purposes? Do we have to file taxes  just as a business and just show $0 profit and $0 taxes owed?  

Lynne D in PA

 

Lynne,

Great question!

Yes, you can organize and operate as a nonprofit for a while and save up some money to apply for tax exempt status.

The IRS expects nonprofit organizations to apply within 27 months of formation. If you file for nonprofit corporation status in your state, then the day you become incorporated is the date of formation. It is sort of like the organization’s official birth date.

The IRS will grant you tax exempt status from the date you incorporate. It “back dates” your tax exempt status.

You should not consider yourselves as a for-profit business if you are organized (meaning have a board and bylaws) and operate (no profit motive, no one pocketing the profits) as a nonprofit. You can call yourself an “unincorporated nonprofit.” That has a nice, official ring to it!

You do not need to file a business tax return.

So, the bottom line is that you can start and run your co-op for about a year, maybe close to two years, and then apply for tax exempt status with the IRS. I recommend getting nonprofit incorporation from PA first, maybe about 6-12 months before you apply to the IRS.

After you incorporate, I strongly recommend you start filing the annual Form 990N with the IRS. It’s a simple 8-question online form. Start filing the Form 990N even before you file for 501(c)(3) tax exempt status.

You can call the IRS Customer Account Services at 1-877-829-5500 and be added to their database so you can begin filing the Form 990Ns. It typically takes 6 weeks to be added to the IRS database.

I hope that helps!

Carol Topp, CPA

All nonprofits need to file a 990N every year (or else!)

2009 Form 990

I’ve read your books and really appreciate the information.

When you say you have 27 months from when you file with your state for incorporation as non-profit to file with the IRS, is that only if you want the IRS to grant 501c3 status retroactively to your date of incorporation?

My concern is that I would like to file as a nonprofit with my state so I can get the protection afforded by incorporation but I don’t anticipate seeking 501c3 within the next 27 months and I just need to be sure that is not a deadline to file after becoming a non-profit with the state.

Your clarification is much appreciated.

Tiffany

 

Tiffany,
If you do not file for tax exempt status with in 27 months of the date of your formation (nonprofit incorporation), then the IRS will only date your tax exemption to the date they receive your application, not back to when you were formed.

If you do not have tax exempt status, then you need to be filing a corporate income tax return (Form 1120) and pay corporate income tax on any surplus you have.

If you plan to file for tax exempt status then you should file an annual 990N (the IRS electronic postcard) every year until you tax exempt status is granted.

Lately I have helped several nonprofit clients that formed years ago and were not filing the 990N each year. Now the IRS is making them go back and file corporate income tax returns, even though they have always been nonprofits.

I am now telling ALL nonprofits (even one like yours that is delaying filing for tax exempt status), to PLEASE file the 990N EACH year or it will be unpleasant when you do apply for tax exempt status.

You can call the IRS Customer Account Services at 1-877-829-5500 and be added to their database so you can begin filing the Form 990Ns. It typically takes 6 weeks to be added to the IRS database.

Carol Topp, CPA