By Virginia (Ginny) R. Belcher, CPA | January 2015
For many calendar year not-for-profits, a new year brings new changes and new challenges for the organization. Program services, fundraising activities or the organization's management may change. However, one thing that remains a constant is the not-for-profit's obligation to file an annual return with the IRS. With the approach of the official tax filing season, it seemed appropriate to review the penalties that nonprofits are assessed for noncompliance.
Not-for-profits are subject to steep penalties for failure to file or late filing of their form 990. If an organization does not file its return by the due date, including extension, the penalty is $20 a day for each day the return is late. The maximum penalty for any return is the lesser of $10,000 or 5% of the organization’s gross receipts for the year. For organizations that have gross receipts over $1 million, the penalty is $100 a day up to a maximum of $50,000. These penalties can also apply if the organization files an incomplete return or fails to provide correct information.
If the organization is subject to this penalty, the IRS usually request that correct return information be provided by a specified date. If the information is not provided by this date a penalty of $10 a day may also be charged to an individual within the organization who fails to comply with the request. The maximum penalty for an individual with respect to a return shall not exceed $5,000.
Automatic revocation occurs when an organization does not file an annual return for three consecutive years.
Failure to file penalties may be abated if the organization has reasonable cause for the failure to file timely, completely and accurately. However, the determination of a reasonable cause exception to these penalties is made on a case by case basis taking into account all relevant facts and circumstances.
The regulations state that a request for abatement must be made in writing setting forth all the facts alleged as reasonable cause. This includes:
- What prevented the organization from requesting an extension of time to file if they did not request an extension;
- How the organization was not negligent or careless, but exercised ordinary business care and prudence; and
- What steps have been taken to prevent the same situation from occurring in the future.
Loss of exempt status could have disastrous consequences for a not-for-profit. Therefore, all not-for-profit leaders need to be familiar with the annual filing requirements in order to maintain their tax exempt status.