June 8, 2011

I.R.S. Ends Exemptions For 275,000 Nonprofits

The I.R.S. announced on Wednesday that it had revoked the tax exemptions of 275,000 nonprofit organizations after they did not meet legal requirements to file annual tax forms.

The action shrinks the nation’s growing nonprofit sector by roughly 17 percent, to about 1.3 million charities, trade associations, membership groups and labor unions.

Lois Lerner, director of the division of the Internal Revenue Service that oversees tax-exempt groups, said the agency believed most of the organizations on the list were defunct, though there was really no way to know because so many of them simply could not be reached.

“In many cases, we didn’t have a good address because the last one was many years old and they hadn’t had to file since then because they weren’t big enough,” Ms. Lerner said.

Leaders of several nonprofit groups predicted disruptions and nasty surprises as a result of the I.R.S. action, but most said it was necessary.

“In the long run, it is going to be a good thing because academics, researchers, policy makers and others will have more accurate data on the nonprofit sector,” said Tim Delaney, chief executive of the National Council of Nonprofits, a trade association.

Until a change in federal law in 2006, only organizations with annual revenue of $25,000 or more — roughly one-third of the 1.6 million nonprofit groups — were required to file.

That law, the Pension Protection Act, required all organizations to file returns, but because it was embedded in 393 pages of a law that otherwise dealt with pension issues, many nonprofit groups did not know that.

When the deadline for complying with the law came last year, the I.R.S. realized as many as one- quarter of all nonprofit groups on the rolls, including charities as well as labor unions, membershiporganizations, trade associations and others, stood to lose their exemptions.

The agency issued a reprieve and redoubled its efforts to alert nonprofit groups of the responsibility to file. It reached out to state nonprofit associations and umbrella groups, asking for their help in getting out the word about the new requirement, and made a big push to get local news media to report on it. “I spoke to a different TV station every 15 minutes for an entire day,” Ms. Lerner said. She said the impact of that effort and others was “quite big,” with many groups taking advantage of a program that helped them avoid revocation if they complied by Oct. 15, 2010.

The Urban Institute’s National Center for Charitable Statistics analyzed the list of delinquent nonprofit filers that the I.R.S. released last year. Roughly 90 percent of them had never filed a tax return, said Katie L. Roeger, assistant program director at the center, suggesting that they had never raised $25,000 in a year.

About one-quarter of them got tax exemptions before 1980, she said, and may have gone out of business without telling the I.R.S.

“A lot of these organizations are in human services or community improvement,” Ms. Roeger said. “Things like local sports and recreation clubs, country clubs, amateur sports.”

Most of a dozen calls made to groups on the list ended at disconnection recordings. Gary Spiers, president of the Pasadena Roving Archers, a group in Pasadena, Calif., that is on the list, said in an e-mail that it had filed a tax form reflecting the year that ended in July 2010.

No one answered at the Alliance of Polish Clubs in the U.S.A. in Chicago, another group on the list, but its Web site carries a news release for the 13th Annual Queen of the Polish Constitution Day Parade on April 15.

“We know there will be some that still didn’t get the message that they needed to file,” Ms. Lerner said.

The I.R.S. has created a process for nonprofit groups with annual revenue less than $25,000 that find themselves on the list and wish to reapply for tax exemption, including a reduced fee of $100.

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