The Nonprofit Version of Y2K?

Do you remember Friday, December 31st, 1999? I do. I remember rushing to backup all of my business and personal data to CD-ROMs. I remember wondering just how fast and how far the market for COBOL programmers was going to fall. I remember losing count of how many times I heard Prince‘s 1999. I remember staying in that night to watch CNN, wondering if the anticipated global computer meltdown was going to occur (and feeling, I admit, just a bit of a letdown when it didn’t).

Over ten years later, heading into this mid-Spring weekend, I find myself experiencing a bit of déjà vu. If you are at all involved in the nonprofit world, you probably know by now that this Monday, May 17th, marks a significant deadline for nonprofit organizations nationwide. Under the provisions of the Pension Protection Act of 2006, any organization that has not filed its annual tax form with the IRS for at least one of the past three years by that date will lose its tax-exempt status. The 2006 law actually only changes the game for organizations with annual revenue below $25,000, which have for decades been exempt from filing requirements. For larger organizations, the filing requirement has not changed.

How hard could it be?

If no action is taken, more than 365,000 nonprofits will lose their tax exemption — along with their ability to accept tax-deductible donations and receive foundation grants. But if this fate befalls an organization, it means that at least one of the following statements are true of its leaders:

1. They were not aware of the regulatory change and its implications for their organization, despite the three-year notice and grace period given by the IRS and the widespread coverage of the issue in both mainstream and social media over the past few months. If you are still not aware of the details of the change, I suggest you check out this information from the National Council of Nonprofits or this from the IRS itself.
2. They did not recognize that their organization had not met the filing requirement for each of the past three years. I would hope that every board member and nonprofit leader would be aware of their organization’s filing status, but if not, the Urban Institute’s National Center for Charitable Statistics provides this simple tool to determine if your organization is at risk of losing its exemption by not filing.
3. They failed to take the necessary step to file this year. While larger organizations and private foundations need to complete Form 990, 990-EZ, or 990-PF, an organization with revenues under $25,000 need only perform the exceedingly simple task of completing Form 990-N, the online “e-postcard”. This literally involves providing the following eight pieces of information:
   • Employer identification number (EIN)
   • Tax year
   • Legal name and mailing address
   • Any other names the organization uses
   • Name and address of a principal officer
   • Web site address, if the organization has one
   • Confirmation that the organization’s annual gross receipts are normally $25,000 or less
   • If applicable, a statement that the organization has or is going out of business

Good riddance?

Here’s the part where I may lose a friend or two. I would suggest that if an organization loses its exemption because one or more of those statements are true of its leaders, the organization probably shouldn’t exist as a tax-exempt nonprofit. In all likelihood, the organization has ceased — or never started — operations. Alternately, it may not be being operated in a sufficiently professional and effective matter to merit the investment of charitable dollars that could be put to better use elsewhere in the nonprofit sector.

The number of registered 501(c)(3) organizations nearly doubled between 1996 and 2009 — from approximately 654,000 to over 1.2 million. Many, including myself, have cited and questioned the necessity and appropriateness of this proliferation. Others have downright criticized it. If my theory that the vast majority of any organizations which lose their exempt status next week are not operational anyway is true, there will be little or no impact on the efficacy of the nonprofit sector. However, this “thinning of the ranks” may be very valuable in giving us a truer sense of the size — and heading off criticism — of the nonprofit sector.

Now if only there were a Prince song about this…

photo credit: Mykl Roventine