The IRS v. charities
This article caught my eye, though I’m still not sure why. It seems troubling on several fronts, so, hopefully you can help me out. Approximately 275,000 nonprofit organizations, lost their nonprofit status with the IRS earlier of this year. To explain, let me begin, as they say, at the beginning.
Until 2006, nonprofit organizations with less than $25,000 in annual revenue did not have to file what is known as an “information” return with the IRS. In 2006, as part of the Pension Protection Act, (why it is in a bill with that label can be known only to the drafters), Congress demanded that all nonprofits, regardless of their revenue, must file an annual information return, and, if they did not do so for three consecutive years, they would lose their nonprofit status.
The three year deadline, after various extensions by the IRS, expired in January, 2011, and, as a result, some 18% of all nonprofits in this country lost their nonprofit status. Shortly thereafter, the IRS released a list of those who were no longer deemed nonprofit per the IRS. As would be expected in any undertaking of this magnitude, there were mistakes.
The George Washington University was wrongly listed as having lost its exemption. There were mix-ups with tax identification numbers. And the list could record only so many characters in a group’s name. So if a local post of the American Legion had closed its doors years ago or simply neglected to file, it often showed up simply as ‘American Legion,’ tainting all Legionnaires nationwide.
Many smaller charities were unaware of the new legislation, though, ignorance of the law is, as they say, no excuse. So, the IRS has reduced the filing fee for any organization seeking to regain its nonprofit status. But, as an example, your local Boys and Girls Club will still need to spend their time, and money (for both filing fees and attorney’s fees) to restore itself as a nonprofit in the eyes of the IRS. This is money far better spent on the goals of the organization.
Meanwhile, I am compelled to ask, why?
There is no income tax owed by any nonprofit. Filing an information return by a nonprofit “making” less than $25,000 per year costs the nonprofit money that could be better spent elsewhere, and, costs the taxpayers money paying for the IRS personnel necessary to police this law.
Could someone please explain why the federal government wants to reduce the amount of charitable contributions that actually go to charity?
19 Comments
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Just did some digging into this, SOS…seemed like a good way to get my brain going on a Monday morning.
From what? I’ve read, The Pension Protection Act cracks down on type III supporting organizations. It applies regulations and penalties that removes several of the privileges that supporting organizations have over private foundations.
And from the irs.org website, “Fundraising, investing and managing non-exempt-use property, and making grants (to the supported organization or third parties) are generally not treated as activities that directly further the exempt purposes of the supported organization.”
Will these type III supporting organizations simply fold, now, thanks to *reduced government regulation*?? Based on the irs website, it sounds like the goal was to redefine what qualified an organization for tax exempt status.? But I could still be half asleep and completely clueless.? ha!
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Winnie, You are never clueless. Government does not want to compete with non-profit charities to provide for homeless and unemployed. The Govt. needs to make as many of them dependent on it as possible.
More dependents = more voters…of the legal and illegal variety.? Supah.
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Why does Jefferson’s Declaration of Independence argument stating our duty in dealing with tyrannical usurpation of freedom come to mind again?
There are plenty of not for profits that are not legitimate: in some instances they are arms of for-profits, or used by families to remove assetts from tax roles or for any number of reasons to cheat the government (so you and I have to pay more). Also, non-profits can make money and need to pay taxes on any income not devoted/related to it’s charitable purposes. For example Joe Blow can run an nfp with income of $25K; only $2K of which gets spent on charitable purposes. The rest? How about paying for his limo rides to the airport..or some other luxury. The sad truth is that there are always people trying to game the system…and more sadly they are people just like us. Let’s hope the gov’t can crack down on the cheats.
David R gets it!
Unfortunately, because of the paperwork nightmare created by this huge undertaking, many organizations that aren’t gaming the system and are legitimate non-profit orgs are going to lose donations because they’re mislabeled as having lost their exemption.? Unintended consequences, I guess?
This is nothing more than a big government fishing expedition by the IRS. I run a 501(c)3?that has carefully filed its?Form 990’s for many years. We pass through the vast majority of the $$ we take in. While there are some organizations with questionable business practices, they are few because once it becomes apparent that they are gaming the system, the donations and grants dry up and they are gone. Once?again, just more?unnecessary red tape. ??
Is the moral of this story to let the cheaters cheat because some (most?) non-profits do not cheat?
It should be really interesting to see who gets waivers….
It’s the IRS, Dims: everybody will be found out, no matter how long it takes (and then there will be penalties…)
Government does not want to compete with non-profit charities to provide for homeless and unemployed. The Govt. needs to make as many of them dependent on it as possible. As simple as that….
Note that it’s Congress that demanded the information to be filed. The IRS does not care what the mission of the non-profits are, only that they follow the tax laws.
Frankly, instead of this action. I would prefer we examine the waste and fraud in Govt. Particularly the science grants we pay for to study why people fall in love or some of the other ridiculous studies Urskine Bowles and Alan Simpson found.? You could save billions here instead of sticking it to the little guys. Dims is right, this will also be used to reward and punish the non-profits with waivers. Motto of Obama’s administration: Must buy as many votes as possible.
Sounds like RoBrDona is an honest guy and there should be more like him.? But note the huge number of not for profits. Is there really one for every for every couple hundred of us? What’s with that? Makes you wonder.
Thanks David.? As you can imagine I know a lot of not-for-profit organizations. I would reiterate that any with a public face can’t last long with a business plan that does not pass muster or is intentionally opaque. Don’t forget that donors and grantors require incorporation and tax ID docs as well as financials in many cases.?Hard to hoodwink those folks. My guess is that a LOT of those 275,000 de-listed organizations are moribund or defunct. It’s the fraction left that are operating in good faith that I feel for. ?
@DavidR – It does not make me wonder at all. Most of these charities – again with revenue less than $25,000 – are a few people getting together to serve a particular need in their community. Sometimes the charity may only be active for a year or so (think western Massachusetts tornadoes). They volunteer their time and almost all of the money goes to the people in need. Certainly, there will be folks who game the system, but what is the track record of the IRS in prosecuting charities that have revenue greater than $25k who have been required to file for years?
Your pessimistic attitude, suggesting there are a bunch of “Joe Blows” out there collecting under $25k and spending $23k on “luxuries” and only $2k seems a bit off to me. Sure, a few probably exist and that’s not right, but how many people are now discouraged from putting together a small charity effort to help those in need locally because they now have to deal with tax lawyers and pay fees? (Ugh…)
It’s not a non-profit example, but Jim and I are thinking about ditching the RVO T-shirt sales simply because of the added effort to collect, manage and pay the Connecticut sales tax on these items. It’s the same result. Economy slows down, people in need may not get what they need.
I have been involved with NGPs for more than 20 years as volunteer, officer and grantor. Most do the right thing. (And I have found the IRS to be easy to work with and tolerant of mistakes..if a reasonable explanation is provided.)? However, as a student of human nature, I know, and witnessed, ?that there is a percentage of folks who game the system: Conservatives tend to think it’s the poor…Liberals think it’s the rich. I think it’s some of every class. How many Joe Blows are out there? I don’t know the percentage. Maybe it is small, but I think in tough times like these there are more than enough. Steve M.: if you give me a little more info on your sales tax problem, I may be able to come up with a suggestion. You can e-mail me at [email protected]
@DavidR – Thank you for the offer. It’s not that we have a sales tax problem, rather we have limited resources (time). We’re familiar with the process to pay the sales tax especially since I’ve been in retail sales here in Connecticut during a previous decade. We’d have to keep track and pay the sales tax on these items at the normal intervals and doing that just takes time … we have to ask if it is worth the effort. We’ll work it out.