A relatively obscure provision in the 2006 Pension Protection Act could cause as many as 400,000 nonprofit organizations to lose their tax exempt status next month. The Pension Protection Act expanded the requirement to file an annual tax return to include charitable organizations with $25,000 or less in annual gross receipts. The law authorizes the IRS to revoke the tax exempt status of any organization that fails to file tax returns for three consecutive years. As a result, on May 16, 2010, many nonprofit organizations will automatically lose their tax exempt status, resulting in unexpected tax consequences for the entities and their financial supporters.
According to an article published in last Friday's New York Times, the IRS has offered some assurances that notices of revocation are unlikely to be sent out until January 2011, giving nonprofits a small window of opportunity to come into compliance with the law. Once the organization has received notice from the IRS, its revenue will become subject to income tax and its supporters will be denied tax deductions for their donations. Small nonprofit organizations are at highest risk to be impacted by the law, since they may not invest in adequate tax advice. Even organizations that have shut down operations can be affected, if they failed to properly notify the IRS of the dissolution. Directors and managers of Colorado nonprofit organizations should ensure that they are in full compliance with the applicable tax reporting laws by contacting legal counsel or a certified public accountant.
