Tag Archives: tax policy

Nearly 1000 NYC Charities Lose Tax Exemption

Late last week, The Chronicle of Philanthropy and The New York Post reported that 925 New York City charities lost their property tax exemption because they failed to demonstrate a legitimate charitable purpose to the city’s Department of Finance.

According to The Post, one of the challenged charities, American Youth Hostel, plans to appeal because it has been a recognized charity since 1934, presumably relying on the IRS’s determination that bestows tax-exempt status.

Not long ago, that federal 501(c)(3) charitable designation would have been sufficient to stave off a local or state inquiry into whether tax-exempt status is warranted. No longer.

My hypothesis is that as New York City scrambles for new revenue sources, tax-exempt charities are in Finance’s sights.

That was the case last August when The New York Time’s Stephanie Strom (whose coverage of the national philanthropy beat I sorely miss), reported California charities coming under scrutiny.

Last Friday for Tony Martignetti Nonprofit Radio I interviewed Paul Clolery, editor-in-chief at The Nonprofit Times, at a fundraising conference. He’s concerned about corporations in California, so called “B Corps” that provide a public benefit, eventually appealing to the state for tax exemption proportional to the percentage of revenue (or some other formula) that is devoted to charitable work. (Video of the interview isn’t available yet, but will link it here when it’s ready.)

As charities on both coasts lose exempt status, would that not be a harsh irony?

There are a few wake up calls for charities. You’ve got to stay true to the work that got you the charitable designation from IRS. Relying on a description of your work that’s decades or generations old won’t suffice. Also, stay in compliance with regulations. I can see a failure to adhere to state or local laws being tied to maintaining tax advantages.

Tell me if you’ve seen other instances of states or cities challenging tax-exempt status.

IRS Filing Prompts Charity Registration Compliance

Last week I used Mary J. Blige’s foundation as an example of a noncompliant charity and opened an explanation of why it’s important to register your charity in each state where it solicits donations.

Here’s a motivation I didn’t mention last week: IRS Form 990.

If you’re required to file Form 990 annually, rather than one of the shorter annual forms like 990-EZ or 990-N (the postcard), then you’re answering questions about whether your charity is complying with state registration laws.

The alternate forms for smaller charities (based on gross receipts and/or total assets) don’t inquire about that.

For 990 filers, take a look at Part VI, question 17. (Use the link above to view the form.) It asks you to, “List the states with which a copy of this Form 990 is required to be filed.” Submitting the form is a basic request in every state registration regimen.

If you’re required to register in a state, you are required to submit the 990. (I speculated last week that not having its 990 ready may be why Ms. Blige’s charity hadn’t kept up with its New York registration.)

Charities required to file Schedule G of the 990 (who’s required?) will have their interest piqued by Part I, question 3: “List all states in which the organization is registered or licensed to solicit contributions or has been notified it is exempt from registration or licensing.”

That’s straightforward reporting of your compliance with state laws.

To blatantly nitpick, there is another possibility beyond registration and notification of exemption. Many states allow you to decide for yourself that you’re exempt. You won’t get notified by those states.

This is all quite interesting. A federal agency’s form asking about your compliance with state laws. Might that information be shared with states? I don’t see evidence that it is now, but I have heard rumblings about greater cooperation between IRS and state charities bureaus.

To round out your 990 thrills, the form is signed under penalty of perjury by an officer. It best be filled out honestly.

I’m on TV Tonight With Asa Aarons

Photo courtesy of IRS EIN on Flickr

I was interviewed today by Asa Aarons for tonight’s Consumer Watch segment of the evening news on the Time Warner cable network.

We talked about the IRS’s automatic revocation of tax-exempt status list, and what it means for donors and charities.

If you missed it, here you go. I’d love feedback and comments either here or on YouTube!

Thanks for taking a couple of minutes to watch!

IRS Tells Us What ‘Good Governance’ Means, Part Uno

Photo courtesy of alykat on Flickr.

We hear this language all the time in charity circles:


  • governance
  • accountability
  • transparency
  • board responsibilities
  • conflict of interest
  • whistleblower protection
  • executive compensation
  • document retention

… and other words and phrases in the nonprofit lexicon. What do they mean to the federal agency that reviews public charities when they apply for tax-exempt designation and again every year when most file an information return?

The most comprehensive (read “burdensome”) of the returns, form 990, asks lots of questions about whether policies are in place, but doesn’t (and shouldn’t) provide any detail as to what the expectations are around these arcane concepts.

If only we could agree on what the practices mean.

I found this gem on the IRS website, “Governance and Related Topics – 501(c)(3) Organizations,” that makes it pretty clear what the agency is looking for. (It’s from February 2008, but these definitions don’t change much.) The Internal Revenue Code does not require documentation or detailed policies in these areas.

But–big but–IRS believes, “A charity that has . . .a knowledgeable and committed governing body and management team, and sound management practices is more likely to operate effectively and consistent with tax law requirements.”(page 1)

That explains the Service’s opinion of the relationship between good governance and tax code compliance, and their interest in the former. So what do these things mean?

Good Governance. This is the broad category. It means having in place “policies relating to executive compensation, conflicts of interest, investments, fundraising, documenting governance decisions, document retention and destruction, and whistleblower claims.” (page 3)

Executive Compensation. You pay reasonable compensation for services rendered. Pay is determined by people knowledgeable about compensation practices and financially uninterested in the levels set. (page 3)

Conflicts of Interest. The Service “encourages a charity’s board of directors to adopt and regularly evaluate a written conflict of interest policy that requires directors and staff to act solely in the interests of the charity without regard for personal interests . . .” You set up the policy and monitor compliance. (page 4)

There is considerably more detail at the page references I’ve given you. Read the document and consult your legal counsel. Do not construe this post as legal advice. It isn’t.

Over the next few weeks I’ll take on additional governance topics from this informative IRS paper.

There are expert attorneys much more knowledgeable than me in the legal requirements for running your nonprofit. I suggest you pay attention to Carter Ellis and Gene Takagi. Gene and his colleague Emily Chan will be regular legal contributors to Tony Martignetti Nonprofit Radio starting in July. I’m sure we’ll talk a lot about governance.

The IRS List Is Out, And You Want to Get Off It

Please Pay Here by stevendepolo from Flickr
The Internal Revenue Service released its list of 275,000 organizations that have lost federal tax-exempt status because they failed to file with the Service for three consecutive years.

The Chronicle of Philanthropy reported it yesterday. The New York Times reports it today.

I’d like to go deeper. What do you do to get tax-exempt status back if you’re listed and still operating?

Start on the IRS website.

Small Organizations
You’ll get preferential treatment if your organization “normally has annual gross receipts of not more than $50,000 in its most recently completed taxable year.” That’s from Notice 2011-43 which will guide you through the reinstatement process. If you fit that criteria, you’re a “small organization” for purposes of reinstating tax-exempt status.

If a small organization submits an application for reinstatement (Form 1023 for 501(c)(3) charities; Form 1024 for others) by December 31 of next year, and meets the criteria on page 3 of Notice 2011-43, IRS will reinstate tax-exempt status retroactive to the date of revocation.

As if that weren’t enough. Small organizations get a substantially reduced fee of $100, down from $850 for others. That’s an 88% discount. Where you gonna find that kind of bargain?

Plus, there are three phone numbers at the bottom of the notice for “further information.” I wonder how many calls Ms. Rosenbaum and Messrs. Quesenberry and Giuliano will get this week. (It’s nice to see an italian in the bunch.)

Be sure to write “Notice 2011-43” on top of your application and on your envelope.

Non-small Organizations
Your guidance is in Notice 2011-44 and the news isn’t as good as the small folks’.

You submit Form 1023 or 1024, but the standard for award of retroactive reinstatement is more stringent. It includes “a detailed description of all the facts and circumstances that led to each failure and the continuous failure [to file annually], the discovery of the failures, and the steps taken to avoid or mitigate the failures” along with evidence to substantiate.

I love this, too. Government can be burdensome when it puts a mind to it: “. . . showing reasonable cause for failing to file a required return or notice for the first of the three years by the date it was due would be insufficient; an organization also would have to show reasonable cause for not filing that return or notice at any later time during the three-year period, and for not filing required returns or notices for the second and third years . . .” (Notice 2011-44, page 8). Again, that’s the standard for retroactive reinstatement, not for regaining current tax-exempt status.

As if that weren’t enough: you’ll pay the full $850 application fee.

But, you get the same three nice people to call.

This post is not legal advice. Do not construe it as legal advice. Seek the counsel of an attorney. This is my interpretation of IRS methodology without the benefit of technical explanations, court opinions, revenue procedures and other official guidance.