Half a Million Nonprofits Could Lose Their Federal Tax Exemptions, GuideStar Warns

The Pension Protection Act also directs the IRS to revoke the tax-exempt status of any organization that fails to file an annual return, including the 990-N, for three consecutive years. Revocations will happen automatically beginning in May 2010.

Experts have long believed that many defunct organizations are listed as active in the IRS files. (Exempt nonprofits are required to inform the IRS when they go out of business, but many don't.) It is unlikely, however, that they add up to half a million.

Nonprofits whose exemptions are revoked will suddenly be required to pay federal income taxes -- and subject to financial penalties if they fail to do so. Hundreds of thousands of charities, many operated on shoestrings, could find them themselves no longer eligible to accept tax-deductible contributions. Nonprofits that wish to have their exemptions reinstated will be required to re-apply to the IRS for tax-exempt status, a process that can take several months.

"Smaller nonprofits make up as much as three-quarters of the nonprofit sector," stated Bob Ottenhoff, GuideStar's president and CEO. "They are the local animal rescue societies, the neighborhood groups that tutor elementary school students, the all-volunteer organizations that drive cancer patients to chemotherapy. Collectively they have a tremendous impact, and society will be the poorer if these organizations lose their federal tax exemptions.

"If you volunteer with, work for, or give to a smaller nonprofit, make sure its leaders know about the 990-N. Refer them to http://www.irs.gov/charities/article/0,,id=169250,00.html if they have questions."

About GuideStar

GuideStar, www.guidestar.org, connects people and organizations with information on the programs and finances of more than 1.7 million IRS-recognized nonprofits.