Report finds IRS revoked tax exemption for one in 10 Hoosier nonprofits
Nearly one in 10 registered Indiana nonprofit organizations lost their tax-exempt status last month for failing to file newly required paperwork with the Internal Revenue Service, according to an analysis led by an Indiana University faculty member and philanthropy expert.
Kirsten Grønbjerg and her co-authors found that, not surprisingly, small nonprofits were most likely to have missed the filing requirements and had their tax-exempt status revoked. And while many of the organizations were no longer operating, a good number appeared to still be in existence.
"From one perspective, it may be appropriate to revoke the tax-exempt status of entities that fail to comply with simple IRS requirements," said Grønbjerg, professor at the School of Public and Environmental Affairs at IU Bloomington and Efroymson Chair in Philanthropy at the Center on Philanthropy at Indiana University. The center is headquartered at Indiana University-Purdue University Indianapolis.
"However, it's important to remember that these are mainly all-volunteer organizations, and they are a major mechanism by which people are engaged in their communities," Grønbjerg said. "Many of them must now go through the time-consuming process of re-applying for tax-exempt status, disband or be prepared to operate as for-profit entities."
The findings also raise questions about the complexity of federal regulation of nonprofit organizations and point to the importance of providing guidance to nonprofit leaders on the necessity of tracking regulatory developments at all levels of government. Co-authors of the report are Kellie McGiverin-Bohan, a doctoral student in the IU School of Public and Environmental Affairs, and Kristen Dmytryk and Jason Simons, students in the SPEA Master of Public Affairs program.
Until 2007, nonprofit organizations with revenues of $25,000 or less a year were not required to report to the IRS once they had secured their tax-exempt status. But the 2006 Pension Protection Act changed that, requiring most such organizations to begin filing an annual electronic notice, Form 990-N.
Last month, the IRS released a long-awaited list of nonprofits that failed to file the reports for three consecutive years and thus had their tax-exempt status revoked. Nationally 275,000 nonprofits had their tax-exempt status revoked. In Indiana, the figure was 6,152.
The analysis by Grønbjerg and her co-authors found that:
- 9 percent of Indiana nonprofits that were on the IRS Business Master File of active organizations as of April 2010 had their tax-exempt status revoked in June 2011. (News reports indicated 17 percent of national organizations lost their tax-exempt status; but those reports included organizations that were inactive and had been removed from the IRS master file.)
- Cemeteries, social welfare (advocacy) organizations and nonprofit business associations suffered the highest rates of revocation. High losses also occurred with human-service, environmental and animal-welfare nonprofits, small nonprofits, and those that obtained tax-exempt status recently.
- Fraternal organizations, veterans groups and other organizations with close connections to national groups were most successful in avoiding having their tax-exempt status revoked, suggesting that communications networks helped such groups comply with the law.
In Indiana, many of the organizations that lost their tax-exempt status were undoubtedly defunct, Grønbjerg said. However, follow-up work with a subset of Indiana nonprofits suggests that up to two-fifths of the revoked nonprofits were still active. Those groups now must go through a cumbersome process of getting their tax-exempt status reinstated, unless they choose to disband or attempt to operate beneath the IRS's radar screen.
The 108 Indiana nonprofits included in the follow-up analysis were determined in 2010 to be at risk of losing their tax-exempt status and had participated in surveys conducted by the Indiana Nonprofit Sector, a multi-year, multi-phase project directed by Grønbjerg and designed to provide solid, baseline information about Indiana nonprofit organizations.
Grønbjerg and her colleagues attempted to make sure the organizations were aware of the new IRS requirements. However, some could not be reached because of outdated contact information or leadership changes. The researchers determined that at least 27 percent of the organizations were still active but had their tax-exempt status revoked for failing to file required forms.
For the complete report, see https://www.indiana.edu/~nonprof/results/database/IRSRevocation.html. For more information about the Indiana Nonprofit Sector project and research activities, see https://www.indiana.edu/~nonprof.