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A club can't lose what it never had
In 2006, the Internal Revenue Service (IRS) created new rules requiring all nonprofit organizations to begin filing annual tax forms. Failure to file the appropriate forms would put an organization at risk of losing its tax-exempt status.
Until that time, nonprofits typically did not have to file tax returns if their annual revenues fell under $25,000. However, this change in the tax law meant nonprofits with revenues below that amount would have to begin filing abbreviated returns in 2007. Further, if returns were not filed for three consecutive years after that, the organization’s tax-exempt status would be revoked.
In 2007, the IRS sent out more than 650,000 letters to smaller nonprofits informing them of the new law. These letters, outlining compliance requirements, created considerable confusion in the nonprofit world and raised concern in the model aviation community as well as from a number of AMA-chartered clubs.
The problem, as you might expect, was that most small nonprofits, including model aviation clubs, are run by volunteer officers. Many of these officers had little experience in dealing with tax-reporting issues and weren’t prepared to react to the notices.
After a period of time the issue seemed to settle down as some clubs began to address the requirement to file the appropriate tax forms. The issue simply fell off the radar of other clubs. For many it was a case of out of sight, out of mind. And that’s the way things stayed until mid-May 2010 when the government determined that more than 300,000 organizations had failed to file the appropriate returns.
The IRS extended its initial compliance deadline another five months and initiated an awareness campaign to reach these organizations, hoping to reduce the number of non-filers. The IRS sent notices to the last known address for the organization. Clubs change officers on a regular basis. Officers move, leave the hobby, or simply become disassociated with a club for a variety of reasons. The IRS had no way of reaching the organizations or knowing who the current officers were. Similarly, the organizations had no way of being contacted directly to learn they were at risk of losing their tax-exempt status. The campaign had a minimal to negligible effect.
The issue flared up again recently when the IRS issued a report listing 275,000 nonprofit organizations in the United States that had lost their exemption for failure to file the appropriate tax returns. As well as thousands of small local membership clubs, the list also included more than 1,800 local councils of the Knights of Columbus as well as a number of American Legion and American Legion Auxiliary posts.
The IRS is now allowing organizations that have lost their exempt status for failure to file returns in 2007, 2008, and 2009 to apply for “retroactive reinstatement” if they can show “reasonable cause” for not having filed.
To qualify for reinstatement, an organization must:
- Submit a new application for recognition of tax-exempt status regardless of whether the organization was originally required to submit an application.
- File the appropriate annual federal tax returns for the three missing consecutive tax years and all subsequent years (i.e., 2007 to 2010).
- Provide a written statement explaining the reasonable cause for failure to file.
- Ensure that the organization will timely file its tax returns in the future.
- File the reinstatement application with the IRS within 15 months of the notice of revocation, with a filing fee of $850 (reduced to $400 if gross receipts did not exceed $10,000 annually over a four-year period).
If the organization fails to establish reasonable cause but establishes it qualifies for tax-exempt status, the organization’s tax-exempt status will not be restored retroactively, but will be restored from the date of filing the tax-exemption reinstatement application.
The IRS has published a list of organizations that have lost their tax-exempt status. It can be found at www.irs.gov/charities/article/0,,id=240099,00.html. The list is searchable.
Keep in mind that a number of clubs think they are tax exempt, for understandable reasons, and they are not. Throughout the years, clubs misplace documents and much of the club’s history only resides with one or two members. The members leave and the history and knowledge of the club’s business dealings leaves with them.
A club can’t lose what it never had. If a club has never applied for tax-exempt status with the IRS, or has applied but wasn’t approved, it won’t be on the IRS list. To check to see if your club is listed as a tax-exempt organization, you can visit www.irs.gov/charities/index.html or call (877) 829-5500.
The tax code, at best, is difficult to follow, even for experts who make their living dealing with it. If there are any questions at all about the tax-exempt status of your club or whether or not it is in compliance, the best advice I can offer is to talk to a tax advisor. Many clubs have members with such a background or have members who know someone who can help for little or no fee.
See you next time.
Dave Mathewson AMA Executive Director [email protected]
Transcribed from original scans by AI. Minor OCR errors may remain.
