Community Organization—Not 501c3—and the IRS
April 12, 2016 10:01 AM Subscribe
I am part of an organization run entirely by volunteers, with income from several sources. We've never filed taxes, but the question has come up of whether we need to. I'd appreciate advice from the experienced.
Details:
We are an organization of some hundreds of people, staffed entirely by volunteers. We are not a 501c3 organization, due to some questions about our eligibility—we are a group of co-religionists, but widely dispersed throughout the US and Canada. Our last serious consideration of the question was a decade or more ago, and included consulting a lawyer versed in the issue. It suggested that we are likely not eligible for 501c3 status, and the decision was made that it wasn't worth the effort to try. My recent perusal of IRS information suggests that we might be one of the other types of organizations that can be tax-exempt under other provisions of the tax code, but this is not something we've ever considered as a group.
Our income comes from three places:
1. Donations. This is our largest source of income, and runs anywhere around $10,000 per year, with significant variation from year to year.
2. Surplus registration fees for our annual conference. We run one event, a long weekend, per year. Our goal for this event is to price things so that it is accessible to as many people as possible, and, if possible, for registration & room and board payments to cover the costs of the weekend. Most years we meet that goal; some years it costs more to run than we can recoup. The net income from the conference , if there is any, might be in the hundreds of dollars. Very rarely, it gets up to $1000 or more.
3. Interest on money in savings, and on our checking account balance. This amounts to less than $150 per year.
We spend our money on the conference, producing a newsletter, and other organizational matters. Our two biggest budget items are both forms of support for community members. We give thousands of dollars every year in funds to support travel to our conference, and to a week-long conference of the religion we're a part of, at which we have a very active presence. We also provide money, as needed, to people with short-term financial problems. We help pay medical bills, apartment security deposits, or anything else that a member has need of. We generally make 2-5 of these kinds of grants per year.
Our total annual budget is usually between $10,000 and $20,000. We have no paid staff. We've grown gradually from a very small organization that was started in the late 70s, and that informality has led us to sometimes overlook things like whether the IRS needs to hear from us.
We do have an Employer Identification Number (EIN).
My own googling and reading of IRS documents has confused me. I'd be interested to hear people's experiences, either as part of organizations that have dealt with this issue, or as providers of professional services. I know you're not my lawyer or my CPA, and we're not going to make a decision based on what anyone tells me here. I'd just like to get a little help making sense of what I've read.
Details:
We are an organization of some hundreds of people, staffed entirely by volunteers. We are not a 501c3 organization, due to some questions about our eligibility—we are a group of co-religionists, but widely dispersed throughout the US and Canada. Our last serious consideration of the question was a decade or more ago, and included consulting a lawyer versed in the issue. It suggested that we are likely not eligible for 501c3 status, and the decision was made that it wasn't worth the effort to try. My recent perusal of IRS information suggests that we might be one of the other types of organizations that can be tax-exempt under other provisions of the tax code, but this is not something we've ever considered as a group.
Our income comes from three places:
1. Donations. This is our largest source of income, and runs anywhere around $10,000 per year, with significant variation from year to year.
2. Surplus registration fees for our annual conference. We run one event, a long weekend, per year. Our goal for this event is to price things so that it is accessible to as many people as possible, and, if possible, for registration & room and board payments to cover the costs of the weekend. Most years we meet that goal; some years it costs more to run than we can recoup. The net income from the conference , if there is any, might be in the hundreds of dollars. Very rarely, it gets up to $1000 or more.
3. Interest on money in savings, and on our checking account balance. This amounts to less than $150 per year.
We spend our money on the conference, producing a newsletter, and other organizational matters. Our two biggest budget items are both forms of support for community members. We give thousands of dollars every year in funds to support travel to our conference, and to a week-long conference of the religion we're a part of, at which we have a very active presence. We also provide money, as needed, to people with short-term financial problems. We help pay medical bills, apartment security deposits, or anything else that a member has need of. We generally make 2-5 of these kinds of grants per year.
Our total annual budget is usually between $10,000 and $20,000. We have no paid staff. We've grown gradually from a very small organization that was started in the late 70s, and that informality has led us to sometimes overlook things like whether the IRS needs to hear from us.
We do have an Employer Identification Number (EIN).
My own googling and reading of IRS documents has confused me. I'd be interested to hear people's experiences, either as part of organizations that have dealt with this issue, or as providers of professional services. I know you're not my lawyer or my CPA, and we're not going to make a decision based on what anyone tells me here. I'd just like to get a little help making sense of what I've read.
I'm not sure what would make your organization think you'd be magically exempt from federal, state, and local taxes? If you don't owe any money, technically, you may not have to file, but I'm really not sure how you'd know that without preparing a return, or at least consulting with a preparer. It does seem like you might squeak through, at least federally (your gift income should not be taxable federally, your other net income is quite modest), but why would you leave yourself exposed like that? Pay probably under $1000, get a competent consultation, and at least learn at what level of net income you are likely to find yourself owing taxes (and what kind of documentation you need to retain of your income and expenses, in case the question ever arises). It'll be far more expensive if the IRS starts calling you. Your state CPA association or bar may be able to refer you to someone who specializes in non-profit-type organizations, or even will do the work pro bono.
posted by praemunire at 10:21 AM on April 12, 2016 [2 favorites]
posted by praemunire at 10:21 AM on April 12, 2016 [2 favorites]
From what I understand, whoever holds that money at least should be filing a 1040 Schedule C, treating the organization as a sole proprietorship and paying taxes on it.
But that's an irresponsible way to run the organization. Forming an LLC costs a few hundred bucks. It doesn't solve all your problems (you still need to pay taxes, and in fact you need to file some new forms), but it does make you a legit organization with explicit rules for replacing board members, it makes it possible for the organization to have a bank account rather than a well-intentioned group member, etc.
posted by adamrice at 10:47 AM on April 12, 2016 [1 favorite]
But that's an irresponsible way to run the organization. Forming an LLC costs a few hundred bucks. It doesn't solve all your problems (you still need to pay taxes, and in fact you need to file some new forms), but it does make you a legit organization with explicit rules for replacing board members, it makes it possible for the organization to have a bank account rather than a well-intentioned group member, etc.
posted by adamrice at 10:47 AM on April 12, 2016 [1 favorite]
We help pay medical bills, apartment security deposits, or anything else that a member has need of.
This is the part that strikes me as a serious problem for claiming exempt status. Covering travel to the conference is one thing (though still potentially dicey); picking up random personal expenses is another beast entirely. That they're members, so presumably have some ability to influence the selection process to favor themselves, makes it extra problematic. By all means, consult a lawyer (I am not one), but everything I've picked up about nonprofits over the years says that cash distributions to individuals are a massive red flag over at yonder IRS, and the more arbitrary and/or self-dealing they look (though I understand that you mean well by helping people this way!), the worse.
PS, being a 501(c)(3) or the like doesn't get you out of filling requirements, it just changes them. If you call the IRS, I'm sure they'll be happy to look up your EIN and tell you what they want out of you currently.
posted by teremala at 10:58 AM on April 12, 2016 [1 favorite]
This is the part that strikes me as a serious problem for claiming exempt status. Covering travel to the conference is one thing (though still potentially dicey); picking up random personal expenses is another beast entirely. That they're members, so presumably have some ability to influence the selection process to favor themselves, makes it extra problematic. By all means, consult a lawyer (I am not one), but everything I've picked up about nonprofits over the years says that cash distributions to individuals are a massive red flag over at yonder IRS, and the more arbitrary and/or self-dealing they look (though I understand that you mean well by helping people this way!), the worse.
PS, being a 501(c)(3) or the like doesn't get you out of filling requirements, it just changes them. If you call the IRS, I'm sure they'll be happy to look up your EIN and tell you what they want out of you currently.
posted by teremala at 10:58 AM on April 12, 2016 [1 favorite]
You sound like Benefit or Fraternal Society to me, depending on how religious the organization is. This would not be a 501(c)(3) but perhaps a (c)(8) or (c)(10) depending. I'm not a tax person but take a look at this page and see if it's helpful?
posted by jessamyn at 11:20 AM on April 12, 2016 [2 favorites]
posted by jessamyn at 11:20 AM on April 12, 2016 [2 favorites]
Response by poster: People always jump to such conclusions here and head off on such odd tangents.
I have actually found the information I need at the IRS site. For any future questioners to whom this might be useful:
If you call the IRS, I'm sure they'll be happy to look up your EIN and tell you what they want out of you currently.
This is a good piece of advice that made me go, "Duh! Of course we could call the IRS!"
posted by not that girl at 11:33 AM on April 12, 2016 [2 favorites]
I have actually found the information I need at the IRS site. For any future questioners to whom this might be useful:
Generally, tax-exempt organizations must file an annual information return (Form 990 or Form 990-EZ). Tax-exempt organizations that have annual gross receipts not normally in excess of $25,000 ($50,000 for tax years ending on or after December 31, 2010) are not required to file the annual information return; they may be required to file an annual electronic notice, however. In addition, churches and certain church-affiliated organizations are excepted from filing.In addition, exempt organizations must file a return if they have over $1000 in income from activities unrelated to their primary purpose. The 990-T filing instructions form was tremendously helpful.
If you call the IRS, I'm sure they'll be happy to look up your EIN and tell you what they want out of you currently.
This is a good piece of advice that made me go, "Duh! Of course we could call the IRS!"
posted by not that girl at 11:33 AM on April 12, 2016 [2 favorites]
I have actually found the information I need at the IRS site. For any future questioners to whom this might be useful:
Right, but you need to actually be a tax-exempt organization first before you file an information return. Are you one? Your question says you have an EIN, but it doesn't say what kind of organization or entity you are. The organization could have also lost its tax-exempt status, if it ever had it, by not filing information returns or the electronic notice, if it isn't exempt from filing as a church. There are various types of tax-exempt organizations, with different requirements for each, and special rules for churches that you may or may not qualify for. Donors can get a tax deduction for donations to some types of tax-exempt organizations, but not for others. There are certain things you may need to be aware of since the organization spends much of its budget on benefits for its own members.
All of this is something a lawyer who deals with religiously-affiliated non-profit issues can help with, probably fairly quickly if the situation is straightforward.
posted by zachlipton at 12:11 PM on April 12, 2016 [2 favorites]
Right, but you need to actually be a tax-exempt organization first before you file an information return. Are you one? Your question says you have an EIN, but it doesn't say what kind of organization or entity you are. The organization could have also lost its tax-exempt status, if it ever had it, by not filing information returns or the electronic notice, if it isn't exempt from filing as a church. There are various types of tax-exempt organizations, with different requirements for each, and special rules for churches that you may or may not qualify for. Donors can get a tax deduction for donations to some types of tax-exempt organizations, but not for others. There are certain things you may need to be aware of since the organization spends much of its budget on benefits for its own members.
All of this is something a lawyer who deals with religiously-affiliated non-profit issues can help with, probably fairly quickly if the situation is straightforward.
posted by zachlipton at 12:11 PM on April 12, 2016 [2 favorites]
Response by poster: Based on IRS publication 1828, "Tax Guide for Churches and Religious Organizations," [pdf] which I can't believe nobody bothered to read before this, we are very clearly an "integrated auxiliary organization" of a church as defined by the tax code. Integrated auxiliary organizations have the same filing requirements as the churches they're associated with, which is to say: It is not required to file for 501c3 status in order to be tax-exempt (though many churches and religious organizations do); it is not required to file any annual report or notification with the IRS; contributions are tax-deductible. I am sorry to have cluttered the internet with a question that was too imprecise and specific to us for other people to provide good answers to, and which the IRS had already answered, had we only known it.
posted by not that girl at 12:21 PM on April 12, 2016
posted by not that girl at 12:21 PM on April 12, 2016
You are not a tax-exempt organization because you say you are. You are a tax-exempt organization (which is just a more precise way of saying "non-profit") because you have applied for that status and have been granted it, in the form of a 501(c) whatever.
It would not be impossible for your group to become constituted as a tax-exempt organization, but there are a lot of steps between here and there. In the meantime, you've asked whether you need to pay taxes, and the answer is "yeah, looks like it."
posted by adamrice at 12:22 PM on April 12, 2016 [2 favorites]
It would not be impossible for your group to become constituted as a tax-exempt organization, but there are a lot of steps between here and there. In the meantime, you've asked whether you need to pay taxes, and the answer is "yeah, looks like it."
posted by adamrice at 12:22 PM on April 12, 2016 [2 favorites]
Consider putting that information in a handbook this time around!
posted by aniola at 1:03 PM on April 12, 2016 [2 favorites]
posted by aniola at 1:03 PM on April 12, 2016 [2 favorites]
The requirements for integrated auxiliary organizations are a bit more complicated than the plain words would imply. This is a decent rundown. Because your org would independently need to meet the 501(c)(3) requirements, I'm not sure that it would qualify as an integrated auxiliary org; this could also depend on how you define "member" for purposes of determining who gets the grant payouts.
Here is an example of a letter sent to an organization by the IRS stating that it is not considered an integrated auxiliary org. Here is a blog post on the factors the IRS looks at when determining whether an org is an I.A.O. - it's unclear from your post whether the church has this level of control over your org.
Note that your state tax exemption laws may be different (and certainly Canada's tax laws are different as well - if money is crossing borders there may be additional requirements). Not all states follow the federal exemption format, and many require separate exemption paperwork (or condition your state exemption on having an official exemption letter from the IRS). You may need to chase this information down in each state in/from which you receive or disburse funds. Income tax exemption may not mean sales and use tax exemption and vice versa. There may be separate regulation of your fundraising activities from each state's State Dept or Atty General's office (for example, NY's rules).
You may want to see if you can be covered by a "group exemption letter" possibly held by your church. You can probably ask the religious organization's attorney for advice.
If you are going to be telling people their donations are tax deductible (rather than just exempt to your org), be very careful about separating out payments for goods and services (like hotel rooms and food) from donations that are not in exchange for goods and services.
It will cost your org a few grand to have an attorney handle this (applying for exemption, if needed or recommended, and setting up best practices for your org) - well worth it, IMO. But you likely also have someone in your org - a CPA or EA or attorney - who would do it pro bono.
posted by melissasaurus at 1:42 PM on April 12, 2016 [2 favorites]
Here is an example of a letter sent to an organization by the IRS stating that it is not considered an integrated auxiliary org. Here is a blog post on the factors the IRS looks at when determining whether an org is an I.A.O. - it's unclear from your post whether the church has this level of control over your org.
Note that your state tax exemption laws may be different (and certainly Canada's tax laws are different as well - if money is crossing borders there may be additional requirements). Not all states follow the federal exemption format, and many require separate exemption paperwork (or condition your state exemption on having an official exemption letter from the IRS). You may need to chase this information down in each state in/from which you receive or disburse funds. Income tax exemption may not mean sales and use tax exemption and vice versa. There may be separate regulation of your fundraising activities from each state's State Dept or Atty General's office (for example, NY's rules).
You may want to see if you can be covered by a "group exemption letter" possibly held by your church. You can probably ask the religious organization's attorney for advice.
If you are going to be telling people their donations are tax deductible (rather than just exempt to your org), be very careful about separating out payments for goods and services (like hotel rooms and food) from donations that are not in exchange for goods and services.
It will cost your org a few grand to have an attorney handle this (applying for exemption, if needed or recommended, and setting up best practices for your org) - well worth it, IMO. But you likely also have someone in your org - a CPA or EA or attorney - who would do it pro bono.
posted by melissasaurus at 1:42 PM on April 12, 2016 [2 favorites]
If you're in the US, it sounds like a 501c4 social welfare group. 501c4s don't have to apply for exemption to be that thing, since there's no real tax benefit to it. I'd formalize it if I were you: set up a corp, start filing 990s or 990-Ns.
posted by jpe at 6:24 PM on April 12, 2016
posted by jpe at 6:24 PM on April 12, 2016
BTW, the conference and newsletter sound 501c3-y, the support for member sounds very 501c4-y.
posted by jpe at 6:25 PM on April 12, 2016
posted by jpe at 6:25 PM on April 12, 2016
It also looks as if the group may not "receive financial support primarily from internal church sources as opposed to
public or governmental sources," depending on if the $10K yearly in donations is received via public solicitation. Tax law is a tough subject, verging on opaque, so please don't think I'm saying that you're stupid when I say that you're not parsing those IRS documents very well and are in fact demonstrating why you need to get competent tax advice.
posted by praemunire at 8:02 PM on April 12, 2016 [2 favorites]
public or governmental sources," depending on if the $10K yearly in donations is received via public solicitation. Tax law is a tough subject, verging on opaque, so please don't think I'm saying that you're stupid when I say that you're not parsing those IRS documents very well and are in fact demonstrating why you need to get competent tax advice.
posted by praemunire at 8:02 PM on April 12, 2016 [2 favorites]
You are definitely required to do tax reporting based on your budget size and expenditures and probably liable for tax payments and back taxes. You could incorporate to go forward in the future, but your history means you need to do this with an acountant's advice. Please get advice from an accountant familiar with the c organizations.
posted by Miko at 8:26 PM on April 12, 2016
posted by Miko at 8:26 PM on April 12, 2016
Response by poster: I got the 30-day reminder email today and thought I might as well update, in case people are interested.
melissasaurus, your links were very helpful, but suggest to me even more strongly that we are indeed an integrated auxiliary. The couple of exceptions fall into the area of assumed models of church governance, from which we diverge a great deal. We have a lot of experience navigating relationships with civil authorities that expect us to have a central governing body with authority over local bodies, ordained and/or paid clergy, and so on, which we don't (we're Quakers). For instance, one of the requirements in the IRS document you linked to says that one requirement is that a "church or convention or association of churches has the authority to appoint or remove, or to control the appointment or removal of, at least one of your officers or directors." There is no situation within Quakerism where this is true, and a long history of civil authorities working with Quakers to find alternate approaches for conforming with such requirements.
The requirement that I think we ought to consider seriously is the one that says our assets would go to the umbrella religious organization in the event of dissolution. I don't know if the group has ever discussed or documented that, so I'll make sure we address it.
It will cost your org a few grand to have an attorney handle this (applying for exemption, if needed or recommended, and setting up best practices for your org) - well worth it, IMO.
A few grand is, depending on the year, anywhere from 25% to 60% of our annual budget. This is a major reason why we haven't done it before.
If you are going to be telling people their donations are tax deductible...
We do not do this, or supply tax receipts for donations, precisely because of our ambiguous status.
You are definitely required to do tax reporting based on your budget size and expenditures and probably liable for tax payments and back taxes.
A couple of people have said this, and I can see why—in an effort not to go into too much detail, I didn't provide some extremely relevant information. Based on my research and that of others, I'd say the opposite is true, and that, while there are still many questions and complications about our status, it is clear that we do not need to file or pay taxes.
I appreciate everyone's input. The questions and links were very helpful as I looked into this.
posted by not that girl at 1:04 PM on May 12, 2016
melissasaurus, your links were very helpful, but suggest to me even more strongly that we are indeed an integrated auxiliary. The couple of exceptions fall into the area of assumed models of church governance, from which we diverge a great deal. We have a lot of experience navigating relationships with civil authorities that expect us to have a central governing body with authority over local bodies, ordained and/or paid clergy, and so on, which we don't (we're Quakers). For instance, one of the requirements in the IRS document you linked to says that one requirement is that a "church or convention or association of churches has the authority to appoint or remove, or to control the appointment or removal of, at least one of your officers or directors." There is no situation within Quakerism where this is true, and a long history of civil authorities working with Quakers to find alternate approaches for conforming with such requirements.
The requirement that I think we ought to consider seriously is the one that says our assets would go to the umbrella religious organization in the event of dissolution. I don't know if the group has ever discussed or documented that, so I'll make sure we address it.
It will cost your org a few grand to have an attorney handle this (applying for exemption, if needed or recommended, and setting up best practices for your org) - well worth it, IMO.
A few grand is, depending on the year, anywhere from 25% to 60% of our annual budget. This is a major reason why we haven't done it before.
If you are going to be telling people their donations are tax deductible...
We do not do this, or supply tax receipts for donations, precisely because of our ambiguous status.
You are definitely required to do tax reporting based on your budget size and expenditures and probably liable for tax payments and back taxes.
A couple of people have said this, and I can see why—in an effort not to go into too much detail, I didn't provide some extremely relevant information. Based on my research and that of others, I'd say the opposite is true, and that, while there are still many questions and complications about our status, it is clear that we do not need to file or pay taxes.
I appreciate everyone's input. The questions and links were very helpful as I looked into this.
posted by not that girl at 1:04 PM on May 12, 2016
A few grand is, depending on the year, anywhere from 25% to 60% of our annual budget.
So, is there really no attorney or tax accountant that you have access to who could give you a pro bono consult? I've worked in two Quaker orgs, and in both cases, we had that kind of contact through the board.
posted by Miko at 6:54 PM on May 12, 2016
So, is there really no attorney or tax accountant that you have access to who could give you a pro bono consult? I've worked in two Quaker orgs, and in both cases, we had that kind of contact through the board.
posted by Miko at 6:54 PM on May 12, 2016
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And that lawyer never said anything about how you ought to be organized if you weren't a 501c3? What did you say you were when you filed for the EIN? You had to have marked some kind of box on the SS-4.
posted by Sequence at 10:18 AM on April 12, 2016