What happens when a non-profit forgets to pay its taxes?

June 17, 2007 7:21 PM

Yikes! I recently started helping a small non-profit manage its finances, and I just discovered they failed to file their taxes last year. Are they doomed?

This is a small non-profit whose fiscal year ended in September of last year, meaning its tax return was due in January. The treasurer, for some reason, failed to file even an extension form, so as far as I can tell, they're 6 months late to file. The IRS site says there's a penalty of $20 a day, or up to 5% of their annual operating income. For this group, their annual income last year was around $100K, but they're already about $10K in debt; another $5K in penalties would pretty much put them out of business.

Has anyone ever had this experience before? I should think that this kind of thing happens all the time, with so many non-profits run by volunteers, but I can't seem to find any mention (or comforting words) on the web. Other questions I have are: Can the individuals on the board of directors of the non-profit be held liable for that penalty? What happens if it's not paid? Does the non-profit lose its status?

Any advice from experience/expertise will be greatly appreciated. Thanks!

posted by ad_hominem to Work & Money (7 answers total)

Best answer: Call the IRS hotline and ask. A number of past questions have dealt with the "I didn't file taxes" problem for individuals, and the advice is basically: call the IRS up and ask them what you need to do to get square with them - normally they'll set up a payment arrangement.
posted by LobsterMitten at 8:21 PM on June 17, 2007

Best answer: When you say that they failed to file their taxes, you mean that they failed to file their 990 form, right?

I'm with LobsterMitten. Talk to the IRS to find out what you need to do. You might be able to get a break on the fines, or if not you might be able to stretch payments out enough to make them manageable. It's in their interest to work with you, particularly if you make sure to file correctly from now on. I don't think that they are doomed at all, but you want to make sure to get in touch with the IRS right away, to show your good intentions, because I think you are right that it happens all the time. Good luck.
posted by gemmy at 8:43 PM on June 17, 2007

And even in the worst-case scenario, if they file right away, $20/day is less than $5000.

And if it's a non-profit, why is their operating income so much higher than their debt such that a little more debt will put them under?
posted by commander_cool at 9:07 PM on June 17, 2007

Best answer: I've done this before and the IRS reversed all late fees and penalties. I filed and enclosed copies of information proving the Not-for-Profit status was up to date with the state along with mea culpa's galore. Two months later received a letter saying all is forgiven. This was about 8 years ago.
posted by readery at 9:28 PM on June 17, 2007 [1 favorite]

Best answer: This happened to my stepmom's investment club. The person who was supposed to file the taxes, didn't do it, and nobody knew until the taxes were due the following year. She got in touch with the IRS. She had hoped for a break, because the club hadn't owed more than $50 or so in taxes ever, and didn't owe at all the year they failed to file. But no -- some $1000 in fines. Well, she wrote a letter to her congressman, explaining everything and asking for advice on how to proceed. The congressman fixed it immediately -- her club didn't have to pay.

So, call the IRS. Then write them a letter. If you don't get an answer you like, maybe your congressman can help. If you have made a good faith effort to fix it (including starting to make the installment payments) and are doing some sort of good in the community, odds are he will see helping your organization stay afloat as a win-win.
posted by Methylviolet at 9:32 PM on June 17, 2007

Response by poster: Thanks everyone. These were exactly the kinds of answers I was hoping for: that there may be some wiggle-room for the penalties, and that the IRS isn't always the faceless, evil monolith it's made out to be. I'll give them a call and throw myself on their mercy.

Commander_cool: Sorry, I miswrote; their -gross- income is 100K, with a net this year of about minus ten. Thanks for clarifying.
posted by ad_hominem at 7:02 AM on June 18, 2007

One more anecdote: my non-profit employer filed late about three years ago, and the IRS removed the enormous penalties after we asked oh so nicely. I'd say skip the hotline and put everything in writing with some sort of delivery confirmation.
posted by robinpME at 7:57 AM on June 18, 2007