NPC loses its tax-exempt status for a while - any penalties issued when they get it back?
March 17, 2011 6:47 AM   Subscribe

Will a non-profit corporation that lost its tax-exempt [501(c)(3)] status, but re-applies and regains it at a later date, be subject to fines and/or penalties for the period it did not have the status?

(Asking this for a friend, I know she should get a lawyer, she knows she should get a lawyer. I know you're not a lawyer and that you're not my lawyer. Just hoping someone can answer a basic question.)

My friend is on the board of a teeny tiny non-profit corporation that lost its 501(c)(3) status. She is not sure why (the IRS would not tell her) but if I had to guess it would be because they did not file tax returns for three years in a row, which automatically revokes your status. (The corporation had a treasurer who won't return calls or hand over the financial records from her tenure.)

They would like to regain their 501(c)(3) status, and from looking on line I see that if they regained it (by completing another form 1023), they would be reinstated as of the day they lost their status, but my friend's worried that any penalties and/or fines they would incur from being without the 501(c)(3) status for that period of time would wipe out all their money (they receive less than $3000 a year in income).

So, there's my question - what sort of fines/and or penalties, if any, are imposed upon a 501(c)(3) corporation for the period that it lost its tax-exempt status?
posted by Lucinda to Law & Government (7 answers total)
Someone else may want to volunteer a more substantive answer, but I can tell you that you can just call the IRS and ask them. They're not going to tap the phone line and track your friend down :-)
posted by facetious at 7:01 AM on March 17, 2011

There's nothing illegal, per se, about not having 501(c)3 status. Plenty of organizations lapse.

The organization would only get fined if it conducted activities that are restricted to 501(c)3s. That means things like buying stuff and not paying sales tax, using a 403(b) for employees instead of a 401(k), etc. Probably not things that a charity with a $3000/year budget needs to worry about.

If you can post the activities the organization has performed in the past three years, I can give you some more concrete advice.
posted by juniperesque at 7:28 AM on March 17, 2011

Call the IRS. They are are very helpful in situations like this because these situations are all too common. I once took over as treasurer at a 501(c)(3) where taxes hadn't been filed in years and fines had been assessed and we got things cleared up within a few weeks and they reversed all the fines. The not for profit had kept all its state reporting up to date, though. You may need to check on that. Local states have entirely different regulatory rules.
posted by readery at 8:12 AM on March 17, 2011

Response by poster: Basically they collect the sample shampoo/soap/shower gel/toothpaste, etc. that you get at hotels, parcel them out and deliver them to homeless shelters and women's shelters. No employees, I don't even think they pay rent for the small space where they store stuff. I'd need to ask her if they'd gotten a sales tax exemption for purchases.

I think my friend doesn't want to call the IRS because the person who told her their status had been revoked (when she tried to file the 990 postcard) was very unhelpful on the phone. I'll tell her that not everyone's like that there.
posted by Lucinda at 8:17 AM on March 17, 2011

Best answer: I am not a tax attorney, though I do serve on the board of a very small non-profit.

A 501(c)(3) entity that receives less than $5,000 per year in annual income is exempt by statute and does not have to file any forms for status. An article by a tax professional is where I found the information that I used to get our entity listed as a non-profit. Getting reactivated in the tax-exempt database does require calling the IRS, and using this procedure won't get them a new status determination letter. Whether or not having an actual letter is important is up to the non-profit itself. (For mine, it doesn't matter because we're exempt for another purpose that doesn't involve contributions)

As far as I can tell, there aren't any fines or penalties for operating like a 501(c)(3) without actually being one. The income might officially be taxable, but the IRS does not seem to care about what entities doing less than $5k in income are up to so I would call and get reactivated on the tax-exempt list, file last year's 990 ePostcard and have a good week. :)
posted by fireoyster at 10:06 AM on March 17, 2011

Oh, by the way: sales tax and similar excise taxes are handled by the state, not by the federal government. My org was qualified as exempt from sales tax months before it got listed as a tax-exempt entity by the IRS.
posted by fireoyster at 10:07 AM on March 17, 2011

Response by poster: Thank you for the article! I will forward it on to my friend.
posted by Lucinda at 10:38 AM on March 17, 2011

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