By John R. Hill
ENVIZION Financial
Did your department miss the recent new IRS requirement deadline? Your department may owe back taxes and your donations may not be tax-deductible if your not-for-profit department failed to file required forms by the May 15, 2010 deadline.
What has changed… and the new requirements
Small departments with smaller budgets and fewer assets were exempt from filing any information with the IRS each year. Most volunteer departments have to file a form 990 due to the amount of their funding and assets.
In 2007, the IRS changes the rules so that every department must file some version of the form 990.
If a department fails to file the proper form for 3 consecutive years, the law provides that the department automatically loses its tax-exempt status. Loss of tax-exempt status means a department must file income tax returns and pay income tax on their revenue and its contributions are no longer tax-deductible for its contributors.
So, if your department failed to file a form 990 in 2008, 2009, and 2010, your department has lost it tax-exempt status. The consequence of this is that your income is subject to corporate income taxes and you will owe the IRS income taxes on your revenue. Unpaid taxes on that income could be subject to interest or penalties.
Further, any donations you receive can not be deducted as a charitable donation by your contributors.
What can our department do?
If your department has failed to file form 990 for the past 3 years, you must re-apply for reinstatement of your exempt status. This means filing a new application and filing a new filing fee. Your exempt status would be effective as of the date of the new filing – which means your department may owe taxes on the past 3 years revenues.
However, the IRS is providing a one-time filing relief for organizations that failed to file for 3 consecutive years. This one-time relief benefits Form 990-N and form 990-EZ filers only.
You can discover if your department is on the List of Organizations at Risk of Automatic Revocation of Tax-Exempt Status on the IRS website:
http://www.irs.gov/charities/article/0,,id=225889,00.html
What other problems can occur?
Banks will no longer lend money to departments who can not demonstrate that they have filed the proper IRS forms for the past 3 years. There are a couple of reasons for that.
First, your department probably has a new fairly large financial liability. And the full extent of what you owe is probably not certain given the lack of information and the unknown costs of penalties and interest on the back taxes.
Second, your department does not qualify for tax-exempt financing if your department is not registered and recognized by the IRS as an exempt organization. That means you will have to pay standard, commercial interest rates which are a few percent higher than exempt rates.
For more information
This article is intended for informational purposes only and is not tax advice about your departments specific situation.
Please consult your tax professional for help and advice for your department.
Further information about this topic can be found on the IRS website:
http://www.irs.gov/charities/article/0,,id=169250,00.html
http://www.irs.gov/charities/article/0,,id=217087,00.html
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John R. Hill is an apparatus budgeting consultant for ENVIZION Financial, which helps fire departments avoid common financial mistakes that are made in the apparatus purchasing process. John also writes a weekly Web site column on FireFinanceGuy.com. To contact John, e-mail jrhill@envizionfire.com.