What Churches Should Know about IRS Form 990-N

(Editor's Note: Since posting this on May 14, the IRS has issued a statement urging small nonprofits to still file, even though the May 17 deadline has passed).

We recently fielded a question from a reader regarding the Internal Revenue Service's Form 990-N.

Tax-exempt organizations that average $25,000 or less in gross receipts during the previous three years are required–annually–to file a Form 990-N with the IRS through a free electronic form. When an organization misses a filing for one year, or even two, the IRS will send a reminder. But if the organization fails to make its filing for a third consecutive year, the IRS will revoke the organization's tax-exempt status.

It's a big deal this year because 2009 represents the third tax year since certain law changes went into effect. And the deadline for filing for the 2009 tax year looms near.

The reader wanted to know whether the Form 990-N affects churches. The short answer is no.

But there are situations that church leaders should note because they could trigger a need for ministries and organizations related to their churches to comply. And in those situations, a filing must be made, either by Monday, May 17 (the deadline for organizations that use a January 1 fiscal year is normally May 15, but because that date falls on a Saturday this year, it pushes back to May 17), or by November 15 (the deadline for those that use a July 1 fiscal year) at http://epostcard.form990.org.

There was a time when small nonprofits didn't have to file annual returns with the IRS. That changed with the Pension Protection Act of 2006.

As our friends at the Evangelical Council for Financial Accountability note in a recent article, the Act "requires the IRS to revoke the federal tax exemption of any organization that has failed to file three consecutive annual returns (Form 990-N, 990-EZ, 990, or 990-PF [private foundations]). Nonprofits that wish to have their exemptions reinstated will be required to re-apply to the IRS for tax-exempt status. This process can take several months."

For this tax year, the IRS says a Form 990 must be completed by nonprofits that meet the following conditions:

* Gross receipts of $500,000 or more, or total assets of $1.25 million or more, for the end of the 2009 tax year.

Smaller and mid-sized organizations that meet the following conditions can complete a Form 990-EZ:

* Gross receipts were less than $500,000, or total assets were less than $1.25 million, for the 2009 tax year;

The IRS also created the electronic Form 990-N for small nonprofits (those with gross receipts that average $25,000 or less for three consecutive years), which is free and doesn't require any software. This was designed as a simple way for the smallest organizations to comply, the IRS says, and requires only an Internet connection and e-mail address.

And the IRS also provides a list of tax-exempt organizations that don't have to file annually. "Exceptions to this requirement include ... churches, their integrated auxiliaries, and conventions or associations of churches," according to the IRS.

The "integrated auxiliaries" stipulation is where churches need to be careful, says Frank Sommerville, an attorney and CPA specializing in nonprofits and churches (and an editorial advisor for Your Church magazine). Integrated auxiliaries typically include seminaries, women's auxiliaries, and schools.

So long as the church remains in majority control of the integrated auxiliary's governance, or it remains the majority financial supporter, then the exemption should remain, Sommerville says. But if either of those factors changes–for instance, the church's control of the organization goes below 50 percent, or its financial support shrinks below 50 percent, then the church needs to consult with a legal professional, he says. That's a likely sign that a Form 990-N is required for that organization, since it likely no longer fits under the definition of an "integrated auxiliary," he says.

In an e-mail to Your Church, the IRS says "the tests to qualify as an integrated auxiliary are very technical, so an organization should consult with legal counsel to determine qualification as an integrated auxiliary. IRS Publication 1828, Churches and Religious Organizations, includes information about an Integrated Auxiliary of a Church on page 27."

The IRS continues: "One of tests for determining integrated auxiliary status is the internal support test, which an organization meets if it neither offers admissions, goods, services or facilities for sale, other than on an incidental basis, to the general public (except goods, services, or facilities sold at a nominal charge or for an insubstantial portion of the cost) nor normally receives more than 50 percent of its support from a combination of governmental sources, public solicitation of contributions, and receipts from the sale of admissions, goods, performance of services, or furnishing of facilities in activities that are not unrelated trades or businesses. The organization must also meet the affiliation test, which requires an integrated auxiliary to be closely connected to a church or convention or association of churches. Affiliation may be established by a church's majority control over the auxiliary's governing body, but it also may be established by facts and circumstances."

Besides the integrated auxiliary distinction, church leaders also should spread the word to local nonprofits or ministries that aren't affiliated with a church, if only to help them avoid problems with losing their status and the subsequent problems they would encounter with donors as a result of the loss of that status.

In a May 10 article of The Nonprofit Times, the Urban Institute's National Center for Charitable Statistics (NCCS) estimates that 21 percent of the country's 1,592,810 nonprofit organizations haven't filed the required returns. The NCCS has created a searchable database to help organizations determine whether they're affected, according to the article.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is published with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations."

Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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