The IRS announced last week that self-declared nonprofit organizations will be required to indicate that status on their Form 990 starting with the 2015 tax year. Are you asking yourself whether your organization is self-declared? If your organization filed Form 1023 or 1024 and received confirmation from the IRS that your organization has federal exempt status, you’re not self-declared. This new rule primarily applies to organizations other than charitable 501(c)(3) organizations since most charitable organizations (other than religious and very small organizations) must apply to the IRS for federal exempt status.
Organizations have been able to self-declare their status as a 501(c)(4) or 501(c)(6) organization without filing anything with the IRS. They simply start an organization, follow the rules for the particular type of nonprofit they’re claiming to be and file a Form 990 like any other nonprofit. This has been a great tool for organizations that missed the 27-month deadline for retroactive status as a charitable organization. They could easily choose to be a 501(c)(4) civic/social welfare organization for the time period leading up to charitable status. While they wouldn’t get the benefits of charitable donation treatment for donors, at least the income wouldn’t be taxable.
While self-declaration for certain types of nonprofits is still allowed by the IRS, the new rule will identify self-declared nonprofits on Form 990, which will presumably lead to a higher level of scrutiny by the IRS. The IRS began a study in 2013, asking more than 1,300 self-declared organizations to complete a questionnaire intended to provide insight on the level of compliance among these organizations. It’s all part of the continuing efforts of the IRS to weed out nonprofits that aren’t doing what they should, which is good for the industry. Political organizations are likely the primary target of this new rule since they typically are 501(c)(4) or (6) organizations and often never apply to the IRS with detailed information about their activities. It’s not necessarily a problem, but the IRS has some valid concerns.
We don’t see a need at this point to apply for IRS status if you’ve been a self-declared nonprofit for a while, but it certainly doesn’t hurt. If your organization is doing everything it should, there should be no concerns about the outcomes of applying for IRS-recognized exempt status. Keep in mind that, thanks to a 2013 IRS ruling, self-declared organizations filing for federal exempt status more than 27 months after inception will generally not receive retroactive exempt status. Those organizations will still be considered self-declared for earlier years. At the very least, self-declarers should start scrutinizing their board policies, financial policies and compensation methods now. Not only is it a good idea from a healthy, well-run nonprofit standpoint, but it will help you ensure a smooth IRS audit if the situation arises.
