Four Hundred Thousand Nonprofits to Lose Exemption Status

About four hundred thousand nonprofit organizations or about one quarter of all nonprofit organizations could lose their tax-exempt status in May. As outlined in the Pension Protection Act of 2006, any organization that has tax-exempt status but has not filed a tax form for three consecutive years will lose their exemption status at midnight on May 15^th. Before this legislation was passed in 2006, only nonprofit organizations with annual revenue of $25,000 or more had to file.

The Internal Revenue Service has claimed to lack data on nonprofit organizations for years, citing the problem that many nonprofits did not file tax forms. According to the IRS, with out general and basic facts for each organization recorded and on file, the agency cannot provide the kind of oversight necessary for them to appropriately run the nonprofit sector.

Lois G. Lerner, director of the exempt organizations division of the IRS, told the New York Times that non-compliant organizations will lose exemption status May 16^th, but the IRS will not send out notices until January in order to give nonprofits a chance to bring themselves into compliance with the law.

Experts say that small organizations are most likely to be affected, saying that many small nonprofits are inactive and were not aware of the requirement to inform the IRS of their dissolution. Diana Aviv, president of the Independent Sector (a nonprofit trade group) said, "It's going to be an unholy mess once these organizations realize what's happened to them."

Donors to these organizations will also be affected; they will not be able to make deductions on their gifts until the organization they donate to has received a notification from the IRS. Lerner says, "We are moving very cautiously, the last thing we want to do is revoke the exemption of someone who has already filed."