Tax-exempt organizations are required to file a 990 series Form with the IRS on an annual basis. This is a critical piece of their tax-exempt status. Key financial information and operations information is required to be reported on their 990 Form.
Failing to file this form can have big consequences. Fines can add up, and losing your tax-exempt status should be avoided at all costs. Here are the 990 penalties that your organization could face and, most importantly, how to prevent them.
Reasons Why IRS Imposes Penalties
The IRS may impose penalties on your organization for two major reasons.
- Failure to file your 990 return on or before the deadline
- Filing your 990 return with incorrect information or incomplete
Organizations’ returns are deemed incomplete,
- If there is so much as a requested line item
- If the required schedule missing
- If an organization can’t prove a reasonable cause for late or incorrect filing.
Check out this information from the IRS to learn more about what is considered a reasonable cause.
How Are Penalties Determined?
Before we get into the monetary amounts for penalties, let’s cover how the IRS doles them out. They do this based on the size of your organization, i.e., your gross receipts. This is all the money that you receive annually before mission-related programs and operational expenses.
An organization is considered small if its gross receipts for the tax year are less than $1,000,000 and considered large if its gross receipts for the tax year are over $1,000,000. Here are the penalty amounts:
- The IRS will impose $20 per day for the reasons mentioned earlier.
- The maximum penalty is $10,000 or 5% of their gross receipts (whichever is less).
- A large organization will have a larger fine to contend with, $100/day.
- The maximum penalty can be as high as $50,000.
Penalties For A Paid Preparer
Hiring a paid preparer is fine, but keep in mind that the IRS will still hold your organization liable for any mistakes or late filing. Be sure that you are using a professional that is requitable and can be trusted to file your nonprofit tax returns accurately and on time.
If by chance your paid preparer doesn’t follow through and file your form or if they file 990 forms with errors, the IRS will penalize your organization, not the paid preparer. This penalty is $10 per day if the Form is late or incorrect. The total maximum penalty for only one 990 return can total up to $5,000.
Avoiding Automatic Revocation is Crucial
The last two words that you want to hear from the IRS are “Automatic Revocation”. This is bad news for your organization. This means that your tax-exempt status has been revoked. Not only will there be a process to reinstate your tax-exempt status, but this sends a bad message to your donors.
You want your donors to feel that you are responsible and transparent financially. Donors don’t want to contribute to an organization that can’t prove they are a good steward of these contributions.
Organizations that fail to meet their IRS e-filing requirements for three consecutive years will automatically lose their tax-exempt status.
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