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Biggest Mistakes Made by Tax-Exempt Organizations when Filing Tax Returns



John Stancil

Even though non-profit organizations can be tax-exempt, they are still required to file a return with the IRS. Many individuals, including those associated with non-profit organizations, do not understand the tax obligations of a non-profit organization.

I have compiled a top ten list of mistakes made in regard to taxes for these organizations.

• Not understanding the difference in non-profit and tax-exempt. An organization is a non-profit when it registers with the state as a non-profit organization. This state registration does not confer on it tax-exempt status. The organization must file a Form 1023 with the IRS to apply for, and receive tax-exempt status.

• Not filing a return. Because the organization is tax-exempt, some have a belief that the organization is not required to file a tax return. All tax exempt organizations, with the exception of churches, must file a Form 990 annually with the IRS.

• Not filing on a timely basis. A 990 is due by the fifteenth day of the fifth month after the end of the organization’s fiscal year. For most organizations, this would be May 15. Usually such penalties are a percentage of the tax due. However, a tax exempt organization normally does not pay taxes, so the penalty is $20 for each day the return is late.

• Filing the wrong form. There are three returns in the 990 series. The 990 must be used by organizations with gross receipts of $200,000 or more or total assets of $500,000 or more. The 990-EZ is for organizations having less than those amounts. If the organization normally has $50,000 or less in gross receipts, it may file a 990-N, commonly referred to as a postcard return. This return is filed online and is basically a notification to the IRS that the organization is still in existence.

• Tax-exempt organizations are required to file returns as an accountability measure. They have been granted the privilege of not paying taxes on its income. In return it must disclose certain operational information on its tax return. This information is made available to the public.

• Many organizations may not fully answer the questions required on the return or provide inadequate explanations of certain items on the return. This likely arises from a misunderstanding of the purpose to have the organizations file a tax return (see number 6).

• Some organization may fail to file a Schedule B with their return. Schedule B is a list of donors contributing $5,000 or more in a given year. This includes cash and in-kind contributions. One reason given for failure to include this information is that the organization does not want to make its significant contributors made known to the general public. However, they should have no fear on this count. Even though the 990 is made publicly available, the information on Schedule B is redacted and not visible to the public.

• A significant amount of financial information is given on Form 990, and some numbers are repeated in various sections of the return. A common mistake is not being consistent in including the same amounts throughout the return. Fortunately, tax software usually picks up on these inconsistencies and raises a flag for the preparer.

• A significant amount of financial information is given on Form 990, and some numbers are repeated in various sections of the return. A common mistake is not being consistent in including the same amounts throughout the return. Fortunately, tax software usually picks up on these inconsistencies and raises a flag for the preparer.

• A related area is classifying expenditures incorrectly. In addition to the traditional expenditure classifications (office supplies, salaries, etc) tax-exempt organizations must break its expenditures down into program services, management and general expenses, and fundraising expenses.

• Even though an organization is classified as tax-exempt, it may be subject to taxation on some of its income. This is known as unrelated business taxable income, and arises when an organization is engaged in a business activity not related to its exempt purpose. Suppose that a tax-exempt organization operates a restaurant, open to the general public. If the organization does not pay tax on its profits, it is given a competitive advantage to other restaurants who must pay taxes on their profits. To level the playing field, tax-exempts are subject to tax on these business activities. Many organizations are unaware of this requirement.

Tax-exempt organizations serve a worthy purpose in our society. However, they are subject to public accountability for the stewardship of it funds. It does not serve the organization or the public if the organization attempts to circumvent this accountability. It is required to provide copies of its tax returns on request. This can be done simply by posting the return on a web page.

Dr. John Stancil (My Bald CPA) is Professor Emeritus of Accounting and Tax at Florida Southern College in Lakeland, FL. He is a CPA, CMA, and CFM and passed all exams on the first attempt. He holds a DBA from the University of Memphis and the MBA from the University of Georgia. He has maintained a CPA practice since 1979 with an emphasis in taxation. His areas of expertise include church and clergy tax issues and the foreign earned income credit. He prepares all types of returns, individual and business.

Dr. Stancil has written for the Polk County Business Journal and has presented a number of papers at academic conferences. He wrote the Instructor’s Manual for the 13th edition of Horngren’s Cost Accounting. He is published in the Global Sustainability as a Business Imperative, Green Issues and Debates, The Encyclopedia of Business in Today’s World, The Palmetto Business Review, The CPA Journal, and in the NATP TaxPro Journal. His paper, “Building Sustainability into the Tax Code” was recognized as the outstanding accounting paper at the annual meeting of the South East InfORMS. He wrote a book entitled “Tax Issues Faced by U. S. Missionary Personnel Abroad ” that will soon be published.

He has recently launched a new endeavor, Church Tax Solutions, which presents online, on demand seminars on various church and clergy tax issues.

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