Writing this blog for the PSGA site I know I have two main audiences: grant writers that work for a specific nonprofit and consultants who work for a variety of nonprofits.

If you are a consultant, then this entry is probably more critical for you. As you are likely aware, the IRS plans to revoke the nonprofit status of many small nonprofits. In the past, revocation occurred only if you misused the status, and the IRS could prove and took action on that misuse. Now the world has changed. Every organization must actively work to maintain its status, even if it is only filing the 990-N postcard.

I recently received the Nonprofit Center’s email bulletin that included new information on the IRS move to revoke the exemptions of nonprofits they deem inactive because of a lack of filings. While it’s hard to imagine that the news has slipped by anyone truly active in the nonprofit sector, in short the issue is this. Beginning in 2007 any nonprofit organization that failed to file a 990 form for three fiscal years will automatically lose its nonprofit status. One step in implementing this was developing the 990-N, a postcard form to be filed by small nonprofits whose operating revenues were below the minimums set for filing a full 990 or a 990 EZ. Also, it should be noted, that churches operating solely for religious purposes continue to be exempt from any and all filing.

The Nonprofit Center bulletin provided a link, which I’ve copied here, to the IRS site listing the organizations they plan to revoke. The Bulletin puts the total number for Washington State at 8,128.

I downloaded the Washington file and looked through the listing. Using the Excel spreadsheet format I was able to sort by city, making it easy to focus on the organizations listed for Tacoma.

Looking through the list I suddenly understood why this might be worth a blog post alerting consultants. I’d ignored the issue with the thought that any organization that has enough resources to hire a grant writer surely is filing a 990; so there was no issue for the PSGA audience.

Yet a few names in the listing reminded me that consultants are often called upon to help small organizations. And in particular, small organizations that have been inactive, but want to revive under the leadership of a new and vibrant board.

While restarting an organization has many challenges, the new IRS policy revoking the nonprofit status of non-filing organizations adds another critical dimension.

Imagine a scene in early 2011. You are a consultant and a small nonprofit board hires you to help ramp up the organization. You find they have a pretty good case and are able to match their work with a number of local foundations. While it took a while, they finally located a copy of their original 501 (c) (3) letter. So all is going well, right?

However, just after you send out your first round of letters, a program officer from one of those local foundations you’ve targeted calls you. She’s ran the organization’s name against the IRS database of revoked organizations. The organization you’ve done all this work for lost their status at the end of 2010 because they hadn’t filed a 990, or even the 990-N postcard, during the past three years.

That means the organization is back at step one, having to file a new application for nonprofit status. It also means all of your work is put on hold until that issue gets resolved.

That step about a foundation program officer vetting your organization against the IRS list isn’t as easy as it sounds. We on the foundation side of things are not quite sure how we will deal with the issue. On one hand, a foundation could adopt a policy that it will not make a grant to an organization that has not filed at least a 990 EZ. That has two good reasons to recommend it: first, it means the organization clearly won’t be facing revocation of its nonprofit status; and second, it limits grants to organizations that have been operating at least at a certain level of revenues.

Whether such a policy comes to pass or not, the message is clear that small organizations must take the time to clearly document that their nonprofit status is current.