July 12, 2019 Exempt organization provisions included in IRS reform legislation The Taxpayer First Act (the Act), signed by President Trump on July 1, 2019, enacts various reforms to the IRS and includes two provisions affecting exempt organizations: (1) extending mandatory e-filing to all exempt organizations required to file statements or returns in the Form 990 series or Form 8872 (Political Organization Report of Contributions and Expenditures). and (2) requiring IRS notice before revocation of tax-exempt status for failure to file returns. This Alert focuses on these exempt organization provisions. Mandatory e-filing Background Exempt organizations generally must file an annual information return or notice in the Form 990 series. In addition, tax exempt organizations that generate unrelated business taxable income over $1,000 are specifically required to file federal Form 990-T. Under current regulations, large tax-exempt organizations (those with assets of $10 million or more and that file at least 250 returns during a calendar year) must electronically file their Form 990 information returns. Private foundations and charitable trusts that file at least 250 returns during a calendar year (regardless of their asset size) must also file their returns (Form 990-PF) electronically. Organizations with gross receipts of less than $50,000 generally must file Form 990-N online at the IRS website, unless the organization elects to file Form 990 or 990-EZ. Accordingly, before the Act, while e-filing requirements generally applied to the largest and smallest exempt organizations, no such requirement applied to exempt organizations not included in those categories. Extending e-filing The Act extends the e-filing requirement to all exempt organizations required to file statements or returns in the Form 990 series or Form 8872 (Political Organization Report of Contributions and Expenditures). The Act further requires the IRS to make the information provided on the forms available to the public (consistent with disclosure rules) in a machine-readable format as soon as practicable. The Act will also require exempt organizations to e-file Form 990-T, Exempt Organization Business Income Tax Return. Before the Act, the IRS did not accept e-filing of Form 990-T by any organization. The new requirement is generally effective for tax years beginning after the date of enactment (i.e., July 1, 2019). Transition relief is included for (1) certain small organizations (gross receipts less than $200,000 and aggregate gross assets less than $500,000) or other organizations for which the Treasury Secretary determines that application of the e-filing requirement would constitute an undue hardship in the absence of additional transitional time, and (2) the filing of Form 990-T, at the IRS’s discretion. In such cases, the requirement will be delayed not later than tax years beginning two years after July 1, 2019. Notice required before revocation of exempt status Under existing law, if an organization fails to file a required Form 990 series return or notice for three consecutive years, the organization’s tax-exempt status is automatically revoked. The Act requires the IRS to provide notice to an organization that fails to file a Form 990-series return or notice for two consecutive years. This notice must (1) state that the IRS has no record of having received such a return or notice from the organization for two consecutive years, (2) inform the organization that its tax-exempt status will be revoked if it fails to file such a return or notice by the due date for the next such return or notice, and (3) include information about how to comply with the annual information return and notice requirements under IRC Section 6033(a)(1) and 6033(i). This notice requirement applies to failures to file returns or notices for two consecutive years if the return or notice for the second year must be filed after December 31, 2019. Implications With the implementation of mandatory e-filing of Form 990-series returns, many organizations that were not historically subject to e-filing will have to adjust their current procedures to prepare for compliance. Specifically, those organizations that have historically filed paper versions of Form 990 but that are not eligible to file Form 990-EZ will be required to e-file their returns for tax years beginning after July 1, 2019, even though they are not considered a large organization. Furthermore, although the new legislation grants the IRS the option to extend implementation of the e-filing requirements for small organizations, Form 990-T filers or other organizations as it deems necessary, the IRS has not yet elected to do so. Accordingly, organizations that have historically filed Form 990-EZ should prepare to e-file for tax years beginning after July 1, 2019, until such time that the IRS exercises its option, if at all. The requirement to file Form 990-T electronically will necessitate substantive changes to be made to tax return preparation and filing software programs, particularly if the organization has significant alternative investment portfolios and/or foreign activities to report. Therefore, whether the organization will now be required to file a Form 990-series return electronically for the first time and/or will have to add Form 990-T to its list of returns to be filed electronically, the organization should begin to evaluate what e-filing tools and options are available and will best suit its needs. The requirement to file Form 990-T electronically will enable the IRS to make the organization’s unrelated business income and corresponding deductions publicly available in a machine-readable format. As such, organizations should anticipate increased IRS exam selection efficiencies and public review of their unrelated business activities. Although the Act now requires the IRS to provide notice of possible tax exemption revocation to an organization that fails to file a Form 990-series return or notice after two consecutive years, the underlying rule has remained the same—tax exemption will be revoked if an organization fails to file for three consecutive years. Every tax-exempt organization should understand its filing obligations to ensure protection of tax-exempt status and should file the required Form 990-series returns annually or provide notice to the IRS if a return will not be filed. Please contact your Ernst & Young LLP professional for further information. ———————————————
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