WASHINGTON– Senators Ben Cardin (D-Md.) and Dan Coats (R-Ind.) have introduced the NOTICE Act (S.400), legislation that would require the Internal Revenue Service (IRS) to notify nonprofit organizations in a timely manner before their tax-exempt status is automatically revoked. The bill also allows the IRS to retroactively reinstate tax-exempt status if the nonprofit did not receive this notice and subsequently files an information return.
Under current federal law, charities and other nonprofits automatically lose their tax-exempt status if they do not file annual information returns – regardless of how much income the organization receives – for three consecutive years. Originally intended to clear defunct organizations from the government’s books, this automatic revocation is punishing small charities that are unaware of the requirement.
In Maryland, 12,739 nonprofits lost their status and only 1,020 of these have successfully been reinstated. In Indiana, the IRS automatically revoked the tax-exempt status of over 12,000 charities and other nonprofits. Less than a thousand of them successfully navigated the IRS process of reinstating their status.
Nationwide, nearly 584,000 charities and other nonprofit lost their status because of the automatic revocation. While many of these may have been defunct, many more were still operating as charities and had to reapply for tax-exempt status. Others may still be unaware that their status has been revoked. At least 80,000 organizations reapplied for exempt status after suffering through the automatic revocation. To date, the IRS has processed and reinstated the tax-exempt status of less than 51,000 of these nonprofits.
“It’s just commonsense that we ensure small charities in Maryland and across the U.S. receive reasonable notice before an administrative stumbling block causes a lapse in their status. This allows for minimal disruption to the good work being performed by these charities in our local communities and frees up scarce IRS resources,” said Senator Cardin. “I’m pleased to join Senator Coats on this legislation that will make such a big difference to our nonprofit organizations.”
“As the federal government is forced to reduce spending, community and faith-based organizations are increasingly filling the void,” said Senator Coats. “We need to make sure we allow these organizations to grow without interference from Uncle Sam. Because the IRS does not adequately notify charities as this deadline approaches, many nonprofits discover the problem only after their names appear on a list of organizations that have already lost their status, after it is too late to act. Some never realize it at all.”
National organizations supporting the Cardin/Coats bill include the Alliance for Charitable Reform and the National Volunteer Fire Council. Indiana organizations supporting the legislation include the Indiana Philanthropy Alliance, Indiana CPA Society and Indiana Society of Enrolled Agents.
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