The May 15, 2018 filing due date for the Form 990 for tax-exempt organizations operating on a calendar year is just around the corner. Organizations may file Form 8868, Application for Automatic Extension of Time to File an Exempt Organization Return, in order to receive an automatic 6-month extension of time to file their Form 990 (https://www.irs.gov/pub/irs-pdf/f8868.pdf).
Whether the Form 990 is filed by the May 15th due date or the extension due date (November 15th), it is important to note that the IRS has instituted new automated processing changes that involve returning the Form 990 when it is incomplete or the wrong return is filed, accompanied by specific letters indicating the nature of the organization’s noncompliance.
If your organization fails to file its return by the due date, it must pay a penalty of $20 per day for each day the return is late; the same penalty applies if the organization does not give all of the information required by the return or gives incorrect information. The maximum penalty for failure to file a return is the lesser of $10,000 or 5% of the organization’s gross receipts, but if an organization has gross receipts of over $1 million for the year, the penalty is $100 per day up to a maximum of $50,000.
If your organization’s return as filed is incomplete or the wrong return for the organization, the IRS will send it back to the organization with a letter indicating what is missing or misfiled. In order to avoid penalties after receipt of one of these letters, within the time period requested by the IRS letter, the organization must: 1) provide the missing or incomplete information, or proceed to file the complete and accurate return and sign the return, 2) attach a copy of the IRS’s letter, and 3) include a written “reasonable cause” explanation of why the organization did not initially provide both the missing or incomplete information.
“Reasonable cause” is a facts-and-circumstances determination that is made by the IRS on a case-by-case basis. The law relevant to this area provides that the explanation must be made by the appropriate person under penalties of perjury, and must set forth all of the facts supporting a determination that the noncompliance was due to reasonable cause. Further, the organization should submit any available supporting documentation to address how the organization exercised ordinary business care and prudence (or, in other words, how the organization was not neglectful or careless), along with what steps the organization has taken to prevent the same situation from occurring again in the future.
For example, a public charity operated for years with gross receipts substantially below the Form 990-EZ threshold amount, making it eligible to file and thus filing Form 990-EZ for those years. However, the organization had $350,000 in gross receipts in 2017. Mistakenly, it files a paper Form 990-EZ return for the 2017 tax year and the return is rejected by the IRS. The organization would need to then file the appropriate full Form 990 return and submit an explanation as to why this mistake was made and how the organization has taken steps to ensure this will not happen again in the future in order to avoid penalties.
For more information related to processing changes, common errors on Form 990, or penalties for failure to file your Form 990, additional information is available on the IRS website.
