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Smaller not-for-profit organizations that don't file Form 990 or file late may be unpleasantly surprised at how large the penalties can be. But there are solutions.
Many small and medium-size not-for-profit organizations are mostly run by volunteers, and the staff of these charities may forget or inadvertently fail to timely file Form 990, Return of Organization Exempt From Income Tax, Form 990-EZ, Short Form Return of Organization Exempt From Income Tax, or even Form 990-N, Annual Electronic Filing Requirement for Small Exempt Organizations, which is a postcard-size information return that is electronically filed. 1RS penalties for late filing can be hefty, not the least of which is the loss of exempt status after failing to file for three consecutive years. It can be devastating to receive penalty letters from the 1RS telling the not-for-profit to pay thousands of dollars in penalties or pulling the organization's exemption.
Penalty Framework
Sec. 6652(c)(1) imposes a penalty on any tax-exempt organization for failure to file a tax return or failure to include complete or correct information on the tax return. For organizations with gross receipts less than $1 million, the penalty is $20 for each day during which the failure continues, with a maximum penalty of the lesser of $10,000 or 5% of the organization's gross receipts for the year. If gross receipts are more than $1 million, the penalty is $100 for each day the return is late with a maximum penalty of $50,000 (Sec. 6652(c)(1)(A), flush language).
It is important to note that (1) the statute provides the formula for the penalty calculation; (2) the 1RS has no discretion to decide how much of a penalty to impose; (3) the statute does not allow for imposition of a partial penalty; and (4) the penalty is either fully enforceable or fully unenforceable (see Service Employees International Union, 598 F.3d 111 (9th Cir. 2010)).
Criteria for Penalty Relief
Generally, relief from penalties falls into four categories: (1) reasonable cause; (2) statutory exceptions; (3) administrative waivers; and (4) correction of service error. The first three categories are discussed in this article. 1RS Appeals may recommend Ithe abatement or nonassertion of a penalty based on these four criteria as well as "hazards of litigation" (Internal Revenue Manual (IRM) §20.1.1.3).
Reasonable...