Oops! We Submitted a 990-N Postcard but Should Have Filed a 990-EZ...

Question: What if a nonprofit submits a Form 990-N Electronic Postcard when it should have filed a Form 990-EZ or long form 990?

Answer: The submission of a Form 990-N postcard in this case does not meet the filing requirement and is therefore the same as not filing anything. Submitting the postcard (when required to file a 990-EZ or 990) for three consecutive years will result in revocation of the organization's tax-exempt status.

If the error is corrected by filing the correct form (990-EZ or 990), the organization will be subject to a late filing penalty if the 990-EZ or 990 is filed after the due date.

But how will the IRS know we've submitted the wrong form?

In many cases it won't know and won't find out. It really doesn't matter. The IRS does not revoke exempt status for failure to file returns. Exempt status is revoked automatically by operation of law! IRC section 6033(j)(1).

In other words, the IRS doesn't even have to be involved. If an organization fails to meet its filing requirement for 3 consecutive years, it is automatically placed in revoked status. All the IRS does is notify the public of your revoked status, if it becomes aware, by publishing notification of the revocation on the IRS website.

How can the IRS find out if we were not eligible to file a 990-N electronic postcard?

The IRS has a Compliance Strategy. The IRS gathers information from documents that may have been submitted to or on behalf of the organization, such as the following forms:

• W-2

• 1099-NEC

• 1099-K

• 941

• 990-T

• Form 8283

• Form 1040, Schedule C

So, for instance, if the organization issued 1099's totaling $30,000 to independent contractors, there is a high likelihood the organization's gross receipts were greater than $50,000, which would warrant an examination (audit). If payments to the organization exceeding $50,000 were reported on a 1099-K, it could cause the organization to be selected for an audit.

Reports to the IRS from third parties (snitches) could alert the IRS to the organization's non-compliance. Who might these third parties be? Competitors, disgruntled former board members or volunteers, relatives, bloggers, investigative reporters, clients, bookkeepers, etc.

What if the IRS discovers that an Ineligible Organization has Submitted a Form 990-N for Two Consecutive Years?

In this case, the IRS can either make a written demand that the returns be filed, or it can prepare a 990-EZ on behalf of the organization (Substitute For Return) based on what it believes the organization received in income.

Isn't there a law that says the IRS must notify an organization if the IRS has not received a filing for two consecutive years to give the organization notice that a revocation will occur if a third consecutive year goes unfiled?

Yes, but...

The only way you'll get such a notice is if the IRS has no record of any filing from your organization. If you've been submitting a 990-N postcard, the IRS will assume you've met kyour filing requirement unless it discovers through its compliance strategy tactics that you should have ifiled a 990-EZ or 990.

So, if we didn't receive a notice from the IRS warning us about an upcoming revocation, can we still be revoked?

Yes, definitely. To quote from IRS Chief Counsel Memorandum #202211011F released on 3/18/22:

" The statutory text of section 6033(j)(1)(B) does not condition automatic revocation upon the Services's issuance or the organization's receipt of the notification described in section 6033(j)(1)(A)."

Translation: The IRS can still notify the organization that it is in revoked status even if no warning notification was sent. (Remember, the IRS does not actually revoke--the revocation happens by operation of law. The IRS just acknowledges and publishes the revocation notice to the public).

Takeaway:

Carefully consider whether your organization is eligible to submit the Form 990-N. If not, be sure to file the correct form on time.

Correcting a filing error:

If you discover that you've submitted a 990-N when you should have filed a 990-EZ or 990, the best course of action is to go ahead and file the correct return as soon as possible. I normally mark the "Amended" box in the heading of the return, even though it is not technically an amendment. The IRS will likely assess a late-filing penalty. Don't worry. You should be able to write a reasonable cause penalty abatement request letter to the IRS and explain what happened and why the wrong return was filed. The IRS will normally abate (waive) the penalty.