2. Note e-filing requirements.
E-filing provides quick acknowledgment that the IRS has received the return and reduces processing time and delayed refunds. However, e-filing requires software capable of e-filing or a tax preparer that can electronically file. Prior to enactment of the Taxpayer First Act (TFA), certain large tax-exempt organizations and private foundations were required to electronically file Forms 990 and 990-PF. In addition, organizations eligible to file a Form 990-N (e-Postcard) have been required for years to file these forms electronically through the IRS website.
The TFA expanded mandatory e-filing for tax-exempt organizations. Generally, for tax years beginning after July 1, 2019, tax-exempt organizations that file Forms 990, 990-EZ, 990-PF, or 990-T, and private foundations that file Form 4720 must file these returns electronically. However, the IRS delayed mandatory e-filing in certain cases. For instance, mandatory e-filing for Forms 990 and 990-PF is effective for returns for tax years ending on or after July 31, 2020. In addition, mandatory e-filing for Form 990-EZ is effective for tax years ending on or after July 31, 2021. Mandatory e-filing for private foundations to file Form 4720 also was delayed. As a result, all 2021 calendar year Forms 990, 990-EZ, 990-PF, 990-T, and 4720 due on May 16 are required to be filed electronically. Tax-exempt organizations subject to e-filing for the first time should take steps now to ensure they have a plan in place to meet the requirement.
3. Avoid common errors.
As the May 16 filing deadline approaches, tax-exempt organizations should take steps to avoid common errors, including filing the wrong version of Form 990, filing returns with missing or incorrect identifying information, and including the wrong schedules with the return. Returns with these errors will be rejected by the IRS, delaying processing and receipt of refunds and resulting in additional effort to determine the source of the error. The IRS has tools to assist tax-exempt entities, including a series of prerecorded online workshops to help tax-exempt organizations file accurate and correct returns as well as tutorials aimed at helping them maintain their tax-exempt status. In addition, organizations can check the IRS Exempt Organizations Business Master File Extract to ensure their legal name, employer identification number, and address agree with the information used on the tax return being filed.
4. Consider extending the filing due date.
Tax-exempt organizations may request a six-month automatic extension to file Forms 990, 990-EZ, 990-PF, 990-T, or 4720 by filing a Form 8868, “Application for Automatic Extension of Time to File an Exempt Organization Return.” No extension of time is available for Form 990-N. However, filing the extension does not extend the time for paying tax in situations where tax is due. The IRS encourages filing extension requests electronically. Tax-exempt organizations with large portfolios of pass-through investments should consider extending their returns to reduce the impact of late or corrected information received from these investments. Even if a tax-exempt organization wants to file its return by the unextended due date, having a valid extension on file with the IRS provides an opportunity to file a superseding return, rather than an amended return, to correct any error on the originally filed return.
5. Ensure timely filing.
Failure to file Forms 990, 990-PF, 990-EZ, or 990-N for three consecutive years will cause an automatic revocation of the organization’s tax-exempt status. Revocation of exempt status has significant consequences, including a significant tax liability for the entity and denial of a charitable deduction for contributors. Reinstatement of tax-exempt status is possible but typically is time-consuming and costly.
Reasons for failing to timely file can be varied, such as employee turnover, changes in who is responsible for tax filings, failure to recognize separate filing requirements for newly created entities, or short tax periods caused by dissolution of the organization. Some best practices to help avoid late filing are to maintain a tax calendar with pertinent due dates for all legal entities, note the responsible party for each entity’s tax filings, and put procedures in place to review and update the tax calendar as necessary.
