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Charities face 'doomsday': Loss of tax-exempt status

  • Article by: JEAN HOPFENSPERGER
  • Star Tribune
  • May 5, 2010 - 11:28 PM

More than 7,000 Minnesota nonprofits, and as many as 400,000 nationwide, are slated to lose their tax-exempt status next week -- an event being dubbed "doomsday."

At midnight May 15, any group that hasn't filed a new tax form will lose the tax break that is the lifeblood of most small nonprofits. It allows them to raise money tax-free and lets the public write off donations to them.

For decades, nonprofits that raised less than $25,000 a year didn't have to file tax returns. Thousands apparently don't have a clue that changed in 2006.

The affected nonprofits span the state and include well-known names. Athletic leagues. Boy Scout chapters. Labor unions. Social service groups. More than 50 chapters each of the Lions Club, Knights of Columbus, American Legion and other fraternal groups.

"This could be the largest loss of organizations in the last 80 years," said Jon Pratt, executive director of the Minnesota Council of Nonprofits. "We're trying to get the word out."

Nationally known for its vibrant nonprofit community, Minnesota is home to about 35,000 nonprofits registered with the Internal Revenue Service, according to the council. About 15,000 groups need to file new tax forms this year, but only about half did.

If they miss the deadline, these small nonprofits would have to start paying taxes on the money they raise. Fundraising could become tougher, because most contributors like to get tax breaks for their donations.

Given the tight financial situation facing most nonprofits and charities, the tax breaks could make or break an organization, Pratt said.

'What's going on?'

Dick Ward didn't know his American Legion Post 1 was slated to lose its tax status after more than 90 years of doing charitable work in Minneapolis. The south Minneapolis post, created in 1919, is the oldest in the state. Ward learned about the new tax rules from a reporter's inquiry this week.

"I thought, what's going on?" said Ward, the post commander.

He quickly called the Minnesota America Legion, which sent him an article about the tax changes published in its newspaper in May 2008. That was two years after Congress amended the law to track nonprofits closer. This year is the first requiring mandatory filing of the new IRS forms.

First thing Wednesday morning, Ward sat down at his home computer with the newspaper article and clicked onto the IRS website. He typed in his federal tax identification number and filled out the electronic 990 N form that is now the law of the land. It took about 35 minutes to complete.

"If you have your current tax ID number and you're an officer who can represent your organization, it doesn't take long," he said.

Relieved, Ward said the nonprofit status was critical to his historic Legion post. It doesn't make a ton of money on its omelet breakfasts and other fundraising events, he said. What it makes goes directly to the south Minneapolis community where the post is based. Seward neighborhood baseball and softball teams. Minneapolis South High School baseball team. An ROTC program at Minnesota Transitions High School.

By filling out the IRS forms Wednesday, Ward ensured that all the proceeds will continue to go to charities rather than be taxed.

"The American Legion's mantra is 'Still Serving America,'" Ward said. "Having a nonprofit status allows us do that."

This week, the Council on Nonprofits pulled together a list of the 7,500 organizations that still haven't filed tax returns. Many are household names. It includes chapters of Habitat for Humanity International, the National Association for the Advancement of Colored People (NAACP), 18 chapters of the American Association of University Women, and dozens of chapters of the American Federation of State, County and Municipal Employees.

Need better notification

Figuring out which of these nonprofits are active organizations is critical in the next 10 days, Pratt said. In theory, organizations should have been notified by the IRS three years ago that they needed to file the new forms.

In Ward's case, he helped his post's women's auxiliary fill out its forms last year. The auxiliary had received a notice of the tax changes, but the Legion post did not, Ward said.

That has been a problem, Pratt said. The address listed with the IRS may no longer be the current address of an organization, especially if it's an older organization that hasn't filed a tax return for decades. "The address listed could be of a secretary 20 years ago," Pratt said.

That's particularly true for the hundreds of veterans and fraternal organizations on the list. With declining memberships, many have lost their historic buildings, which served as their mailing addresses, and longtime volunteers. They might meet in the halls of other fraternal groups. Ward's post, for one, has an office in the Eagles Club of Minneapolis.

"Sometimes it [the organization] is a box of files in someone's closet," Ward said.

The 4-H Clubs in Minnesota report that many of their clubs on the list already have shut down. The nonprofit spent the past three years preparing for the new tax laws, said Pat Morreim, a 4-H regional director of the University of Minnesota Extension Service.

The good news: The 4-H now has a clear picture of which organizations are still functioning in Minnesota, she said. That's the silver lining seen by Pratt, who also hopes to end up with a more accurate list of all nonprofits in the state.

"They [the IRS] want to make sure that everyone who is supposed to be paying taxes is paying taxes, and that organizations that are exempt are properly exempt," he said.

"I hope that the truly active groups will take the steps to maintain their status."

On Thursday the Minnesota Council of Nonprofits plans to post links on its website to the list of all 7,500 nonprofits slated to lose their tax status, as well as links to the IRS forms and instructions on how to fill them out. For more information, go www.mncn.org.

Jean Hopfensperger • 612-673-4511

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