Authored by: Michael C. Levy, Esq.

For many philanthropic minded clients, the use of a private foundation or other forms of tax exempt entities created pursuant to IRC § 501(c) (3) has been an essential tool to allow individuals and families to maximize the charitable giving capabilities.  Many of these clients may soon be in for a rude awakening as the IRS has begun the process of revoking tax exempt status for that fail to comply with a recent change to the tax code.

Section 1223 of the Pension Protection Act of 2006 requires virtually all tax exempt entities to file an informational return with the IRS for each fiscal year.  Failure to file annual returns for three consecutive years results in the exempt organization automatically losing its tax exempt status.  Prior to this section’s enactment, only organizations with gross receipts of $25,000 were required to file informational returns.  It is estimated that between 20-25% of all charities in the United States could be affected by this change.

The automatic revocation provision became effective for tax periods beginning on January 1, 2007.  For those organizations in existence at that time using a calendar year as their fiscal year, the deadline to file was May 17, 2010.  However, a recent statement from IRS Commissioner Doug Shulman indicated that those organizations who missed the May 17th deadline should file informational returns and work with the IRS to help avoid losing tax exempt status.  For those people who may be affected by this change, it is imperative that they speak to their planning attorney to ensure that the proper filings have been made.