INN has been focused on how nonprofit newsrooms acquire 501(c)(3) status from the IRS ever since I arrived at INN back in July 2010. Our involvement was born out of necessity: INN itself struggled for 19 months to win a favorable determination letter.
After that, INN began to assist individual member projects that also found themselves in IRS limbo, in some cases waiting up to 31 months for a determination. In order to focus on a solution to help the IRS better handle applications from mission-driven nonprofit newsrooms, I also worked with the Council on Foundations Nonprofit Media Working Group on its recent report, "The IRS and Nonprofit Media – Toward Creating a More Informed Public.“
With our own freshly-minted determination letter in hand, INN recently began to offer fiscal sponsorships to start-up member projects that operate within the rules of 501(c)(3), are consistent with our mission to inform the citizenry with investigative and public-service journalism, and which are only just now beginning the time-consuming, expensive and confusing process of applying for a 501(c)(3).
Offering back-office and financial oversight as a fiscal sponsor has its own risks and challenges. Our research has found that there are ways to do fiscal sponsorship right, and there are ways to do it wrong. INN has gone to great lengths to offer the appropriate services to our fiscally sponsored projects, including the intention to handle all the necessary tax filings for those projects. But on this important detail we were wrong.
Tax attorney and former IRS agent Kevin Shortill Esq., of the law firm Covington & Burling LLP, said: "All nonprofit organizations are required to file an annual tax return with the IRS: Form 990, Form 990-EZ or Form 990-N. This annual filing obligation includes organizations that have not yet received a determination letter from the IRS that they are tax-exempt, and it also includes organizations that are fiscally sponsored by INN or other fiscal sponsor."
(Disclosure: Shortill and Covington & Burling LLP represented INN in its successful bid to get its IRS determination letter and has generously continued to give us Pro Bono advice in support of our mission.)
In conversations with Shortill, I further learned that while this is a relatively recent development — a requirement since 2006 — the IRS expects that revenues that are accepted by a fiscal sponsor on behalf of a fiscally-sponsored project need to also be included in its 990 filing and that monies distributed to a fiscally-sponsored project by a fiscal sponsor must be recorded as either grants or expenses therein. This means that grants, donations and monies received on behalf of a fiscally-sponsored project are effectively double filed: first by the fiscal sponsor, and then by the sponsored project.
“Failure to file a [990, 990-EZ or 990-N] return for three consecutive years automatically revokes an organization’s tax exemption and, if that happens, a new application for exemption must be made with the IRS," said Shortill.
Additional information on the annual filing requirements is available from the IRS FAQ on annual reporting requirements for exempt organizations..
The IRS states: “Section 6033(j) of the Internal Revenue Code automatically revokes the exemption of any organization that fails to satisfy its filing requirement for three consecutive years. The automatic revocation of exemption is effective as of the due date of the third required annual filing or notice.“
It is the responsibility of all executive directors and project managers of fiscally sponsored projects that have an Employee Identification Number (EIN) and are registered as nonprofits in their State to familiarize themselves with the code, engage the services of an experienced tax attorney, and file a 990, 990-EZ or 990-N every year.