Did you know that tax-exempt organizations are 2 times more likely than tax payers to be late with filing annual returns with the IRS?
According to the IRS, there are about 2.95 million registered nonprofit organizations in the United States. Of this number, 1.065 million registered organizations, or 36%, lost their tax exempt status because they didn’t file Form 990 for three years in a row. While the remaining 1.88 million registered organizations are still eligible to receive tax-exempt contributions there is a strong likelihood that they still may have compliance issues. In comparison, about 85% of individual and corporate taxpayers file their income taxes (Form 1040) on time.
Filing annual 990’s with the IRS is only one piece of the compliance puzzle. You also have to follow your organization’s own policies and procedures, and funders’ grant agreements. On top of that, you should be concerned with following federal and local regulations and maintaining transparency with the public. The consequences of noncompliance include strained relationships with funders and regulators; loss of funding; loss of standing with your clients and community; difficulty attracting funding; loss of tax-exempt status; tax liabilities and paying penalties and interest.
Let’s be clear: I am not a lawyer or an accountant. However I have found in my experience that all roads lead to compliance. It doesn’t matter what the assignment involves—program development, strategic planning, board development—or what have you. At one time or another we are all confronted with compliance issues and challenges.
I pulled this checklist together to give you a sense for what is required at the state and federal levels for Illinois nonprofits to maintain compliance. Be sure to check with your own state’s requirements.’
File Annual Report With the Secretary of State
ALL Not-for-Profit Corporations must file an annual report of officers and directors with the Secretary of State. The due date depends upon when the corporation was formed. The annual report is due before the first day of the corporation’s anniversary month each year. The anniversary month is the month in which the corporation was formed. For example, if the date of incorporation was Sept. 15, the anniversary month is September and each annual report is due before the first day of September each year. Forms will be sent to the registered agent approximately 60 days before the due date. Annual Fee: $10.00 Late Fee: $3.00 Failure to file an annual report may result in involuntary dissolution of the corporation. https://apps.ilsos.gov/nfpannualreports
Check to See If You Need An Audit
According to the Council of Nonprofits, not all charitable nonprofits are required to conduct an independent audit. Circumstances that may trigger the requirement for an independent audit include:
1) Federal, state, and local governments may request a copy of the organization’s audited financial statements.
2) Charitable nonprofits that expend $750,000 or more in federal funds in a year are subject to special audit requirements.
3) Some contracts with state and local governments to provide services in the community may require the nonprofit to conduct an independent audit.
4) Many state laws require that charitable nonprofits submit a copy of their audited financial statements when they register with the state for charitable solicitation/fundraising purposes.
5) Private foundations may request that a nonprofit submit a copy of the nonprofit’s most recent audited financial statements in conjunction with submitting a grant proposal.
6) Some banks may require a nonprofit to have an audit as a condition of receiving a loan.
Maintain Compliance With All Grant Requirements and Conduct A Separate Grant Audit If Required
Periodically review your grant agreements to make sure that your organization is fulfilling funders’ requirements as they relate to periodic reporting. Be sure to turn in your reports on time and hit your targets for outcomes and financial management. Be mindful of specific terms and conditions that could impact future funding. Check to see if your funder will require an audit of the specific funds they provided.
File Annual Report With the Attorney General
File (state) Form AG-990-IL (within 5 ½ months of the fiscal year end) Filing Fee: $15.00. Penalty for late filing: $100 (for every late return) AG990-IL Charitable Organization Annual Report. This is usually filed at the same time as your federal Form 990 and financial audit (if your organization does have an audit prepared)
File Your Form 990 With the IRS
File (federal) Form 990 (within 5 ½ months of the fiscal year end) If Form 990 is filed after the due date(including any extensions), and the organization doesn’t have reasonable cause for filing late, the Internal Revenue Service will impose a penalty of $20 per day for each day the return is late. (For every return that is filed late) The maximum penalty is $10,000 or 5% of the organization’s gross receipts, whichever is less. The penalty increases to $100 per day up to a maximum of $50,000 (For every return that is filed late) for organizations whose gross receipts exceed $1,000,000. Previously, only organizations with revenues above $25,000 were required to file. As of 2008, all nonprofits are required to file Form 990. http://www.irs.gov/pub/irs-pdf/f990.pdf Click here for instructions: http://www.irs.gov/pub/irs-pdf/i990.pdf
If your organization doesn’t file the required information return (Form 990, Form 990EZ, or Form 990-PF) or e-Postcard (Form 990-N) for three years in a row, it will automatically lose tax-exempt status. The revocation of an organization’s tax-exempt status will not take place until the filing due date of the third year. For example, if your Form 990 was due on May 15, 2020 (for tax year 2019) and you did not file in 2021, 2022, or by May 15, 2023, your organization probably lost its your tax-exempt status on May 15, 2023. The IRS will not send additional notices once your tax-exempt status is automatically revoked.
Make Sure That Your Records Concerning Your Registered Agent Are Up to Date
Your registered agent is the person the organization designates to receive all official and legal notices, including reminders to file Form 990 and other annual reports. This person may be the organization’s attorney, executive director, etc. Be sure to complete NFP 105.10/105.20 if there are any changes. ttp://www.cyberdriveillinois.com/publications/pdf_publications/nfp10510.pdf
If the changes came about as a result of a resignation of the registered agent, complete Form BCA-5.15 NFP 105.15 http://www.cyberdriveillinois.com/publications/pdf_publications/nfp10515.pdf
File AND PAY State and Federal Payroll Taxes
File quarterly Form 941 (federal employment tax withholding) Penalties. For each whole or part month a return is not filed when required (disregarding any extensions of the filing deadline), there is a penalty of 5% of the unpaid tax due with that return. The maximum penalty is 25% of the tax due. Also, for each whole or part month the tax is paid late (disregarding any extensions of the payment deadline), a penalty of 0.5% per month of the amount of tax generally applies. This penalty is 0.25% per month if an installment agreement is in effect.
You must have filed your return on or before the due date of the return to qualify for the reduced penalty. The maximum for this penalty is also 25%. The penalties will not be charged if you have a reasonable cause for failing to file or pay. Use of a reporting agent or other third-party payroll service provider does not relieve an employer of the responsibility to ensure that tax returns are filed and all taxes are paid or deposited correctly and on time.
Download Form 941 here: http://www.irs.gov/pub/irs–pdf/f941.pdf
Download instructions here: http://www.irs.gov/pub/irs–pdf/i941.pdf
File quarterly IL-941 or annual IL 941A (State of Illinois employment tax withholding) See Publication 103 Penalties and Interest for Illinois Taxes for further details. Contact the Illinois Department of Revenue for further information.
File For State Sales Tax Exemption
Be sure to renew your exemption from sales tax with the state of Illinois. Complete Form STAX-1 https://tax.illinois.gov/content/dam/soi/en/web/tax/forms/reg/documents/stax-1.pdf
File For Exemption From County Property Taxes
If your organization owns property and is using it for a tax-exempt purpose, be sure to appeal to your local board of appeals. Here is the link for the Cook County Board of Review in Illinois. Go to the Cook County Assessor’s Office’s website for background. https://www.cookcountyassessor.com/not-profit. In addition, you need to complete a Board of Review Real Estate Exemption Complaint and Illinois Department of Revenue Application. This is a very complicated process, and you should hire an attorney to help your organization navigate the bureaucracy. A list of required documents for charitable or educational ownership property tax exemption is outlined below. (Source: Cook County)
Board of Review Real Estate Exemption Complaint
Illinois Department of Revenue Application (PTAX-300)
Affidavit of Use
Notarized and dated statement signed by a charity/school officer detailing the specific charitable or educational activity by the owner and any lessees taking place on the property within the year. Specify street address and all Permanent Index Number (P.I.N.s) that form the property
You may include documented preparation of the property for its intended charitable or educational use
Recorded Proof of Ownership
Deed, Title Insurance Policy, Contract for Deed and Proof of Current Installment Payments, Memorandum of Contract or Lease
If you acquired parts of your property on different dates or if parcels are not beside each other, file separate applications for each parcel
Cook County Recorder of Deeds
Leases
Required when anyone other than the owner used the property
Preparation Documents
Dated bid solicitations, contractor estimates, architect plans, contracts, permits, invoices, etc.
State Corporate Charter or Articles of Incorporation
Secretary of State
Corporate By-Laws
Illinois Department of Education Certificate of Accreditation
For schools only
Current Tax Bill for Each Parcel
Cook County Treasurer
Original Photographs
Including the interior and exterior of all buildings
Plat of Survey
Hand Drawn Floor Plans
Showing use and approximate dimensions of each room in the building
Illinois Department of Revenue Sales Tax Exemption Letter
Illinois Department of Revenue
U.S. Internal Revenue Service 501(c)(2) or 501(c)(3) Letter
Internal Revenue Service
Current Financial Statement or Charitable Organization Financial Summary
Brochures
Registered Mail Notification to Affected Municipalities, School Districts and Community College Districts
Copies of letters and U.S. Postal Service receipts
Required only if property’s assessed value is more than $100,000
Main Church Building Exemption Letter
Required if subject property involves parking lots, branch offices, etc.
Register With The State Department of Revenue
If your organization is relatively new, you may or may not have filed Form Reg-1, which is used to register your business or nonprofit organization with the State of Illinois. This form helps the State to understand the type of business you operate and whether or not the business is subject to any state taxes, including income and payroll. https://tax.illinois.gov/forms/reg/reg-1.html
Determine Your Unemployment Insurance Liability
If your organization has not done so at the time of incorporation, complete Form UI-1 Report to Determine Liability Under the Unemployment Insurance Act to register for the State of Illinois unemployment insurance program. This form should be completed within 30 days of forming the nonprofit. Report to Determine Liability under the Unemployment Insurance Act (Form UI-1)
Nonprofits, with the exception of religious institutions, are required to pay state unemployment taxes once if they have at least four employees (whether full-time, part-time, or temporary), during at least 20 weeks of a calendar year. Once your organization exceeds 4 employees, it must pay state unemployment insurance taxes on a quarterly basis. File Unemployment Insurance Taxes
Register With the Attorney General’s Office
If you didn’t do so at the time of incorporation, make sure your organization is registered with the State of Illinois Attorney General’s Office Charitable Trust Bureau, https://illinoisattorneygeneral.gov/Page-Attachments/Form%20CO-1_Registration%20Statement.pdf
File Form CO-2 with the State of Illinois Attorney General’s Office, if your organization is less than 1 year old https://illinoisattorneygeneral.gov/Page-Attachments/CO2FinancialInformation.pdf.
This checklist has been developed for informational purposes only and is not construed to be professional advice. It is strongly advised that you consult an attorney and accountant who are well-versed in matters of nonprofit organizations and taxes.
About the Author
Valerie F. Leonard is a Chicago-based expert in community and organizational development, with a mission to strengthen the capacity of organizations to make a positive impact on the communities they serve. Valerie is the Founder of Nonprofit Utopia, the ideal community for emerging leaders. For further information, you may call Valerie at 773-571-3886, visit www.valeriefleonard.com or e-mail her at valeriefleonard@nonprofitutopia.com.
