On Aug. 24, 2022, the IRS announced it will provide automatic relief for some taxpayers from penalties for failure to file certain tax returns due for taxable years 2019 and 2020. The IRS stated that it is offering the penalty relief to “help struggling taxpayers affected by the COVID-19 pandemic” and to help the IRS make up ground on backlogged returns and correspondence so it may “return to normal operations for the 2023 filing season.”
While this relief is welcome, it comes with certain limitations that nonprofits should note — including that nonprofits filing IRS Form 990 or 990-EZ are not eligible for this relief.
Penalty Relief for Nonprofits
The impact of IRS Notice 2022-36 on nonprofits is that the IRS will not impose any penalties under Internal Revenue Code Section 6651(a)(1) for failure to timely file a Form 990-PF or Form 990-T for tax years 2019 and 2020. The penalty typically imposed for failure to file a 2019 or 2020 Form 990-PF is $20 for each day the return is late, with the maximum penalty equal to the lesser of $10,500 or 5% of the organization’s gross receipts for that tax year; organizations with gross receipts exceeding $1,067,000 are subject to even larger penalties, at $105 per day and a maximum of $53,000 or 5% of the organization’s gross receipts for that tax year. The penalty typically imposed for failure to file a 2019 or 2020 Form 990-T is 5% of the unpaid tax for each month the return is late, with a maximum penalty equal to the lesser of $435 or 25% of the unpaid tax.
Importantly, as it relates to nonprofits, the automatic relief granted by Notice 2022-36 is available only for the 2019 and 2020 tax years for Forms 990-PF and 990-T filed on or before Sept. 30, 2022. If an eligible nonprofit is able to file its late 2019 and 2020 Forms 990-PF and 990-T by this date, all corresponding failure-to-timely-file penalties will be abated automatically by the IRS. This means nonprofits previously assessed failure-to-timely-file penalties relating to those tax years and returns will be abated automatically, and if the nonprofit paid the penalty, such amounts will be refunded or credited.
Also, for any nonprofits required to file information returns with the IRS (e.g., Form 1099), Notice 2022-36 provides for automatic relief from failure-to-timely-file penalties for 2019 returns filed on or before Aug. 1, 2020, and 2020 returns filed on or before Aug. 1, 2021. Additionally, the automatic relief applies to failure-to-timely-file penalties for many 2019 and 2020 Form 1040, 1041 and 1120 series returns filed before Sept. 30, 2022.
As mentioned above, there are some glaring omissions from the relief awarded by Notice 2022-36, which “does not apply to any penalties [or returns] that are not specifically listed in the grant of relief.” Common nonprofit returns such as Forms 990, 990-EZ and 4720 are notably excluded, meaning nonprofits required to file such returns may obtain relief from failure-to-timely-file penalties for years 2019 and 2020 only by showing the failure was due to reasonable cause.
Electronic Filing Update
Recall that electronic filing is now mandatory for most nonprofit returns under the Taxpayer First Act of 2019: Forms 990 and 990-PF for tax years ending July 31, 2020, and later must be filed electronically; Forms 4720 and 990-T for tax years ending Dec. 31, 2020, and later must be filed electronically; and Form 990-EZ for tax years ending July 31, 2021, and later must be filed electronically. These changes have been in effect for some time.
As of Aug. 1, 2022, however, the IRS announced that Form 990-N also must be filed electronically. With this new requirement also comes a new sign-in process for Form 990-N filers. The person filing the Form 990-N on behalf of the nonprofit must sign into the IRS modernized authentication platform using an active username, or will be required to login or create an account with ID.me. Additional instructions are available in IRS Publication 5248.
Thus, nearly all Form 990 series returns must be filed electronically going forward. Any paper returns will be rejected by the IRS and will be subject to failure-to-file penalties if not timely corrected with an electronic filing.
Electronic Filing Tips
At the IRS Nationwide Tax Forum on Aug. 16, 2022, an IRS representative presented some helpful electronical filing tips for nonprofit returns. One recurring point was the importance of correctly completing the return. Specifically, the representative indicated that an incorrect organization name or EIN will result in the IRS rejecting the return. Likewise, incorrectly completing Part V of Form 990-PF will result in the IRS rejecting the return.
Other common errors raised by the IRS dealt with related organizations. Forms 4720 must be filed separately by a private foundation and its disqualified person(s) to avoid rejection of the returns. Similarly, if a subordinate organization files its return before its parent organization does and uses the parent’s EIN on its return, the parent will be unable to electronically file its return. This can be corrected by calling the IRS to have the subordinate organization’s return unposted so the parent can file; however, this correction results in the IRS’ records showing no return filed for the subordinate organization. Such result may result in failure-to-timely-file penalties, and if this happens for three consecutive years, could result in automatic revocation of exempt status.
The issue of failure-to-timely-file penalties arises for all taxpayers, nonprofits included. The IRS provided meaningful relief last month to address a significant number of taxpayers that could be or were assessed penalties for years 2019 and 2020. For those taxpayers eligible for such relief, acting quickly is imperative to ensure outstanding returns for those tax years are filed by Sept. 30, 2022. Also, as the IRS continues its shift to mandatory electronic filing of nonprofit returns, it provided helpful tips to avoid common electronic filing missteps and future penalties.