Nonprofit groups are pushing Congress and the Treasury Department to provide relief to struggling tax-exempt organizations in the wake of the Covid-19 outbreak.
The organizations—which encompass public charities, colleges, and hospitals—are facing the same hardships as many small businesses, including closures, revenue loss, and employee furloughs and layoffs. At the same time, many are also facing increased demand for their services to help suffering people.
“Too many nonprofits are struggling right now to keep their doors open for the people who need them most,” said Rick Cohen, chief operating officer at the National Council of Nonprofits.
For that reason, nonprofits say lawmakers and Treasury should provide more assistance to the industry through additional legislative and regulatory changes—on par with what other businesses and sectors have received.
Legislation (H.R. 748) passed by the Senate Wednesday contains some measures to help nonprofits, including new incentives for people to donate to charities. But groups like the National Council of Nonprofits said they would like Congress to take further steps to help the charitable sector. The House has yet to vote on the legislation.
On the regulatory front, helpful measures, they say, should include extending an upcoming IRS filing deadline for tax-exempt organizations and offering more flexibility to groups trying to provide coronavirus-related aid.
Filing Deadline Approaching
Treasury’s 90-day extension of the deadline for individuals and companies to file and pay federal income taxes didn’t include nonprofits unless they had to report taxes on income from activities unrelated to their mission on Form 990-T by April 15. This was clarified in a set of questions and answers posted to the IRS website Tuesday.
But a large number of nonprofits have returns due May 15, including many that have to file Form 990, an annual informational return detailing their activities and finances.
Because those returns contain so much information, they are very long and often require input from several people throughout the organization, said Ruth Madrigal, a principal and leader of the exempt organizations group in the Washington National Tax practice of KPMG LLP. Madrigal worked as an attorney and policy adviser in Treasury’s Office of Tax Policy from 2010 to 2016.
It can be difficult for those organizations to meet the May deadline for the same reasons the April deadline is tough for many businesses—they have more pressing issues to address, they may have staff shortages, and remote employees may not have access to the resources or technology they need to compile all of the information, Madrigal said.
They also have the same cash flow issues as for-profit businesses because many nonprofits have had to suspend certain services and cancel fundraising events, or have endowments that have taken a hit.
“Charities, just like businesses that have their revenue streams cut off abruptly, have a very difficult time keeping the doors open,” Madrigal said.
On the Front Lines
While dealing with the economic fallout, many nonprofits are also on the front lines, attempting to help individuals and businesses that have been affected by the virus.
The government could help in a few ways, including expanding the list of groups that charities can assist during the pandemic.
The IRS could deem Covid 19-stricken small businesses a “charitable class,” allowing public charities to serve them while maintaining their tax-exempt status, said Eric K. Gorovitz, a principal at Adler & Colvin.
For-profit businesses are rarely considered a charitable class, but the agency has been flexible in the past in disaster situations.
“A lot of small businesses have suddenly become in need of charitable support,” said Gorovitz, whose practice spans a wide range of nonprofit and tax-exempt legal issues.
The IRS could also announce that it is expediting the review of new applications from charities providing coronavirus-related aid and applying for tax-exempt status on Form 1023. In a post Tuesday the agency said it would continue to process these applications during the outbreak but didn’t say whether organizations with missions tied to Covid-19 would get preferential treatment.
There is already a process for organizations to request expedited review. The IRS on its website says it may process applications faster in cases where an applicant would provide disaster relief to victims of emergencies, but it’s ultimately the agency’s decision whether or not to do so. Requests for expedited review must be made in writing, with a full explanation of why an applicant should receive special treatment.
“I think we’d want to hear that the IRS—understanding limited staffing and capacity with all kinds of issues—will try to prioritize those applications under their expedited review process,” said Bradley Ridlehoover, a partner at McGuireWoods LLP who advises tax-exempt organizations on federal tax and governance issues.
Fear of Scams
Some practitioners were wary of a blanket decision to expedite the review of such applications.
Cohen said that historically the expedited process has been scrutinized for possibly leading to approval of exemptions for groups that shouldn’t qualify.
“My CEO has called it like giving away tax-exempt status like prizes in a Cracker Jack box,” Cohen said.
The IRS still doesn’t have the resources it needs to thoroughly vet a large number of applications on an expedited basis, which could lead to bad actors slipping through the cracks, Gorovitz said.
He advocated for Congress providing more funding to the IRS to bolster enforcement and help the agency shut down scams.
The stimulus bill the Senate just passed would give the IRS an additional $250 million in emergency funding—on top of its normal appropriation for fiscal year 2020—to support taxpayer services during the extended tax filing season and to respond to the coronavirus outbreak.
Previous funding cuts have left the IRS “really hamstrung in recent years, and it needs to be funded to help protect against scams that are preying on people’s fears and stealing their money,” Gorovitz said.