Thousands of Washington, D.C.-based nonprofits need to act soon to save their tax-exempt status, thanks to a new filing requirement that is catching the organizations by surprise.
The D.C. Office of Tax Revenue has sent 14,000 entities a notice to renew the exemption this year, part of its efforts to update its tax records, said Natalie Wilson, a spokeswoman for the office. Entities that received their tax exemption more than four years ago will otherwise see the status expire this year. And the city will reclassify those nonprofits as taxable entities if they fail to renew their exempt status.
The city says it plans to host webinars and will send an additional notice about the renewal requirement in the coming weeks. The added warning comes as nonprofit tax practitioners say so far the requirement hasn’t been widely publicized, with some learning about the new requirement almost by accident.
“Until my client contacted me about receiving a notice, I didn’t know this was happening,” said William Turco, who oversees tax compliance for the D.C. practice at RSM US LLP. “I don’t think D.C. has been beating the drum loudly about this.”
The city has been communicating the requirement since July 2017, Wilson said, but it took effect officially in January.
City Giving Notice
On top of a general notice for renewal, nonprofits will receive an additional notice at least 30 days prior to the expiration of their exempt status. Should the exemption expire, the city will send a final notice to the organization saying their tax exemption is revoked.
The city is already hearing from nonprofits that may be confused by the renewal process. Nonprofits that don’t get the information they need from the IRS to renew their application should contact the city’s tax office, Wilson said.
It is possible that some of the nonprofits that received a notice have already had their exemption revoked by the IRS, she said.
“Our goal is not to remove the exemption for anyone—we hope that any nonprofit who is currently receiving exemptions to continues to receive exemptions from our office,” Wilson said.
All nonprofits, even if they haven’t received a notice from the city, should log into the tax office’s online portal to check their status, Turco said. Nonprofits that have changed addresses over the last couple years may not receive their notices in a timely manner or at all, he said.
“My only advice is that this notice should not be ignored,” Turco said. “It should be acted upon, or you could lose your exemption.”
Affirmation May Be Needed
The D.C. tax office in 2008 stopped requiring nonprofits to file their tax returns, the Form 990. That decision was an effort to ease the administrative burden on nonprofits and the city. The city requires organizations to renew their status every five years.
James P. Joseph, a tax partner at Arnold & Porter in Washington, said in an email that some nonprofit entities have said vendors they work with are already not honoring or accepting sales tax exemptions that are older than four years old.
To renew exemptions, organizations will need to provide a copy of the IRS determination letter approving the exemption. Organizations will need to obtain an affirmation letter from the IRS, confirming their status, if the determination letter is more than four years old, according to guidelines from the D.C. government.
Nonprofits are exempt from taxes under tax code Section 501(c)(3).
The IRS said in a statement that the processes for affirmation letter requests and determination letter requests are completely separate, it typically issues affirmation letters more quickly. Entities typically receive affirmation letters within 10 to 14 business days from the time of their request, according to the IRS.
Requests for an affirmation letter shouldn’t impact the determination letter process, the IRS said.
Shutdown Adds Challenge
The potential need for an affirmation letter comes as the IRS is still trying to get out from under a backlog created by the 35-day government shutdown.
The IRS Exempt Organizations correspondence unit is taking about 55 days to process technical requests received via mail, IRS Exempt Organizations Director Margaret Von Lienen said during a Baltimore conference hosted by the TEGE Exempt Organizations Council on Feb. 22.
The backlog at the IRS and the requirement for nonprofits could create a problem for organizations that don’t submit written requests to the agency early, said Meghan Biss, a counsel at Caplin & Drysdale in Washington and former technical adviser in the IRS Exempt Organizations division.
“It also generates an additional strain on the already limited resources at the IRS as organizations with DC exemptions are coming in to request these letters,” she said in an email.
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(Updates with response from the IRS starting in the 16th paragraph.)