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Nonprofits Must File a 990 or Lose Tax-Exempt Status, Other Tax Season Reminders

Advocates Alert: January 26, 2010

As tax season gets underway, we want to make sure you have all the information you need to keep your land trust and it’s donors out of trouble…

Nonprofits that Fail to File a 990 for Three Years Will Automatically Lose Their Exempt Status

Since tax year 2007, even the smallest non-profit organizations have been required to file some version of Form 990.  Organizations with gross receipts under $25,000 may file the 990-N e-postcard, with just 8 simple questions.  Please do it!  The consequences for not filing are steep.

Starting May 15, 2010, organizations that have not filed a 990 for three consecutive years will automatically lose their tax exempt status on the due date of their return (the 15th of the fifth month following the end of their fiscal year -- May 15 for calendar year filers).  Even if you're up to date on your filings, we hope you'll spread the word to other small organizationsClick here for an IRS notice that discusses this requirement.

Please visit our Detailed Guide to the New Form 990 for information about the form and filing thresholds for the 990-EZ and 990-N, which have changed since last year.  The IRS also recently announced some changes and clarifications to the Form 990, although none are specific to land trusts.

Even if your organization is eligible for one of the short forms, we recommend you take a look at the full Form 990 and particularly the conservation easement questions in Schedule D.  Starting next year, organizations with gross receipts exceeding $200,000 or assets exceeding $500,000 will be required to file the full form and the questions on Schedule D will be asked by the IRS in any audit of your land trust.  Reading them and being prepared to answer them can be the ounce of prevention that could save a good deal of time and money if you or your easement donors are ever audited.

IRS Releases Governance Check-sheet Used in Audits of Non-Profits

The Internal Revenue Service has released the check sheet on nonprofit governance used by its revenue agents in audits of 501(c)3 public charities.  Few land trusts have been audited, but some have -- and more will, as IRS continues to ramp up its scrutiny of all nonprofits, including nonprofit hospitals, universities, and, yes, land trusts.  This check sheet provides insight into the kinds of questions the IRS may ask.  Click here for more guidance on nonprofit governance including resources from Independent Sector and the Land Trust Alliance.

For some additional insight into what the IRS is looking at, we've posted some examples of closing letters sent to land trusts at the successful completion of their audits. These letters reveal how the IRS views the details of running a land trust and may include conditions for a nonprofit organization to retain its tax exempt status and/or additional advice. More…

Substantiation Letters: Recent Cases Suggest Leeway, but Don't Put Your Donors at Risk!

As donors begin preparing their 2009 taxes, it's critical that land trusts send contemporaneous written acknowledgement letters for all gifts of $250 or more, including gifts of land and easements.  The IRS requires donors to obtain such a letter before they file their tax return, or the due date of that return, whichever is sooner.  The letter must describe the gift and state that no goods and services were received in exchange for it, or indicate the value of goods and services received in the case of a bargain sale.

At Rally, IRS officials suggested that a taxpayer donating a conservation easement may want to attach their letter to their tax return!  This is not required by law -- but it may mean that an IRS revenue agent who hopes to disqualify a donation because of the lack of such a letter won't open an audit just to see if the donor has the letter. Click here for more highlights from that session.

Land trusts that haven't sent these letters in the past may find solace in two recent Tax Court cases: Simmons v. Commissioner and Consolidated Investment Group v. Commissioner.  These cases suggest that substantial compliance through other documentation may be adequate, but the IRS disagrees and land trusts shouldn't risk putting their donors through an audit to find out.

Working on a pro bono basis, the law firm Miller & Chevalier recently completed a memo to help land trusts understand and comply with IRS substantiation rules.  Read the Miller & Chevalier memo and see our page on Substantiation Letters.

Budget Freeze and Tax Legislation Update

Update for eNews Readers: You'll find more recent news on the Budget and tax legislation in our ADVOCATES Archives.

Many of you may be concerned by news reports that President Obama will propose a three-year freeze of non-security discretionary spending.  Will this proposal make it harder to secure appropriations for the things we care about?  Probably, but it doesn't mean that all line items will be frozen at current levels, and we believe President Obama remains committed to his pledge to provide $900 million for the Land and Water Conservation Fund by 2014.  It does mean we'll need to work harder than ever to show our elected officials that conservation is important enough to local economies that it should be a priority among a chorus of other needs.  We will provide more details as they emerge following Wednesday's State of the Union address.

As for the enhanced easement incentive and estate tax, the Congressional schedule remains murky to say the least.  Senate Finance Committee Chairman Max Baucus was recently quoted as saying, "I don't know when we're going to do all this," but we believe there will be action on tax legislation in the next few months.  We'll certainly keep you posted, but for now our January 7th alert provides the most current information.

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February 12: The House successfully voted 279-137, demonstrating a supermajority (67%) of support, on H.R. 644, a package of charitable incentives including the conservation tax incentive.Now we need your help in the Senate to secure co-sponsors! Sens. Heller and Stabenow have requested land trusts’ assistance in asking senators to cosponsor S. 330, the Conservation Easement Incentive Act. Learn more »

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