As the Internal Revenue Service (IRS) is busy preparing its Nonfiler Revocation List (“The List”), the rest of us are biting our nails and scrambling to prepare grant termination templates…well, maybe we haven’t hit that level of panic just yet, but you can most likely expect an extra step in your due diligence process.

It all goes back to the Pension Protection Act (PPA) of 2006 (doesn’t it always?!). Under the PPA, the IRS must revoke the tax-exempt status of any nonprofit that hasn’t filed its annual information return for three consecutive years or more. This filing includes Form 990, 990-PF, 990-EZ, 990-N, and the e-Postcard. Small organizations with annual revenues of $25,000 or less were not required to file the 990-N and e-Postcard before the PPA was adopted.

Let’s fast forward to May 2010…the first filing deadline that triggered revocations was scheduled for May 17th, and by May 18th, the IRS realized that many organizations had missed the deadline. But, assuming a lot of the small nonprofits were not aware of the change in policy under the PPA, the IRS wanted to help preserve exemptions. So they launched a one-time filing relief program specifically for these nonprofits that ran through October 15, 2010. At which point, if an organization had not filed under the relief program, or, if it didn’t qualify for the relief program and still had not submitted an annual return, its tax exemption would most likely be revoked. In December 2010, the IRS published a list of at-risk nonprofits. Over 120,000 of the more than 300,000 nonprofits appearing on this “At-Risk” list are thought to be defunct. Of the remaining organizations, over half are public charities and could be grantees or applicants of our respective organizations.

The List will be the result of the IRS combing through and investigating the hundreds of thousands of nonprofits that appeared on the initial “At Risk” list in December 2010. Once The List is published it will be updated monthly. The List will be available in two formats, Adobe Acrobat PDF and Microsoft Excel, and will be divided into separate sections for each state for ease of searching. Information available will include: the revoked organization’s legal name; their Employer Identification Number (EIN); the organization subsection code; the last known address provided to the IRS, and the effective date of revocation (the original filing due date of the third annual return).

You might be wondering what happens if a nonprofit does lose its tax-exempt status under these conditions. Basically, it means that the organization must file income tax returns and pay income tax; therefore its contributors will not be able to deduct their donations and could be subject to excise taxes.

What this means for you and me? Funders will need to confirm that a grantee or grant applicant does not appear on The List, in addition to the other due diligence steps we take to confirm tax-exempt status (IRS Publication 78 and the IRS Business Master File for subsection coding). This verification should also be documented like the other steps.

If you find that you made a contribution to an organization that appears on The List, prior to the date of the publication, don’t panic. The IRS has said that contributions could continue to be made to any nonprofit that is verified on Publication 78, but once the name appears on The List it’s a ‘no-no.’

This brings to light one of the many ways that we can help our grantees and grantseekers – especially young or smaller organizations – by providing technical assistance around their tax exemption, including annual filing requirements. The IRS created a site specifically around some of these issues, which is much more user-friendly then the main IRS website. You can steer nonprofits needing additional assistance to http://www.stayexempt.irs.gov/.  From there, they can access free webinars, virtual workshops, and mini-courses about the full nonprofit life-cycle. In addition, the IRS provides the written materials used in their day-long workshops designed for small to mid-sized organizations. Helping your grantees and potential grantees fulfill these IRS requirements ultimately helps them fulfill their mission, keeps our audits clean, and helps our blood pressure stay within the normal range!

So, we can all breathe a sigh of relief, for now, and prepare to add The List to our ‘Bookmarks’ and due diligence process once it’s published.