990 Late Filing Penalty and How to Request Abatement
Understand the financial and compliance implications of a late Form 990 and the established framework for resolving penalties with the IRS.
Tax-exempt organizations are required to file an annual information return, known as Form 990, with the Internal Revenue Service (IRS). This document provides financial and operational information, ensuring transparency. Failing to file by the deadline, which is generally the 15th day of the fifth month after the organization’s accounting period ends, can lead to significant financial penalties and jeopardize tax-exempt status.
The Penalty Calculation
The Internal Revenue Service has a tiered penalty structure for late filing Form 990, which is tied to an organization’s annual gross receipts. For organizations with gross receipts of less than $1,309,500 for the tax year, the IRS imposes a penalty of $25 for each day the return is late. The total penalty is capped at the lesser of $13,000 or 5 percent of the organization’s gross receipts for the year.
A more substantial penalty applies to larger organizations. Those with gross receipts exceeding $1,309,500 face a daily penalty of $130 for each day the return is delinquent. The maximum penalty for these larger entities is set at $65,000 per return.
The IRS can also impose penalties directly on the individuals responsible for filing. If the IRS issues a written demand for the delinquent return and the responsible person or manager fails to comply by the specified date, a separate penalty is assessed. This penalty is $10 per day, with a maximum cap of $6,500 for any one return.
Additional Consequences of Non-Compliance
Beyond financial costs, the most serious consequence of non-compliance is the automatic revocation of an organization’s tax-exempt status. If an organization fails to file a required Form 990-series return for three consecutive years, its status is revoked by law on the third year’s filing due date. The organization then loses its exemption from federal income tax and must file corporate or trust income tax returns and pay applicable taxes.
Losing tax-exempt status directly impacts an organization’s ability to fundraise. Once revoked, an organization is no longer eligible to receive tax-deductible charitable contributions, and the IRS removes its name from the official list of eligible charities. Reinstating tax-exempt status is a complex process that requires the organization to re-apply and pay associated user fees.
Tax-exempt organizations are also required to make their Form 990 returns available for public inspection. Failure to provide copies upon request can result in separate penalties, which are distinct from those for late filing.
Information Needed for a Penalty Abatement Request
An organization can request to have penalties waived by formally requesting an abatement from the IRS and establishing “reasonable cause.” Reasonable cause is the standard used to determine if a failure to file on time was not due to willful neglect but occurred despite the organization exercising ordinary business care. The IRS reviews each case based on its specific facts and circumstances.
To build a case for reasonable cause, an organization must provide supporting documentation. Examples of circumstances that may qualify include the death or serious illness of the person responsible for filing or the destruction of records by a fire or flood. Another valid reason is reliance on erroneous advice from a tax professional who was provided with all necessary and accurate information.
The documentation needed to substantiate the claim is important. If the delay was due to illness, a letter from a physician or hospital records would be necessary. In the case of a fire, a report from the fire department would serve as proof. For claims involving incorrect advice, copies of correspondence with the tax advisor can be evidence. The organization should also prepare a detailed narrative explaining the events that led to the late filing and the steps it has taken to ensure future compliance.
The Abatement Request Process
The formal abatement request is a written statement that outlines the case for reasonable cause. The letter should be directed to the IRS service center that issued the penalty notice; the correct address will be on the notice itself. The letter must reference the organization’s name, Employer Identification Number (EIN), the tax year in question, and the specific penalty notice number.
The letter must provide a detailed explanation of the facts alleged as reasonable cause. It should present a clear, chronological account of what prevented the organization from filing on time. The statement must also explain how the organization exercised ordinary business care and what preventative measures have been implemented to avoid future delinquencies. This written statement must contain a declaration, signed by an officer, stating that the facts presented are true under penalties of perjury.
The IRS will review the request and evidence to determine if the reasonable cause standard has been met. Possible outcomes include a full or partial abatement of the penalty, or a denial. If the request is denied, the notice will explain the reasoning and provide information on appeal rights.