• Melissa Walton-Jones

Finer Finance Fridays #14


HAPPY NEW YEAR SORORS!!!

I have taken a bit of time to listen intently to you and collect your feedback for what you are concerned about. You will begin to notice blog topics catered to you and what you want to know!! You will remember me saying, this campaign and the position of Tamias, isn't about me, or one person, it is about you, the members, the Sisterhood and how someone serving in this capacity can be of service to you! This week's blog is about Tax Exempt Status.

DO YOU KNOW YOUR CHAPTER'S STATUS?

Filing requirements of small nonprofit organizations, including fraternity and sorority chapters, changed significantly with the passage of the Pension Protection Act of 2006. In addition to requiring all nonprofit organizations to file a return with the IRS regardless of its level of gross receipts, perhaps the most consequential change to come with the Pension Protection Act is the requirement that the tax-exempt status of any organization be revoked if that organization fails to file a proper Form 990, 990-EZ, or 990-N for three consecutive years. In May of 2010, the automatic revocation of exempt status began when the tax exempt status of approximately 275,000 organizations was revoked, including numerous fraternity and sorority chapters (Guidestar Publications, 2011).

Understandably, the revocation of a chapter's tax-exempt status can come as quite a surprise, especially to our undergraduates, if they are aware of their current status at all. Given the infrequent nature of IRS filing requirements as a part of chapter operations, this is an aspect that is easy for both chapter officers and advisors to overlook. Nevertheless, meeting these requirements is important and can have very real consequences for the future operations of our chapters. The aim of this post is to outline how a chapter can lose its tax-exempt status, the process a chapter should use to reapply for that status, and how advisors can assist in ensuring chapters continue to meet the IRS filing requirements.

It is important that chapters understand what “tax-exempt” means in relation to their operations. Fraternities and sororities are typically classified by the IRS as 501(c)7 social clubs. The 501(c)7 classification exempts these organizations and their subordinate units (chapters) from paying federal income taxes on business related income. It is also important to understand the difference between 501(c)7 organizations and 501(c)3 organizations.

In comparison to a 501(c)7, an organization classified as a 501(c)3 is exempt from paying federal income tax on business related income, but donations to a 501(c)3 are typically tax deductible for the donor. Donations to 501(c)7 organizations, though, are generally not tax deductible for the donor. There are additional, more specific, differences, but this basic distinction is the most applicable to fraternity and sorority chapters, like ours.

If a 501(c)7 organization, such as Zeta Phi Beta Sorority, Incorporated, has its tax-exempt status revoked, it may be required to begin paying federal income taxes, which could have a significant impact on its operations. For chapters, paying federal income taxes, and possibly applicable state income taxes, would likely result in less dollars for member development, recruitment, educational programs, and philanthropic giving. The other “option” available to local chapters would most likely include significant increases in local member dues, which would have its own impacts on a chapter’s operations.

How does a chapter lose its tax exempt status?

As the new filing requirements were implemented, the IRS also adjusted the filing threshold for the new Form 990-N, to include organizations whose gross receipts are normally less than or equal to $50,000. Most fraternity and sorority chapters meet this threshold, requiring them to file the 990-N annually. However, regardless of which 990 a chapter is required to file, they are all subject to Section 6033(j) of the Internal Revenue Code, which “automatically revokes the exemption of any organization that fails to satisfy its filing requirement for three consecutive years” (Social Clubs, 2012).

The filing requirements are one of the centerpieces of confusion for a lot of chapters. To help alleviate some of the potential confusion, there are two points that are important to remember:

  • Chapters are required to file a 990 form annually.

  • If a chapter files a 990 only once in a three year period, it may avoid having its tax exempt status revoked, but until a 990 is filed for each of the previous missing years, the chapter is delinquent in its filing requirements and may be subject to penalties and other ramifications.

How does a chapter get its tax-exempt status reinstated?

If a nonprofit organization loses its tax-exempt status, it can apply to have its exemption reinstated. For fraternity and sorority chapters under the 501(c)7 classification, this means filing IRS Form 1024 (Application for Recognition of Exemption) and paying a user fee.

It is possible that a chapter that has lost its tax-exempt status will be subject to paying federal income tax for the time between the revocation of its exemption and the reinstatement of its exempt status. Therefore, the chapter may choose to request its reinstatement be retroactive to the date of revocation. Such a request can be made as a part of its reinstatement application and is described on the IRS website (www.irs.gov).

The IRS also advises writing “Automatically Revoked” at the top of the reinstatement application, as well as the envelope, to ensure that your application goes to a specialist trained to handle these applications.

Ultimately, any chapter applying for reinstatement of its tax-exempt status would be well served to consult a financial or tax professional. The expertise of a tax professional can help to ensure the reinstatement application and supporting documentation is completed and filed properly.

How can advisors assist a chapter in reapplying for tax-exempt status?

The most important thing advisors can do to assist chapters regarding their filing requirements is to help them avoid a scenario where the chapter is facing revocation of its tax-exempt status. The consistent turnover of chapter officers can create an environment in which it is easy to overlook the filing requirements if left to officer transitions. Advisors provide a continuity that can help to ensure that important but infrequent aspects of chapter operations, such as IRS filing requirements, do not get lost in the grind of day-to-day operations.

If a chapter does lose its tax-exempt status, an advisor can play an important role in helping the chapter understand what it needs to do to apply for reinstatement. Moreover, an advisor can provide an important balance. It is likely that many chapter officers will not understand the potential consequences of losing the tax-exempt status, so for undergraduate chapters, advisors can play an important role in keeping the chapter focused on addressing the issue promptly.

The IRS website offers a litany of information and resources relevant to 501(c)7 organizations, including fraternities and sororities, and advisors should take time to review these resources and familiarize themselves with the information available (www.irs.gov/Charties-&-Non-Profits/Other-Non-Profits). The IRS also publishes the list of organizations whose tax-exempt status was automatically revoked because of failure to file a required Form 990, 990-EZ, 990-PF or Form 990-N (e-Postcard) for three consecutive years.The list gives the name, employer identification number (EIN), organization type, last known address the organization provided to the IRS, effective date of revocation and the date the organization was added to the list. For organizations that applied for and received reinstatement, the list gives the date of reinstatement. IRS updates the list monthly. The easiest way to search the list is by using the EIN. Ask your chapter Basileus or Tamias to check your chapter's status!!!

Our sorority has approximately 800 chapters. The preliminary search I conducted returned a listing of 730 chapters whose tax-exempt status has been automatically revoked; of those 60 have been reinstated, leaving a total of 670 chapters whose tax exempt status is currently revoked. This list would only include chapters who have an EIN. Startling isn't it. Check the listing for yourself, here: Tax Exempt Revocation Listing. Limit your search to "Were automatically revoked" and In the "Name" field, list "Zeta Phi Beta" (with the quotations).

I've assisted quite a few chapters this past year getting on track to regaining their status after it was revoked. If I can provide additional information or assistance to your chapter, please let me know. My goal, is for 100% active status for all our chapters, beginning with active chapters and then working through those that are not currently active, because even though a chapter isn't active per Zeta, the IRS still requires reporting. Sorors, we have work to do! My experience and expertise is at your service! We can be Finer in Finance!

References:

Guidestar Publications. 2011. How Automatic Revocations Could Affect You.

Social Clubs. 2012.

Exempt Organizations. 2018.

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PROUDLY ENDORSED BY: OMEGA IOTA ZETA CHAPTER │ STATE OF MISSOURI │ MIDWESTERN REGION

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Soror Melissa Walton-Jones, Zeta Phi Beta Sorority, Inc.

2020 Candidate for Re-Election: International Tamias