While 501(c)(3) public charities are exempt from federal income tax, most of these organizations have information reporting obligations under the Code to ensure that they continue to be recognized as tax-exempt. In addition, they may also be liable for employment taxes, unrelated business income tax, excise taxes, and certain state and local taxes.

Form 990, Return of Organization Exempt from Income Tax and Form 990-EZ

Public charities generally file Form 990, Return of Organization Exempt from Income Tax, Form 990-EZ, Short Form Return of Organization Exempt from Income Tax, or Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations not Required To File Form 990 or 990-EZ.

The type of Form or Notice required is generally determined by the public charity's financial activity. An organization may file Form 990-EZ if its gross receipts are normally more than $25,000 but less than $100,000, and its total assets are less than $250,000 at the end of the year. (The Form 990 Instructions show how to compute an organization's "normal" receipts.) If the organization's gross receipts are $100,000 or greater, the organization generally must file Form 990. If the organization's gross receipts are generally less than $25,000, the organization must file the Form 990-N, but may elect to file a complete Form 990 or Form 990-EZ.

Forms 990 and 990-EZ must be filed by the 15th day of the fifth month after the end of the organization's annual accounting period. The due date may be extended for three months, without showing cause, by filing Form 8868, Application for Extension of Time To File an Exempt Organization Form, before the due date. An additional three-month extension may be requested on Form 8868 if the organization shows reasonable cause why the return cannot be filed by the extended due date.

Forms 990 and 990-EZ Filing Exceptions

Public charities that are not required to file Forms 990 or 990-EZ include:

• churches and certain church-affiliated organizations,
• certain organizations affiliated with governmental units,
• organizations that file as part of a group ruling, and
• organizations whose annual gross receipts are normally less than $25,000

If a public charity is excepted from filing a Form 990 or Form 990-EZ because gross receipts are below the $25,000 threshold, it is not required to file a return even if the IRS sends it a Form 990 package. Should the public charity elect to file the Form 990 or Form 990-EZ, it must complete the entire return; otherwise, it must file the Form 990-N.

Special Requirements for Supporting Organizations

Public charities that are supporting organizations described in section 509(a)(3) are generally required to file Form 990 or Form 990-EZ even if their gross receipts are less than $25,000, effective for returns filed after August 17, 2006. Supporting organizations of religious organizations need not file Form 990 or Form 990-EZ if their gross receipts are normally $5,000 or less. Such organizations will, however, be required to file the Form 990-N. Supporting organizations will be required to indicate whether they are a Type 1, Type 2, or Type 3 supporting organization, identify their supported organizations, and annually certify that they are not controlled by a disqualified person. See the instructions for Schedule A (Form 990 or Form 990-EZ) and Notice 2006-109 to determine an organization's appropriate supporting organization type for information return purposes.

Form 990 Schedules A and B

Public charities that file Form 990 or Form 990-EZ must file Schedule A of that return. Schedule A reports information about compensation of officers, directors, key employees, and independent contractors; the basis for the organization's public charity classification; lobbying expenditures; and certain other activities, as noted on Schedule A instructions. Private schools must fill out a special questionnaire on Schedule A. Organizations that file Form 990 or Form 990-EZ also must file Schedule B if they report contributions over a specified amount on these annual returns. See the Guidelines for Meeting the Requirements for Schedule B in the instructions for Form 990 and Form 990-EZ and the instructions to Schedule B (Form 990, 990-EZ) for complete information.

Reporting Excess Benefit Transactions

If a public charity believes it provided an unreasonable benefit to a person who is in a position to exercise substantial influence over the organization's affairs, it must report the transaction on Form 990 or Form 990-EZ. Excess benefit transactions are governed by section 4958 of the Code. Additional information can be found in the Form 990 and Form 990-EZ instructions.

Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations not Required To File Form 990 or 990-EZ

Section 6033(i) requires a public charity to file Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations not Required To File Form 990 or 990-EZ, for tax periods beginning after December 31, 2006, if that organization is not required to file Form 990 (or Form 990-EZ), because the organization's gross receipts are normally $25,000 or less.

The Form 990-N is due by the 15th day of the fifth month after the close of your tax period. For example, if your organization's tax period ends on December 31, 2007, the Form 990-N is due May 15, 2008.

An organization is required to provide the following information on Form 990-N.

• the organization's name,
• any other names the organization uses,
• the organization's address,
• the organization's web site address (if applicable),
• the organization's taxpayer identification number (TIN),
  name and address of a principal officer of the organization,
• the organization's annual tax period, and
• a statement that the organization's annual gross receipts are still normally $25,000 or less.

Form 990-N also includes a check-box for the organization to notify the IRS that it is terminating.

e-filing Requirements

Public charities with $10 million or more in total assets and that also file at least 250 returns in a calendar year, (including income, excise, employment tax, and information returns such as Forms W-2's and 1099's), are required to electronically file Form 990. Other public charities are given a choice to file Form 990 electronically.

Filing Penalties and Revocation of Tax-Exempt Status

If a Form 990 or Form 990-EZ is not filed, the IRS may assess penalties on the organization of $20 per day until it is filed. This penalty also applies when the filer fails to include required information or to show correct information. The penalty for failure to file a return or a complete return may not exceed the lesser of $10,000 or 5 percent of the organization's gross receipts. For an organization that has gross receipts of over $1 million for the year, the penalty is $100 a day up to a maximum of $50,000. The IRS may impose penalties on organization managers who do not comply with a written demand that the information be filed.

Section 6033(j) of the Code provides that failure to file Form 990, Form 990-EZ, or Form 990-N for 3 consecutive years results in revocation of tax-exempt status as of the filing due date for the third return. An organization whose exemption is revoked under this section must apply for reinstatement by filing a Form 1023 and paying a user fee, whether or not the organization was originally required to file for exemption. Reinstatement of exemption may be retroactive if the organization shows that the failure to file was for reasonable cause.

Form 8734, Support Schedule for Advance Ruling Period

A newly formed exempt organization that cannot show enough public support to qualify as a public charity, rather than a private foundation, when it files its application for exemption, may request an advance ruling of public charity status. Within 90 days after the end of the advance ruling period, which usually lasts five tax years, the charity must file a Form 8734, Support Schedule for Advanced Ruling Period, showing its significant and diversified sources of public support. If the organization does not provide the information or the information is not sufficient to demonstrate that the organization is a public charity, the IRS will reclassify the organization as a private foundation.

Form 990-T, Exempt Organization Business Income Tax Return

Even if a public charity is not required to file a Form 990 or Form 990-EZ, it must file a Form 990-T, Exempt Organization Business Income Tax Return, if it has $1,000 or more of gross receipts from an unrelated trade or business during the year. Net income from income-producing activities is taxable if the activities:

• constitute a trade or business,
• are regularly carried on, and
• are not substantially related to the organization's exempt purpose.

The public charity must pay quarterly estimated tax on unrelated business income if it expects its tax for the year to be $500 or more. Form 990-W, Estimated Tax on Unrelated Business Taxable Income for Tax-Exempt Organizations, is a worksheet to determine the amount of estimated tax payments required.

Exceptions and Special Rules

Income from certain business activities, is excepted from the definition of unrelated business income. Earnings from these sources are not subject to the unrelated business income tax. Exceptions generally include business income from:

• activities, including fundraisers, that are conducted by volunteer workers, or where donated merchandise is sold;
• activities conducted for the convenience of members, students, patients or employees;
• qualified conventions and trade shows;
• qualified sponsorship activities; and
  qualified bingo activities.

Income from certain "passive" business activities are usually excluded from the calculation of unrelated business activity. Examples of this type of income include earnings from routine investments such as certificates of deposit, savings accounts, or stock dividends, royalties, certain rents from real property, and certain gains or losses from the sale of property.

Special rules apply to income derived from real estate or other investments purchased with borrowed funds. Such income is called "debt-financed" income. Debt-financed income generally is subject to the unrelated business income tax.

Employment Tax Returns

Like other employers, all public charities that pay wages to employees must withhold, deposit, and pay employment tax, including federal income tax withholding and Social Security and Medicare (FICA) taxes. A public charity must withhold federal income tax from employee wages and pay FICA on each employee paid more than $100 in wages during a calendar year. To know how much income tax to withhold, a public charity should have a Form W-4, Employee's Withholding Allowance Certificate, on file for each employee. Employment taxes are reported on Form 941, Employer's Quarterly Federal Tax Return. Any person that fails to withhold and pay employment tax may be subject to penalties. Public charities do not pay federal unemployment (FUTA) tax.

Public charities do not generally have to withhold or pay employment tax on payments to independent contractors, but they may have information reporting requirements. If a charity incorrectly classifies an employee as an independent contractor, it may be held liable for employment taxes for that worker.

Employment Taxes and Churches

Although churches are excepted from filing Form 990, they do have employment tax responsibilities. Employees of churches or church-controlled organizations are subject to income tax withholding, but may be exempt from FICA taxes. Like other 501(c)(3) organizations, churches are not required to pay federal unemployment tax (FUTA). In addition, although ministers generally are common law employees, they are not treated as employees for employment tax purposes. These special employment tax rules for members of the clergy and religious workers are explained in Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.