Maintaining Corporate Status and Tax Exemption: State and Federal Filing Requirements for Iowa Nonprofit Corporations
September 13, 2023
By: Willard L. Boyd III, Noah Sattler
Nonprofit corporations formed in Iowa must make regular filings with the Iowa Secretary of State and the Internal Revenue Service (“IRS”) to preserve their status as a tax-exempt corporate entity. To maintain its corporate status, Iowa nonprofit corporations must file biennial reports with the Iowa Secretary of State, and to maintain tax exemption, nonprofits must file annual returns with the IRS. While these requirements may sound simple enough, completing the appropriate form by the recurring deadline can trip up even the largest nonprofits, and reinstating corporate existence and tax-exempt status can be administratively burdensome.
Is your 501(c)(3) nonprofit complying with its regular filing requirements? Are you incurring penalties for late filing, or has your tax-exempt status been revoked? Read on for an overview of the filing requirements necessary to maintain or regain your nonprofit’s corporate status and tax-exempt status under Iowa and federal law.
1. State Filing Requirements
A nonprofit corporation is a “creature of statute,” meaning it exists only to the extent that it complies with the requirements of the Revised Iowa Nonprofit Corporation Act located in Chapter 504 of the Iowa Code. Under Chapter 504, a nonprofit corporation is created by filing articles of incorporation with the Iowa Secretary of State, but compliance with the statute doesn’t end there.
Recurring Filing Requirements
Once formed, an Iowa nonprofit corporation (like an Iowa business corporation) must file a biennial report (on odd years) with the Iowa Secretary of State containing basic information such as the nonprofit’s principal office address, the address of the nonprofit’s registered agent, whether the nonprofit has any members, and whether the nonprofit holds any interest in agricultural land. The Secretary of State’s Office permits online filing of biennial reports through its internet portal.
Consequences of Non-Compliance
Failure to file the biennial report by the deadline can result in administrative dissolution. Administrative dissolution causes a nonprofit corporation to cease to exist as a corporate entity under law. This means the nonprofit can lose protections under the Revised Iowa Nonprofit Corporation Act and another entity could take the nonprofit’s name. Further, an administratively dissolved nonprofit may also find that it cannot legally solicit charitable donations in many states until it remedies its dissolved status in the state of incorporation. Soliciting donations without valid registration could subject a nonprofit to significant penalties, fees, or even lawsuits from other state attorney general offices.
A dissolved Iowa nonprofit corporation can be reinstated by filing an application for reinstatement with the Secretary of State and paying the associated filing fee. The application requires disclosure of the entity’s name, its FEIN, its date of dissolution, and a statement that the grounds for dissolution no longer exist. If the nonprofit’s name was taken while the nonprofit was dissolved, the nonprofit must select a new name. Once reinstatement is approved, the nonprofit’s corporate existence will relate back to and take effect as of the date when the nonprofit was administratively dissolved, as if the nonprofit was never dissolved in the first place.
Administrative dissolution can be avoided by ensuring the registered agent on file with the Secretary of State is up to date. Often nonprofits that are administratively dissolved were not aware of the missed filing deadline that ultimately caused their dissolution because the individual identified as the registered agent for the nonprofit is no longer involved with the nonprofit. The Iowa Secretary of State Office notifies corporate entities’ registered agents when the deadline for filing the biennial report is approaching. To avoid inadvertent administrative dissolution, ensure your nonprofit’s registered agent and registered office address are up to date on the Secretary of State’s website.
2. Federal Filing Requirements
Once a nonprofit corporation is formed, it will need to obtain a Federal Employer Identification Number (“FEIN”) from the IRS prior to applying for tax-exempt status. Except in the case of churches, integrated auxiliaries of churches and conventions or associations of churches, it can then obtain federal tax exemption by filing Form 1023 or 1023-EZ with the IRS. Iowa is one of many states that provides automatic exemption from state income tax to nonprofits that have already obtained federal tax exemption. Failure to obtain and maintain federal tax-exempt status can leave a nonprofit subject to both state and federal income tax.
Recurring Filing Requirements
To preserve its existing tax-exempt status, a nonprofit must file one of several annual information filings (tax return forms) with the IRS known as Form 990, 990-EZ, and 990-N. As reviewed below, the appropriate form depends on the nonprofit’s size and operations. In general, a nonprofit should file the annual return with the least amount of administrative burden associated, provided the nonprofit meets the relevant qualifications. Nonprofits should keep in mind that much of the information disclosed on Form 990 or any of its variations will be publicly available, including on the IRS website.
Annual returns are generally due on May 15 for nonprofits with tax years ending on December 31. However, a nonprofit may obtain a one-time automatic six-month extension by filing Form 8868 with the IRS prior to the filing deadline. This extension is not available for nonprofits filing Form 990-N. If a nonprofit has reason to believe it might not meet the May 15 deadline, it should avoid the negative consequences of late filing by submitting Form 8868.
Some nonprofit entities, such as churches and integrated church auxiliaries, are exempt from filing annual returns. However, most nonprofits - even faith-based organizations - are not integrated church auxiliaries within the meaning of the Internal Revenue Code and therefore are subject to the annual return filing requirement. See the IRS’s guidance page on church affiliates and integrated auxiliaries and consult an attorney if you believe your nonprofit is a qualifying integrated church auxiliary or other nonprofit entity that may not need to file an annual return.
The default annual return form is Form 990: this twelve-page form contains general information about the nonprofit’s operations in the previous year, including its charitable mission, charitable activities, income and revenue, net assets, contributions and grants, and the salaries and compensation of its employees and officers. Form 990 is an in-depth filing and generally requires much more attention and accounting than the biennial reports reviewed above.
Depending on your nonprofit’s size, you may be eligible to file a shorter form of the Form 990 called Form 990-EZ. A nonprofit may choose to file Form 990-EZ instead of Form 990 if 1) the nonprofit’s gross receipts are below $200,000, and 2) the nonprofit’s total assets are below $500,000. Conversely, a nonprofit must file Form 990 if its gross receipts are equal to or above $200,000, or the nonprofit’s total assets are equal to or above $500,000. Form 990-EZ is much shorter than Form 990, but still requires disclosure of revenue, expenses, changes in net assets or fund balances, a list of officers, directors, trustees, and key employees, and an itemized list of any grants received.
If your nonprofit is small, it may instead file an annual notice called Form 990-N. A nonprofit may choose to file Form 990-N instead of Form 990 or Form 990-EZ if its gross receipts are normally less than or equal to $50,000. The IRS considers a nonprofit’s gross receipts “normally less than or equal to $50,000” if one of the following apply:
- The nonprofit has been in existence for one year or less and has received, or donors have pledged to give, $75,000 or less during its first tax year;
- The nonprofit has been in existence between one and three years and has averaged $60,000 or less in gross receipts during each of its first two tax years; or
- The nonprofit is at least three years old and has averaged $50,000 or less in gross receipts for the three immediately preceding tax years.
Form 990-N is the least burdensome of the Form 990 variations, requiring only the nonprofit’s FEIN, the relevant tax year, the nonprofit’s legal names and mailing address, the name and address of the nonprofit’s principal officer, the URL of the nonprofit’s website, and a representation that the organization’s annual gross receipts are normally under $50,000. The lack of accounting information required for this filing as well as the limited number of questions required to be answered make it the most attractive annual return option for nonprofits that qualify under the above criteria.
Consequences of Non-Compliance
Regardless of which variation of Form 990 your nonprofit is required to file, late filings and failure to file have significant consequences.
The IRS imposes different penalties for late filing relative to the nonprofit’s size. If a nonprofit with gross receipts of less than $1,000,000 files after the due date without reasonable cause, the IRS can impose a penalty of $20 per day for each day the return is late, with a maximum penalty of $10,000 or five percent of the organization’s gross receipts, whichever is less. The penalty increases to $100 per day, up to a maximum of $50,000, for a nonprofit whose gross receipts exceed $1,000,000.
If a nonprofit fails to file its annual return for three consecutive tax years, the IRS will automatically revoke the nonprofit’s tax-exempt status and issue a Revocation Letter (CP120A) notifying the nonprofit. If the IRS revokes your organization’s tax-exempt status, the organization will be added to the Revocation of Exemption list. You can check that list at the IRS website.
Abating Late Fees
As noted above, a nonprofit that files its annual return after the due date without reasonable cause can be subject to significant penalties. To prove “reasonable cause” and abate the penalties reviewed above, a nonprofit should file its annual return even if it is past the May 15 deadline. The nonprofit should attach a written statement to its annual return containing the following:
- A declaration by the authorized signatory that the written statement is made under penalty of perjury.
- A description of the reason the penalty was charged. Penalties may be charged for a return being late, incomplete, or both; the written statement should identify why the relevant penalties were charged.
- A description of what prevented the nonprofit from requesting an extension of time to file its return, assuming the organization did not request such an extension. This could be because the responsible person died or left the nonprofit, the nonprofit changed addresses, or any other justification for why the nonprofit was unaware it missed the filing deadline.
- A description of how the nonprofit was not negligent or careless but exercised ordinary business care and prudence.
- A description of the steps the nonprofit has taken to prevent the same situation in the future.
Oftentimes nonprofits have few resources and rely on volunteers to meet multiple responsibilities, and filing annual returns can slip through the cracks. A well-written statement should honestly address each item above with special emphasis on how the nonprofit exercised ordinary care and prudence under the circumstances and the steps taken to avoid the same situation in the future.
Although it is harder to establish reasonable cause if the nonprofit requested and received a six-month extension, such an extension does not disqualify and should not deter a nonprofit from requesting abatement of penalties.
A nonprofit that fails to meet its annual filing requirements for three consecutive tax years will have its tax-exempt status revoked, leaving it subject to federal and state income tax. If an organization’s tax-exempt status is revoked, it can apply for reinstatement through a streamlined process or a more arduous one.
The streamlined process is available to nonprofits that 1) were previously eligible to file Form 990-EZ or 990-N and 2) have not previously had their tax-exempt status revoked. The streamlined process requires that nonprofits file either Form 1023 or Form 1023-EZ with the IRS and pay the associated fee no later than fifteen months following the later of the date of the organization’s Revocation Letter and the date the organization appeared on the Revocation List on the IRS website. If approved, reinstatement of tax exemption under this process will be retroactive to the date of revocation.
If the streamlined process may not be used, a nonprofit must file Form 1023 with the IRS and pay the associated fee within the fifteen-month period described above. The nonprofit must also include a statement establishing it had reasonable cause for failing to meet the filing requirement in one of the three years it did not file, as well as a statement confirming it has since filed returns for those years and any other necessary years. If approved, reinstatement of tax exemption under this process will be retroactive to the date of revocation.
If a nonprofit is applying for reinstatement outside the fifteen-month period described above, it must comply with all the requirements above and must include a statement establishing it had reasonable cause for each of the years in which the nonprofit did not file its annual return. If approved, reinstatement of tax exemption under this process will be retroactive to the date of revocation.
If none of the above processes for reinstatement are available, the nonprofit must apply for tax exemption by filing Form 1023 with the IRS and pay the associated fee as if it were applying for tax exemption for the first time, the only difference being that, if approved, reinstatement of tax exemption will be effective as of the postmark date of the application.
Often, a nonprofit that misses its filing deadline does so only because the individual designated as the registered agent for the nonprofit and/or the individual responsible for such filings no longer is associated with the nonprofit. Nonprofits should periodically review their internal succession policies to ensure filing responsibilities are properly assigned and review the Secretary of State website to ensure their registered agent and registered office address are up to date.
Nonprofits that are delinquent in their filings should reinstate their corporate and/or tax-exempt status as soon as possible to reduce any potential penalties owed and lighten the administrative burden associated with regaining corporate and/or tax-exempt status. Regaining tax-exempt status after three years of failing to file annual returns is a burdensome process that can be avoided by responsible record keeping. However, the IRS has clear methods available to nonprofits for abating late penalties and regaining tax-exempt status.
This article concerns the filing requirements of 501(c)(3) nonprofits. If your nonprofit is tax exempt under a different subsection, or has other specific considerations, the requirements may vary. For example, churches and church auxiliaries are exempt from filing Form 990 or any of its variations, and private foundations may file Form 990-PF instead of the above-reviewed forms. Please consult the IRS website and/or a Nyemaster attorney for more information.