Thousands of nonprofits face loss of tax-exempt status

One-fifth of the state’s nonprofits are at risk of losing their tax-exempt status this fall, courtesy of a tax law that is being enforced this year for the first time.

Almost 4,000 organizations are at risk of losing their exemption if they do not respond by Oct. 15 to a law requiring them to fill out a “postcard” – as Gregg Semanick, spokesman for the Internal Revenue Service in Connecticut, calls the questionnaire they must complete.

The exemption allows local nonprofits — including soup kitchens, scholarship funds, alumni clubs and veteran groups — to raise money tax-free and allows the public to write off their donations.

“We would be very disappointed if this many organizations doing good work go defunct because of this,” said Ron Cretaro, executive director of Connecticut Association of Nonprofits.

There are 21,000 nonprofits in the state. In 2008, the most recent year available, 640,000 Connecticut residents wrote off $2.6 billion in donations to nonprofits.

Nationwide almost 300,000 nonprofits are at-risk of losing their status because of this a law passed in 2006 that requires small nonprofits to file an annual tax return for the first time. Previously, these organizations with gross expenditures and donations totaling $25,000 or less were exempt from filing a return.

Cretaro suspects that many groups on the state’s list no longer exist or do not have any staff to realize they are not in compliance.

“Is this going to reduce the number significantly, my guess is yes,” he said, adding with the Oct. 15 filing deadline, “I hope there will be a lot of scrambling soon to fill this out.”

Despite the IRS having mailed 650,000 letters nationwide in July to these delinquent nonprofits, The Connecticut Mirror found numerous charities that had no idea they were on the verge of losing their tax-exempt status.

Sal Mattei and Christine Sandford, president and vice president of the East Haven Food Pantry, said they were unaware that they needed to file any new paperwork.

“This was never brought up to me. Wait, does this mean we will have to start paying taxes on everything?” said Sandford, who works at the pantry that serves lunch three times a week to about 300 people.

Also on the list are 41 organizations helping children, 24 animal rescue groups, seven cancer awareness and fundraising foundations, 43 American Legion posts, 64 scholarship funds and local chapters of fraternal groups such as the Shriners and Masons.

“I just am not sure how this is going to play out,” Cretaro said.

He estimates if these organizations fail to comply it will take them between three to six months to regain their nonprofit status — and in the interim they will lose their tax-exempt benefits and those who donate expecting to be able to write it off will lose their faith in that charity when they find out they have to pay taxes on that.

“This could be detrimental,” he said.

Doug Wilke, founder of the Dr. Curtis E. Tate College Scholarship Fund, which gives a $1,500 annual scholarship to a martial arts student from his Woodbury studio, had no idea he wasn’t in compliance.

“Why would I lose my status? I thought we already filed everything we needed to,” he said. “We certainly would have acted on this had we known. This $1,500 is something they really do use for their books or for whatever they need for school. Well, at least we know about it now.”

Others were annoyed.

“Now how exactly do they expect us to know this if they never tell us,” said Lance Latta, the commander of an American Legion Post in Bridgeport. One-fourth of all registered American Legions are on the IRS list of non-compliant nonprofits.

Cretaro suspects that in many cases the IRS notice went to old addresses.

For example, the Aetna Insurance Company Mens Club is listed at 55 Elm Street in Hartford, a building that has housed the state’s attorney general, treasurer and comptroller for more than two decades.

While concerned that thousands of charities may go defunct soon, Cretaro said he understands the reasoning behind the law requiring every nonprofit to file their expenses and donations.

“Nonprofits have the responsibility to serve the public good and they have to be responsible to the public and report where their money is spent and where it comes from,” he said. “The IRS is just asking them if they raise under $25,000 a year to fill out a post card. It’s a very small form.”