When you hear about delays, the usual context is a planes, trains and automobiles saga of missed connections that is only funny if it happened to someone else. In finance, delays around audits or tax filings can mean fines, penalties and larger than normal fees for necessary work.

For Nonprofits

Most tax-exempt organizations, other than churches, must file a yearly return or notice with the IRS or risk losing their tax-exempt status. The Pension Protection Act of 2006 requires the IRS to revoke the exemption of any organization that has failed to file three consecutive annual returns. Loss of exempt status means an organization must file income tax returns and pay income tax, and its contributors will be unable to deduct their donations. Nonprofits that wish to have their exemptions reinstated will be required to re-apply to the IRS for tax-exempt status. This process can take several months and can lead to everything from a decrease in donations to legal fees.

The IRS began revoking exemptions on May 16, 2010, but will wait until 2011 to send revocation notices. In other words, your exemption may get revoked without you even knowing it!

For Businesses

If you are a business, filing your taxes and owing the government is always better than not filing and owing the government for taxes. Failure-to-file penalties are calculated based on the time between the deadline (including extensions) to the date you file your tax return. The penalty is 5% for each month the tax return is late, up to a total maximum penalty of 25%.

And tax filings aren’t the only thing that gets delayed. We’ve been hearing more and more from our CPA partners about resource-strapped organizations that haven’t been able to pull together the supporting material for their audit. They might not have the requisite in-house accounting expertise, the bandwidth to prepare the supporting reconciliations and schedules, or the the time to assemble all of the details. They simply aren’t ready for the annual audit.

Organizations who delay their audits can incur fines, penalties and much larger than normal audit fees. They could be considered in violation of their loan covenants and have their loan worthiness called into question. Federal and/or state funding can be put at risk for non-renewal of contracts.

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Lattimore Black Morgan & Cain, PC
615-377-4600

Article reprinted from the May, 2010, issue of The AMS Report, with permission from Accounting Management Solutions, Inc., Waltham, Mass., www.amsolutions.net.