People are in for a wake-up call: Non-profit organizations (excluding churches) that report less than $25,000 in income in 2010 might discover in 2011 that the donations they received through 2010 were not tax exempt.

Here’s what’s happening: The IRS is requiring non-profit organizations (except for churches) whose reported income is less than $25,000 to fill out an additional form. The due-date for that form was the middle of May but nearly 214,000 non-profits had not filled out the form.

No one will realize their error and they will continue taking donations through the year. Then, when it comes time to issue donation receipts, here’s what will happen:

The organization will discover that it has lost its non-profit status and the generous donations throughout the year will not be tax deductible.

The organization itself will have to report for-profit income, which could be financially devastating to the organization. Meanwhile, the people who have given throughout the year with the full expectation of the tax-deductible benefits of their donation will suddenly discover that they paid money and are receiving no tax deduction in return.

Here is another occasion where the IRS is biting the hand that feeds it. In an attempt to collect every dollar it feels it is owed (and to leave no stone unturned to find more of those “owed” dollars), it will leave in its wake many important organizations that will no longer be able to function, including historical societies, community theater, and community outreach programs. That’s right, the IRS isn’t going after tax cheats, they’re trying to squeeze money from organizations that can barely afford to survive.

You can read more about it in this Associated Press article.
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