Is The Loss of Tax-Exempt Status for Previous Filers Related to Indicators of Financial Distress?

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Abstract

The US Congress passed the Pension Protection Act of 2006 (PPA) that automatically revokes the tax-exempt status of any organization that does not file with the IRS for three consecutive years. This study focus on charities that previously filed with the IRS, and it examines whether or not the loss of tax-exempt status is related to indicators of financial distress. The results show that charities that lost their tax-exempt status have smaller equity reserves, higher revenue concentration, lower operating margins, more debt (relative to assets) and are younger and smaller than their counterparts. The model can correctly predict up to 98 percent of the charities as either losing their tax-exempt status or not.

Author

• John M Trussel, University of West Florida