How To Maintain Your Organizations Tax Exempt Status

Question: What Should We Do To Maintain Our Organization’s Tax-Exempt Status?

Fortunately, it is not common for the IRS to actually revoke a nonprofit’s tax-exempt status. However, even if a nonprofit does not lose its tax-exempt status it may face stiff financial penalties the IRS refers to as “Intermediate Sanctions.”

To maintain your tax-exempt status and avoid penalties with the IRS, watch out for the following:

  1. Private Inurement– Beyond reasonable salaries, the earnings of the nonprofit must go back into the company rather than inure to the benefit of members or shareholders. Tight internal policies and controls will help eliminate these types of problems. For instance, regular audits, proper recordkeeping, and the de-centralization of financial duties among staff are essential.
  2. Excessive Lobbying-No greater than 15% of a nonprofit’s efforts may be used to influence legislation. Additionally, a nonprofit approved under 501(c)(3) may not substantially participate in a political campaign by endorsing or opposing any particular candidate.
  3. Excessive Unrelated Business Income– This type of income refers to regular income that comes from the activity of the nonprofit that is unrelated to its charitable purpose. Although a nonprofit might engage in this type of business activity and simply pay taxes on the income, too much of this might get the IRS to take a closer look at the overall tax-exempt status of the organization.
  4. Failure to File Yearly Returns– Probably the most common reason a nonprofit can lose its tax-exempt status is by simply failing to file an annual tax return. Any nonprofit that has gross receipts of $25,000.00 or more must file an annual Form 990 tax return. Those grossing less than this amount are not required to file a tax return but must instead file an e-postcard Form 990-N.

The best way for a nonprofit to maintain its 501(c)(3) status is to follow one simple rule: stay true to the founding mission!

Related Reading

Have questions about your organization's tax-exempt status? Contact Perliski Law Group online or call (214) 865-7542 to request a consultation with a Dallas non-profit attorney.

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