How Do I Maintain Tax-Exempt Status?

Use these links to jump to different sections:

• Filing Requirements
• Penalties for Not Filing
• Revocation of Tax-Exempt Status

Obtaining tax-exempt status for nonprofit organizations can be a lengthy and time-intensive process. And maintaining that status can also be a lot of work, as the nonprofit must, at all times, continue to meet its federal statutory obligations. This includes avoidance of:

• Serving private interests instead of its exempt purpose
• Income or assets benefiting organization insiders
• Excessive lobbying
• Political campaigning
• Earning too much unrelated business income from nonexempt activities

Nonprofits also must demonstrate they are operating within the law by meeting annual reporting obligations. This requires the organization file what is essentially a federal income tax return with the Internal Revenue Service (IRS).

Filing Requirements

All tax-exempt organizations must file a return (IRS Form 990) each year with the IRS. Georgia does not require a state-level annual return, but does require that Georgia nonprofits file the form 990 with the state. Nonprofits with less income and assets can file simpler forms. Organizations with total assets under $500,000 (and annual gross receipts under $200,000) can file IRS Form 990-EZ. Smaller nonprofits with annual gross receipts of $50,000 or less can file the electronic postcard, IRS Form 990-N. This form saves small nonprofits significant time, as it can be filed online, and very little information is required for this form when compared to the 990 and 990-EZ. Form 990 requires the organization to report a significant amount of information, both within the form and within the 19 different related schedules. Form 990-EZ requires less, as there are only five related schedules. But it still obligates the organization to considerable record-keeping, including information on:

• Contributions and other revenue
• Program accomplishments
• Employee compensation
• Lobbying activity

Penalties for Not Filing

Not only can the IRS levy penalties on nonprofits for failure to file their annual returns, but the IRS can fine nonprofits that fail to correctly provide all reporting requirements within their returns. Nonprofits that fail to file their annual 990 returns by the deadline of the tax year will face penalties of at least $20 per day, with a maximum fine of $10,00—or 5 percent of the organization’s gross annual revenue. For larger nonprofits, with more than $1,000,000 in annual revenue, the penalty is $100 per day with a maximum fine of $50,000. On top of these penalties, if the IRS requests the organization correct the tax return and the organization fails to do so, the IRS can levy fines on the person within the organization responsible for filing the return. The fine is $10 per day with a maximum of $5,000.

Revocation of Tax-Exempt Status

If the nonprofit fails to file its annual return for three consecutive years, or fails to file correctly for three years, the IRS automatically revokes the tax-exempt status of the organization. There is no appeal process for nonprofits; the status is terminated. An organization that loses it tax-exempt status may be required to file a corporate or trust income tax return, and pay applicable taxes. And donors will be unable to claim a tax deduction for any subsequent donations made to the organization. Further, Georgia nonprofits will lose any tax exemptions received at the state level, including sales and use tax exemptions. Notice of the organization’s revocation of tax-exempt status will be widely available to the public, both within the IRS exempt organization search and on the nonprofit reporting website Guidestar. To reinstate tax-exempt status, the organization must reapply. Meeting annual requirements is a significant responsibility for nonprofits, and mistakes can be costly. Nonprofit organizations should consult with an experienced Georgia nonprofit attorney to ensure they’re meeting their obligations under the law. For more information on this area, see our overview of closely held business.