How Do I Maintain Tax-Exempt Status?
For nonprofits, compliance is simple, but penalties are significant
By Doug Mentes, Esq. | Reviewed by Canaan Suitt, J.D. | Last updated on May 8, 2024Use these links to jump to different sections:
- Tax-Exempt Filing Requirements
- Penalties for Not Filing Annual Returns
- Revocation of Tax-Exempt Status
- Find Experienced Legal Help
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; and
- 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 to file what is essentially a federal income tax return with the Internal Revenue Service (IRS).
Tax-Exempt Filing Requirements
All tax-exempt organizations must file a return (IRS Form 990) each year with the IRS.
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 within the form and within the different related schedules. Form 990-EZ requires less, but it still obligates the organization to considerable record-keeping, including information on:
- Contributions and other revenue;
- Program accomplishments;
- Employee compensation; and
- Lobbying activity.
Penalties for Not Filing Annual Returns
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 $12,000—or 5 percent of the organization’s gross annual revenue. For nonprofits with more than $1,208,500 in annual revenue, the penalty is $120 per day with a maximum fine of $60,000.
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 organization’s tax-exempt status. There is no appeal process for nonprofits; the status is terminated.
An organization that loses its 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.
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.
Find Experienced Legal Help
Meeting annual requirements is a significant responsibility for nonprofits, and mistakes can be costly. Nonprofit organizations should consult with an experienced nonprofit attorney to ensure they’re meeting their obligations under the law. For additional information on this area, see our overview of closely held businesses.
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