Thousands of nonprofit organizations have their tax-exempt status revoked each year. Most of the revocations are involuntary and result in a time-consuming and costly reinstatement process. Have you taken the necessary precautions to ensure your nonprofit organization will retain its tax-exempt status?
At a minimum, nonprofit organizations should ensure they incorporate the following procedures into their operations:
- Confirm that the organization is acting in accordance with its mission – management and the board of directors should verify that its current activities and programs relate to the mission originally filed with the IRS;
- Elect a board of directors committed to the organization’s annual reporting requirements – the board of directors must be cognizant of the importance of its responsibility in the organization’s compliance with the IRS and state filing requirements;
- File the applicable annual information return within 5 1/2 months of the organization’s fiscal year-end – automatic revocation of an organization’s tax-exempt status occurs after three consecutive years without filing, so it’s paramount that Form 990, Form 990-EZ, or an electronic postcard (Form 990-N) is filed timely;
- File Form 990-T when necessary to pay required taxes on gross unrelated business income – nonprofit organizations are required to pay taxes on income of $1,000 or more from such activities as advertising revenue, merchandise sales, etc. that are not related to their tax-exempt status;
- Avoid engaging in excessive or prohibited lobbying activities – nonprofit organizations should consider establishing a separate, affiliated organization if it feels the need to engage in these activities;
- Disclose in Form 990 and in contribution letters to members and contributors the nondeductible amount of dues and contributions used for lobbying – nonprofit organizations are required to make this disclosure because dues and contributions used to pay for a political campaign or lobbying are not deductible by the payers; and
- Ensure the board of directors annually evaluates the organization’s employee compensation – excessive compensation can result in revocation, so compensation needs to be compared with industry averages and in line with the mission of the organization.
If a nonprofit organization’s staffing doesn’t possess the expertise to follow the proceeding procedures, hiring third-party professionals or a management company should be considered. Contact Flexible Accounting Services of the Triangle today and let our professionals assist you in implementing the preceding procedures. Don’t risk the revocation of your tax-exempt status.