Maintaining Tax-Exempt Status

Unfortunately, some nonprofits lose their tax–exempt status by not following the rules and regulations. This topic is covered here because more often than not it is due from failure to file IRS reports. There are other situations, though, that also jeopardize the tax exempt status of nonprofits, including AVOs.

According to the IRS your Tax-exempt AVO will jeopardize its status if it ceases to be operated exclusively for one of the exempt purposes identified under section 501(c)(3) of the Code. But what exactly does this mean? In its Life Cycle of a Public Charity publication, the IRS explicitly lists the actions in which an AVO may or may not engage and the obligations it is responsible for upholding. According to the IRS's compliance guide, a 501(c)(3) organization:

must absolutely refrain from participating in political campaigns of candidates for local, state, or federal office;

must restrict its lobbying activities to an insubstantial part of its total activities;

must ensure that its earnings do not inure to the benefit of any private shareholder or individual;

must not operate for the benefit of private interests such as those of its founder, the founder's family, its shareholders, or persons controlled by such interests;

must not operate for the primary purpose of conducting a trade or business that is not related to its exempt purpose, such as a school's operation of a factory;

may not have purposes or activities that are illegal or violate fundamental public policy;

must satisfy annual filing requirements.

Besides the preceding, it should be noted that failing to file an annual return (e-Postcard, or other 990) or notice for three years consecutively results in the automatic loss of tax exemption for an organization. As discussed in a preceding section, the loss of tax exemption means that you will have to begin paying corporate income tax on your annual revenue; you may even be subject to back taxes and penalties if your remitted payment is not calculated based on the effective revocation date of your tax-exempt status. Additionally, loss of this federal classification may result in the revocation of any other tax exemptions (such as PA sales tax) that have been awarded to your organization by the state. This also means that donors will not be able to receive a tax deduction for any contributions they make to your organization after the revocation date.

If you still have questions regarding compliance rules and procedures, please consult IRS Publication 557, Tax-Exempt Status for Your Organization and the Life Cycle of a Public Charity. The IRS provides through its Website invaluable information to your group regarding any other questions you may have including the following: Educational Products, Workshops and Seminars for Exempt Organizations offered; How to Stay Exempt tutorial; and StayExempt.IRS.gov companion Website. The IRS also offers a newsletter for exempt organizations called EO Update specifically geared toward tax-exempt organizations; this free publication can help you stay current on the latest developments in tax law that affect charities and non-profits, so take advantage of it if you can. You can subscribe to EO Update here.

Finally, for additional assistance, please consult a tax adviser. Tax-exempt status and tax law compliance are not matters that should be regarded lightly. If you are unsure of something, ask a professional; the loss of your organization's status should not be a risk you are willing to take. Good luck!

Next: Pennsylvania Reporting

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