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Preserving Your Tax-Exempt Status

Your nonprofit has received a letter from the IRS recognizing its tax-exempt status. Congratulations! The next challenge is maintaining that status. The most effective step you can take to protect your nonprofit is to consult an attorney with experience representing nonprofit and charitable organizations. Another important step is making sure that your nonprofit maintains appropriate records. Generally, you should keep copies of your organizing documents, the Form 1023 application that you submitted to the IRS, your exemption letter, any returns that you file with the IRS (including the documents the returns are based on), and meeting minutes for the governing board and any committees. You should also talk to your attorney or accountant about the types of financial records you should keep and the bookkeeping system you should use.

If your nonprofit is a 501(c)(3) organization, you should also be aware of the following pitfalls:

  1. Private Benefit/Inurement – A 501(c)(3) organization’s activities must be directed towards an exempt purpose, not to the private interests or benefit of any individuals or insiders (such as board members or employees). If your organization’s mission has changed, you should inform the IRS.
  2. Lobbying – While a 501(c)(3) is allowed to do some lobbying, the IRS imposes limits on how much of its resources can be devoted to contacting members or employees of legislative bodies for the purpose of proposing, supporting, or opposing legislation.
  3. Political Activities – Public charities may not participate in political campaigns.
  4. Unrelated Business Income – Earning too much income from business activities that are unrelated to your nonprofit purpose can jeopardize your exempt status.
  5. Annual Reporting – Don’t forget to file your Form 990! The IRS may revoke your tax-exempt status for repeated failure to file. Your
    state will also have periodic filing requirements.

For more information, visit the following sites:

https://www.stayexempt.irs.gov/ – The IRS maintains this site of basic information for exempt organizations.

/wp-content/uploads/sites/3215/2016/05/p598.pdf – Publication 598 addresses unrelated business income.

https://www.irs.gov/Charities-&-Non-Profits/Annual-Reporting-and-Filing – This site provides more detail on Form 990.

https://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Charities,-Churches,-and-Educational-Organizations-Political-Campaign-Intervention – For information on participation in political campaigns.

Blog disclaimer: This site is for informational purposes only – it is not legal advice. Nothing on this site establishes an attorney-client relationship with any reader, nor is it guaranteed to be current, accurate, or complete. If you need legal advice, consult an attorney.


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