Posted On October 31, 2017

Protecting tax-exempt status if you have it

Gaining legal status as a nonprofit organization is not easy. The reason for this is simple. As we have noted before, where money is involved, the IRS has an interest in collecting all it believes it is entitled to by way of taxes.

Because of that, the government requires nonprofit organizations to jump through significant hoops to obtain the 501(c)(3) tax-exempt designation. To keep it, the organization must continue meeting specific criteria. If you as the operator slip up on that score, it can trigger IRS action that could require entering negotiations to settle disputed tax debt and protect the status as a tax-exempt entity.

What could lead to a loss of exemption

It might be useful to remind readers that nonprofit business is still business. While many operations are small, many are quite large and have a big influence on the economy. We also have different expectations of nonprofit groups. That’s one reason why, when leaders of charities are found to make seemingly exorbitant incomes for their work, it often creates a scandal.

As the IRS is swift to point out, to be exempt from taxation a 501(c)(3) organization must be religious, educational, scientific or literary in nature. Dedication to public safety, amateur sports and prevention of cruelty to children or animals can earn exempt status, too. In general, such organizations are all commonly considered charitable.

To sustain nonprofit standing, an organization’s operations:

  • Can’t benefit private interests, officers, directors or individual employees
  • Must limit lobbying for or against specific legislation
  • Are limited in their involvement in campaigns for political candidates

Additionally, those familiar with the nonprofit world should know that even though an organization may be tax exempt, it must still file an annual 990 form with the IRS.

In the end, 501(c)(3) status can be seen as a contract with the IRS, and consulting an experienced attorney may be necessary for the protection of rights.