It’s easy for a 501(c)(3) organization (nonprofit) to maintain its IRS tax-exempt status and it is just as easy to lose it. The IRS recognizes private foundations, churches, educational institutions, hospitals, and many other types of public charities.
501(c)(3) IRS Tax-Exempt Status Is a Privilege
IRS tax exemption status is a privilege, and your nonprofit organization can lose this status anytime if you’re not careful. There are 6 key areas to stay on the IRS’s good side and keep that tax exemption.
- Private benefit/inurement
- Political campaign activity
- Unrelated business income (UBIT)
- Operation in accordance with the stated exempt purpose(s)
- Annual reporting obligation
You can learn more about these six key areas here. If your nonprofit fails to file its annual return (Form 990) for three consecutive years, the IRS will automatically revoke your organization’s tax-exempt status. This automatic revocation happens by operation of law – there are no exceptions.
Check whether your nonprofit is tax-exempt
The IRS maintains a list of all nonprofits that are tax-exempt called, “Select Check,” which is updated regularly by the IRS. Check the list. If your organization is not listed, contributions to it are no longer tax-deductible to the donor(s).
What happens when a nonprofit’s tax-exempt status is revoked?
Revocation means that your nonprofit is no longer exempt from federal income tax and will have to pay corporate income tax on annual revenue. Learn more.
- The organization may be subject to back taxes and penalties for failure to pay corporate income taxes if the effective date of revocation was in a prior tax year.
- A revocation means that any state tax exemptions that your nonprofit received may also be revoked now. Some of these State Tax exemptions are exemptions for income tax, property tax, and sales/use tax. These State tax exemptions are dependent on your IRS Tax Exempt Status
- Revocation will result in your non-profit organization not being listed in IRS Publication 78, which is the official list of organizations eligible to receive tax-deductible charitable contributions.
- Donors will not be eligible to receive a tax deduction for their gifts to the organization after the revocation date.
- Most private foundations are unlikely to give a grant directly to nonprofits that are not tax-exempt because their guidelines normally require grantees to be recognized as tax-exempt public charities.
What if automatic revocation happened in error?
If you believe that your nonprofit’s tax-exempt status was automatically revoked in error, the IRS encourages you to contact its Customer Account Services (toll-free): (877) 829-5500. Remember, before calling the IRS, be sure to obtain copies of all documentation that you have showing a mistake was made (such as copies of correspondence to or from the IRS demonstrating that an annual return, IRS Form 990 was filed within the last three years). What to do if you believe your organization is listed as revoked in error?
Remember that once a charitable nonprofit is no longer tax-exempt, contributions to it are not eligible for a tax deduction. Always be transparent with donors about the tax status of your nonprofit.
It is important to be compliant and follow the rules all the time to maintain your tax-exempt status with IRS. Reach out to our team today to get the help you need to maintain this status so that you can focus on supporting the ‘Cause’ that is close to your heart.