What activities can jeopardize a nonprofit organization's tax-exempt status?
IRS regulations prohibit 501(c)(3) public charities from specific types of activities and require certain levels of reporting and public disclosure. An organization that fails to abide by these rules may be placed under sanction or have its tax-exempt status revoked by the IRS. These regulations include:
- Private benefit/inurement --“ An organization may not permit an insider (someone with a personal or private interest in the organization) to benefit substantially from the activities of the organization.
- Lobbying --“ While 501(c)(3) organizations are permitted to engage in lobbying on some level, the amount of lobbying activities must be limited so that it's not a substantial portion of the organization's activities.
- Political campaign activity/electioneering --“ 501(c)(3) organizations and their representatives (while acting in an official capacity) may not campaign for or against candidates for elected office.
- Unrelated business income (UBI) -- “ An organization may lose its exempt status if it generates excessive income from a regularly-carried-on trade or business that is not substantially related to the organization's exempt purpose.
- Annual reporting obligation -- “ With the exception of churches and subordinate organizations, all 501(c)(3) public charities are required to file some version of the Form 990 with the IRS on an annual basis. While smaller organizations with gross receipts under $50,000 were previously exempt from this requirement, these charities must now file the Form 990-N (e-Postcard) each year in order to stay compliant.
- Operation in accord with stated exempt purpose -- An exempt organization is expected to operate in accordance with the charitable purpose or purposes outlined in its application for recognition of tax-exempt status (Form 1023 or 1023-EZ). An organization must notify the IRS of any substantial changes to its operating purpose.
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IRS [PDF]
Compliance Guide for 501(c)(3) Public Charities
Covers recordkeeping; activities that may jeopardize a charity's exempt status; required filings; governance considerations; changes to be reported to the IRS; required public disclosures; and resources for public charities.
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Nonprofit Risk Management Center
How to Lose Your 501(c)(3) Tax Exempt Status (Without Really Trying)
Provides a succinct overview of the six major activities most likely to cause an organization to lose its exempt status.
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Law For Change
Legal Resources for Social Entrepreneurs
Lots of legal advice, provided by lawyers on a range of topics for the nonprofit community.
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National Council of Nonprofits
Political Campaign Activities - Risks to Tax-Exempt Status
The National Council of Nonprofits provides a series of brief articles outlining activities that may place an organization’s tax-exempt status at risk. See them all here: https://goo.gl/qymP7x
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Nolo
Protecting Your Nonprofit Corporation's Tax-Exempt Status
A brief article describing reporting requirements and certain prohibited activities for tax-exempt organizations. From legal publisher Nolo.
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Hurwit & Associates
Protecting Your Tax-Exempt Status
Provides a list of proactive measures a nonprofit can take to ensure compliance with IRS regulations and public accountability.
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National Council of Nonprofits
Revocation of Tax-Exempt Status
Provides guidance for organizations that may have lost their tax-exempt status due to a failure to comply with the new annual reporting requirements for smaller nonprofits.
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Staff pick
IRS
Stay Exempt
Stay Exempt is an IRS microsite exclusively for 501(c)(3) organizations. The site includes a virtual workshop and a collection of online mini-courses on topics related to obtaining and maintaining tax exempt status for a nonprofit organization.