A Checklist For Nonprofits – How to Maintain Tax-Exempt Status
Receipt of a Determination of Tax-Exempt Status from the Internal Revenue Service (“IRS”) is definitely a significant accomplishment for any charitable organization. After what can be a long, arduous application process, once an organization receives tax-exempt status the last thing they want to do is lose it. The following is a checklist for nonprofits to use to help maintain their hard-fought tax-exempt status:
Follow All Governing Documents
The Articles and Bylaws of the organization typically set forth specific requirements regarding the day to day operations of the organization. These requirements were reviewed by the IRS and need to be followed. The Board of Directors needs to meet when it is supposed to. In addition, the meetings need to be properly noticed and conducted in accordance with the Bylaws. The prohibitions against private inurement must be strictly adhered to. All policies adopted regarding conflicts of interest, records retention, acceptance of gifts, whistleblowers, dealings with Designated Nationals and Blocked Persons and Entities also must be followed. (If the organization does not have any such policies, they should adopt and then follow them.) Checklists, procedures and training sessions should be established so that all of the Directors, staff and volunteers know the requirements of the governing documents.
Timely File All Required Annual Filings
Each tax-exempt organization must file some version of IRS Form 990 annually. Failure to file Form 990 can lead to revocation of the organization’s tax-exempt status. In addition, Arizona corporations, including nonprofits, must file an Annual Report. Failure to file the Annual Report can lead to involuntary dissolution of the corporation. Procedures should be adopted to ensure timely filing of these documents.
Monitor Activities and Practices of Directors, Staff and Volunteers
Whether the activity is a Director acting without the direct authority of the Board of Directors, a volunteer illegally using copyrighted material in a presentation, a staff member campaigning for a candidate in the name of the organization, confidential or private information obtained by the organization being disclosed over social media, or the organization failing to properly categorize an employee or volunteer, various activities may cause an organization to run afoul of IRS requirements. The organization must educate itself regarding those requirements and establish measures to ensure that activities done in its name, whether by Directors, staff or volunteers, are authorized and meet the applicable IRS requirements.
Stay Current Regarding IRS Requirements
In addition to becoming familiar with IRS Publication 557 – Tax-Exempt Status for Your Organization (available on-line at www.irs.gov/pub/irs-pdf/p557.pdf), each tax-exempt organization should subscribe to Exempt Organizations Update at www.irs.gov/charities-non-profits/subscribe-to-exempt-organization-update. The Exempt Organizations Update provides free e-mail updates from the IRS regarding policies, services and other information that impact tax-exempt organizations.
This checklist is a general overview. While it is a good start, it may not cover all situations. Every tax-exempt organization needs to work with its own Board, staff, volunteers and outside professionals to create a framework that will enable the organization to preserve its status as a tax-exempt organization.