Can Your Organization
Lose Its Exempt Status?
by Matthew Los, CPA
If you have jumped through all the hoops to become a 501(c)(3) organization, you want to make sure you maintain your tax-exempt status. Each year, the IRS revokes organizations' exempt status for a variety of reasons. The following are some of the most common activities that could cause your organization to lose its tax-exempt position:
Annual Reporting Obligation
While 501(c)(3) organizations are exempt from Federal income tax, most of these organizations have 
information reporting obligations under the tax code to ensure that they continue to be recognized as tax-exempt. Public cha rities generally file Form 990, Form 990-EZ or Form 990-N (online). If an organization does not file its annual return for three consecutive years the IRS will automatically revoke its tax-exempt status. If an organization finds that its exempt status has been automatically revoked due to non-filing and it wants to be reinstated, it will need to reapply and pay the appropriate user fee.
Private benefit/inurement
Private Benefit - A non-profit differs from a for-profit
organization in that it does not benefit from the private interests of any individual or organization. A non-profit must serve the public good and not serve private interests. Profits/surpluses are not paid to individuals, except for reasonable compensation to staff. Any profits/surplus needs to be channeled back into the organization's activities.
Private Inurement - this goes a bit further in that it prohibits the non-profit from allowing any of its income to be paid to insiders such as officers, directors or employees. This includes improperly selling property below the fair market value. Be very careful to avoid these conflicts of interest.
Lobbying
An organization lobbies when it attempts to influence types of legislation. A 501(c)(3) has to be very careful if it engages in lobbying. Some lobbying is permitted under certain circumstances; however this is tricky so it may be better to not lobby at all.
Political campaign activity
501(c)(3) organizations cannot endorse or oppose any candidate for public office. This includes contributions to political campaign funds and public statements for or against a candidate. A section 501(c)(3) organization may engage in some activities to promote voter registration, and encourage voter participation/education, if
conducted in a non-partisan manner.
Activities that generate too much unrelated
business income
The area of unrelated business income (UBI) is complex but basically means that your organization may not receive income from a regularly-carried-on trade/business that is not related to your mission.
If your organization grosses more than $1,000 of UBI during the year, it must file IRS form 990-T, Exempt Organization Business Income Tax Return. Too much UBI can threaten your tax-exempt status. You could be in trouble if UBI takes up more time and attention than your mission.
The above activities give you a brief example of activity that could jeopardize your tax-exempt status. The IRS has a website devoted specifically to these topics and other issues affecting tax-exempt organizations. Please go to www.stayexempt.irs.gov for a more in-depth review of these topics or give us a call if you have any questions.
