How Tax-Exempt Statuses Can Be Revoked Part 3

According to The Nonprofit Almanac 2015, 1.41 million nonprofits were registered with the Internal Revenue Service in 2013. That same year, nonprofits accounted for 5.4 percent of the country’s gross domestic product, coming in at 905.9 billion dollars. In all, nonprofit organizations make up a huge part of our country’s GDP and overall economy. Despite the high number of entities in this field, the rules behind achieving and retaining a tax-exempt status are often viewed as complicated and sometimes unclear. In cases like this, contacting your Maryland tax attorney can be a prudent maneuver. JDKatz was formed with the intention of helping citizens with interpreting and utilizing tax law. Our attorneys specialize in all aspects of our tax system, from simple tax preparation questions to navigating tax evasion penalties. If you’re in need of representation, we can help!

Many nonprofit organizations who qualify for tax-exempt status fall under (510)(c)(3). Today, we’ll look at the last two tenants that nonprofits should follow to retain their tax-exempt status.

Annual Reporting

Although tax-exempt entities do not have to pay a federal income tax, many of them are still required to submit reporting forms that account for their activities. Based on a company’s assets, the reporting form varies. Many charities are required to file these reporting forms annually, although organizations such as churches can seek exemption. While the requirements vary, nonprofits can check the IRS website or consult their local tax experts for help.

The Pension Protection Act of 2006 brought new changes for tax-exempt organizations. One big difference is that almost all tax-exempt entities must file an annual return with the IRS or face punishments. A span of chaos ensued, involving IRS agents reaching out to organizations to inform or remind them of the changes. Companies that did not respond or file a return had their tax exemptions revoked in 2011. Typically, any 501(c) organization that does not file a 990 form for three consecutive years will automatically have their exempt status revoked.

Continual Nonprofit Activities

Organizations that hold a tax-exempt status are expected to continually execute their nonprofit activities in a consistent manner. Reducing or stopping the activities that the IRS is expecting you to do can lead to revocation. Typically, a change in direction may lead an entity to focus on differing aspects within their organization. Informing the IRS about these changes is essential for preventing big headaches in the future. At any point, failure to uphold the activities that granted the original 501(c)(3) exemption will lead to a loss of that exemption. While there is nothing inherently wrong with changing directions, failing to report the changes can equate to tax fraud charges. Keeping up to speed on your reporting is essential for long-term success!

Although the six tenants we have described can often be viewed as complicated or convoluted, they can be followed to ensure successful operations. If you’re looking for professional tax advice, JDKatz is here to help! Our firm offers the best tax attorneys for Maryland residents, assisting in all aspects of tax law. Contact us today to see how we can help you!