Achieving tax-exempt status is a significant milestone for any nonprofit organization—but keeping it requires ongoing diligence. Many nonprofits focus on the approval process and assume the hard work ends there. In reality, the IRS expects tax-exempt organizations to meet specific compliance requirements every year.
The good news? Staying compliant doesn’t have to be overwhelming. Here are key areas to monitor:
File Your Annual Form 990
Every tax-exempt organization must file some version of the Form 990 each year. The correct form depends on your size and activities:
- Form 990-N: For small organizations (gross receipts $50,000 or less)
- Form 990-EZ: For organizations with less than $200,000 in revenue and less than $500,000 in assets
- Form 990: For larger organizations
- Form 990-T: Required if you make $1,000 or more from activities unrelated to your mission
Important: Failure to file for three consecutive years results in automatic revocation of your tax-exempt status.
Operate Within Your Stated Exempt Purpose
Your organization must continue to operate in alignment with the mission described in your IRS application. Activities that may jeopardize your exemption include:
- Allocating resources to programs unrelated to your mission
- Making significant program changes without notifying the IRS
- Using assets for private benefit or personal gain
If your mission evolves, transparency is essential—material changes should be reported to the IRS.
Avoid Private Inurement and Excess Benefit Transactions
Nonprofits exist to serve the public, not insiders. Prohibited activities include:
- Paying unreasonable compensation to executives or board members
- Providing excessive benefits such as loans or personal services
- Diverting assets for private use
Implement strong conflict-of-interest policies and document compensation decisions to ensure compliance.
Limit Political and Lobbying Activities
Organizations under 501(c)(3) face strict restrictions on political involvement. You may not:
- Endorse political candidates
- Fund political campaigns
- Use organizational resources to influence elections
Manage Unrelated Business Income Properly
Generating income from activities unrelated to your mission is permissible, but it must be handled correctly:
- Report unrelated business income (UBI) on Form 990-T
- Pay applicable tax on UBI
- Ensure that unrelated business does not dominate your operations
Excessive unrelated business activity can put your exempt status at risk.
Maintain Accurate Books and Governance Practices
Strong governance supports compliance and demonstrates accountability. Best practices include:
- Documenting board meetings and decisions
- Maintaining accurate financial records
- Adopting policies for conflicts of interest, whistleblowers, and record retention
- Ensuring board oversight of financial and operational activities
Key Takeaways
- File your Form 990 every year—missing three years means automatic revocation.
- Operate according to your mission and avoid unrelated activities taking over.
- Do not provide personal benefits to insiders.
- Stay clear of political campaigning.
- Report and manage unrelated business income properly.
- Keep governance strong with clear policies and accurate records.
Please contact the Not-for-Profit Niche team at Gilliam Bell Moser LLP for further guidance.
