Ask the Legal Expert about ... nonprofit status
Attorney John Durso, Esq. LeadingAge Legal Committee member since 1980
How can we make sure we keep our nonprofit status intact? What are the most common transgressions (inadvertent or not) which lead to loss of section 501(c) 3 tax exemption status?
As you know, there are many benefits from maintaining tax-exempt 501 (c) 3 status. When the IRS receives an application for exemption, it grants a preliminary tax-exempt status, but it requires the organization to show that it has meet the projected budgets and donations filed with its application. Subsequent filings with the IRS after several years of operations allows the agency to grant a permanent exemption.
An exempt organization can lose exemption by modifying the governance documents, or removing or modifying the charitable public benefit purpose. The exempt organization may run into trouble if it acts contrary to the governance documents. For example, the New York attorney general has taken the Trump foundations to court to challenge their exemptions because the foundations may have used their funds to pay the business expenses of the Trump for-profit business enterprises.
The IRS can challenge exempt status if executives of the organization receive compensation in excess of fair market value. Also, exempt organizations are prohibited from participating in elections. They cannot endorse or fund candidates running for public office.
Exempt organizations must file Form 990 every year. If an exempt organization's tax-exempt status is ever challenged by the IRS or state attorney general, the organization should retain legal counsel who specializes in exemption laws. Attacks seeking total loss of exemption are unusual but can happen if the rules granting the exemptions are not followed.
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