Neglecting to file Form 990
The majority of nonprofit organizations must file Form 990 (or Form 990-EZ or 990-N) annually, an informational return required by the IRS to be filed by the 15th day of the fifth month following the end of the organization’s accounting period. Failure to file a return for three years consecutively can result in the loss of the organization’s tax-exempt status and the requirement to reapply for tax-exempt status.
Improper Reporting of Unrelated Business Income (UBI)
Since some nonprofits may generate income that is unrelated to their tax-exempt purpose, that income could be taxable and must be correctly reported. The most common example of UBI is advertising income, though other examples include renting retail space in a building owned by the nonprofit or selling parking spaces if the organization’s building is located next to an events venue.
UBI can be confusing to identify, but asking the following three questions will narrow it down:
- Is the activity a trade or business? (Does the activity produce goods or services in exchange for money?)
- Is it a regular activity of the nonprofit? (Typically this means more than once a year.)
- Is the activity unrelated to the tax-exempt purpose of the organization?
Answering “yes” to all three questions indicates that the income is most likely taxable.
Incorrectly Classified Workers
Most nonprofits classify workers either as employees or contractors. Failing to correctly classify a worker could result in penalties or unexpected tax liabilities.
Excessive Compensation
All officers and directors of nonprofits should be paid a reasonable rate, not an overly excessive salary that outmatches the organization’s exempt operations and fundraising efforts. Just as nonprofits must follow federal and state wage laws in regards to minimum wage, the upper end of the pay spectrum must be comparable to similar role compensations across the state.
Failure to Comply with State Solicitation Requirements
Organizations that solicit donations across multiple states may be required to register and file reports with each state. Missing deadlines can lead to penalties, and interfere with proper record keeping.
Misunderstanding Fundraising Regulations
It’s extremely important for nonprofits to provide proper disclosures to all donors, and to properly value any non-cash contributions. Failure to comply with fundraising regulations could result in penalties and fines.
Commingling of Funds
Mixing up nonprofit and personal funds makes it extremely difficult to correctly track and report financial information accurately. It can also result in both legal and tax issues.
No Proper Financial Oversight
One of the biggest sources of tax and legal troubles for nonprofits is the lack of a proper internal system to ensure financial accountability and transparency. Failure to instill a well-structured system in place with clear roles, responsibilities, and reporting can easily lead to fraud.
Seek Professional Advice to Ensure Your Nonprofit is Compliant
Asking for forgiveness is never a good strategy, even for nonprofits who are doing good works. The tax attorneys at Hackstaff, Snow, Atkinson & Griess are experts in guiding nonprofits through local, state, and federal regulations and ensuring they are operating in compliance. Contact us today for a free consultation.
