Post By: Kayla Matthews
Nonprofits are bound by a complex tangle of rules and regulations because of the federal and state support they have access to. Noncompliance can lead to steep penalties — like fines or loss of access to government grants. It can even result in your organization losing its 501(c)(3) status if you let it go on for too long.
It can be hard to know just what you need to do to stay compliant, especially if you’re new to the industry. Here are five of the most common compliance issues faced by nonprofits.
1. Filing an Annual Form 990
While nonprofits are exempt from many different taxes, they are not exempt from filing with the IRS. To stay compliant, nonprofits need to submit the appropriate tax information from the Form 990 series every year. It collects data on the income, expenses and function of a nonprofit.
If you don’t file this form annually, you may face steep financial penalties. It could also lead to the outright revocation of your nonprofit’s 501(c)(3) status and administrative dissolution of your corporation status.
If your nonprofit employs staff, you’ll also need to withhold income tax, maintain a W-4 for each employee and file a Form 941 each quarter. The exception would be if the IRS has requested you complete a different form.
2. Maintaining a License to Fundraise
Fundraising is regulated in most states. Any organization or individual that wants to raise money professionally will need to apply for a license to fundraise.
The process will vary from state to state, and you may need more than one license depending on what kind of fundraising you’re doing. For example, in Georgia, nonprofits need a special permit if they want to run fundraising bingo games.
3. Keeping Records Updated
All nonprofits need to keep certain records on hand to stay compliant. Your organization should maintain records of relevant donor information, expenses and grants received. You may need this information to complete your organization’s Form 990, and the IRS or certain governing bodies may request that information under certain circumstances.
Keeping these records stored, organized and digitized, if practical, will help ensure you have the information you need in case it is asked for.
4. Following IRS Auction Regulations
Is your nonprofit planning on holding an auction? If so, your organization will need to comply with IRS regulations.
You will need to provide certain tax-related information to those who donate goods to your auction, including the name of your organization, a description of the item donated, and a statement detailing what goods and services your organization gave in return. You shouldn’t include an estimated value — the donor will provide it when they write off their contribution on their taxes.
During the auction, you’ll need to keep good records of which items sold and how much they went for. You may also need to apply for a special auction-related fundraising license, depending on your state.
5. Maintaining State-Level Tax Exemption
Certain states allow for tax-exempt status, and applying for federal-level exemption doesn’t automatically transfer.
If you apply for state-level tax exemption, your organization will be bound by both state and federal regulations governing nonprofits — and failure to comply with either can lead to steep penalties. As a result, it’s just as important to keep on top of state-level tax exemption compliance as it is to maintain the documents you need to stay on good terms with the IRS.
Specific state regulations will vary depending on where your nonprofit is registered. If you need help, the IRS maintains a state-by-state list of relevant links.
Nonprofits are bound by a complex set of rules and regulations and can face steep penalties if they fail to keep compliant. A few mistakes, however, are more common than others.
Nonprofits need to file Form 990 every year and should maintain the documents they need to do so. Some organizations, depending on the state they’re registered in and how they fundraise, may need to apply for special licenses. All nonprofits should be sure they’re following state-level regulations regarding tax exemption, if applicable.
As long as you follow these guidelines, failure to be compliant should be less of a worry.