Nonprofit organizations operate under the special privilege of tax-exempt status, allowing them to focus on their mission without the burden of federal income taxes. However, maintaining this status comes with strict IRS compliance requirements, including the annual filing of Form 990. When nonprofits fail to file their 990s correctly—or neglect them altogether—the consequences can be devastating.
In this post, we’ll explore real-life cautionary tales of nonprofits that lost their tax-exempt status due to 990 noncompliance and highlight important lessons on how to avoid the same fate.
The Small Charity That Disappeared Overnight
Case: A small educational nonprofit, focused on providing after-school programs to underprivileged children, operated successfully for over a decade. The leadership, comprised mostly of volunteers, didn’t realize that filing Form 990 was required, assuming that their small revenue exempted them from reporting obligations.
What Went Wrong: The organization failed to file Form 990 for three consecutive years. According to IRS rules, nonprofits that miss filing for three years automatically lose their tax-exempt status. The nonprofit was unaware of this requirement until their donations began to dwindle, as donors could no longer claim tax deductions for their contributions.
Consequences: Not only did the nonprofit lose its tax-exempt status, but it also faced a significant decrease in funding due to a loss of donor trust. This forced the organization to cease operations, leaving a major gap in services for the children it once supported.
Lesson: Even if your organization is small, the IRS requires you to file Form 990-N, 990-EZ, or 990 annually. Set reminders, maintain good records, and ensure you’re complying with all deadlines.
The Religious Organization That Ignored the Rules
Case: A religious nonprofit offering faith-based community services ignored IRS compliance, assuming that its religious designation exempted it from reporting requirements. Leadership operated under the misconception that religious organizations do not need to file Form 990.
What Went Wrong: While certain religious organizations, like churches, are automatically exempt from filing, other religious nonprofits (such as those involved in charitable, educational, or other community services) must still comply with IRS rules, including the annual 990 filing. After three years of failing to file, the IRS automatically revoked the organization’s tax-exempt status.
Consequences: The nonprofit was hit with surprise tax bills and penalties, forcing it to cut back on community programs. Worse, the reinstatement process proved time-consuming and costly. During the period of noncompliance, it also lost key grants and donations from foundations requiring proof of tax-exempt status.
Lesson: Don’t assume your organization is exempt from filing Form 990 based on its religious nature. Always double-check IRS guidelines to ensure your nonprofit understands its filing obligations.
How to Avoid Losing Your Nonprofit’s Tax-Exempt Status
Filing Form 990 isn’t just about checking a box—it’s an essential part of maintaining your nonprofit’s good standing with the IRS. Here’s how your organization can stay compliant:
- Know Your Filing Deadlines: Make sure your team is aware of the 990 deadlines and what type of form (990-N, 990-EZ, or 990) applies to your organization based on revenue.
- Keep Detailed Records: Regularly maintain accurate financial and operational records. This will make preparing your Form 990 easier and ensure accuracy.
- Engage Professional Help: If you don’t have the internal resources to handle Form 990 preparation, consider working with a nonprofit consultant, accountant, or tax professional who specializes in nonprofit organizations.
- Understand IRS Rules and Guidelines: IRS compliance rules can be complex. Make sure your team understands what’s required, particularly if your nonprofit engages in lobbying or receives large donations.
- Conduct Regular Governance Reviews: Your board of directors should be involved in the Form 990 review process. This ensures that your organization remains transparent and accountable, and that your governance disclosures are up to date.
Protect Your Nonprofit’s Future
Losing tax-exempt status can be catastrophic for any nonprofit, but the good news is that it’s avoidable with the right steps. Whether you’re a small charity or a large national organization, staying compliant with IRS Form 990 requirements is essential for protecting your mission, securing donor trust, and continuing your important work.
Don’t let compliance issues threaten your nonprofit’s future. At BryteBridge Nonprofit Solutions, we provide expert assistance to help your organization maintain compliance, accurately file Form 990, and avoid costly mistakes. Speak with a BryteBridge consultant today by calling 877-857-9002 and learn how we can support your organization and give you peace of mind.
