Non-profit organizations touch the lives of millions of individuals by advocating and providing services for those in need. These organizations, for the most part, survive by receiving contributions from the public. If organized and incorporated correctly under code section 501 these contributions are tax-exempt. The tax-exempt status results in the need for high regulation and monitoring to ensure that these organizations stay true to their mission and don’t abuse their tax-exempt status. The biggest of the watchdogs is the Internal Revenue Service. So, what happens when the IRS finds that a non-profit is conducting business outside the scope of their non-exempt status? Below we will summarize a few key factors within recent IRS Letter Rulings which revoked a non-profit organizations tax-exempt status.
In the first case, a tax-exempt organization, under IRS audit failed to produce support that it was operating for the exempt purposes it originally registered. Tax-exempt organizations must be operated exclusively for the exempt purposes it registered to do and at all times it must be able to furnish support of their activities.
Another non-profit failed to exclusively operate an exempt purpose. Instead the organization rented a building to the general public who were not of a charitable class.
The final organization failed both the organizational and operational test. The organization’s certificate failed to restrict their activity to one or more exempt purposes. Also, the organization could not prove that it did not benefit private interests such as the founder. The IRS did state that the activities appear to further charitable activities, but the bylaws explicitly stated that there could be a distribution of earnings to private shareholders, which is expressly prohibited under section 501.
As evidenced above, running afoul the non-profit rules will prove a costly mistake. Consultation with a tax professional in regards to non-profit compliance is an imperative step to ensure tax-exempt status is maintained .