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As much as any business, a nonprofit can suffer an IRS audit

There's big money in nonprofits. That might seem hard to believe when applied to this sector of the U.S. economy. After all, when Georgia readers think of nonprofits – also known as charities – they likely call to mind their local place of worship, the community food shelf, or some other operation that seems to always be just scraping by year to year.

Statistically, however, nonprofit organizations abound. At last count, there were nearly 1.6 million of them operating in the U.S. – both public charities and private foundations. In 2014, they accounted for more than 5 percent of the country's gross domestic product. And, where any sum of money is in play, it is bound to draw the attention of the IRS.

Threats to tax-exempt status

Anyone who has been through the process knows that obtaining a 501(c)(3) tax-exempt designation is not simple. To clear the hurdles, the petitioning organization must show that it is organized in accordance with federal law and is operating exclusively to further one of the purposes identified as being tax exempt.

Additionally, once charitable status is granted, the organization has to continue to attest that it is operating according to the law by filing the 990 tax information form every year. Failing to do so can send up a red flag and require action to respond to an IRS audit. That isn't the only way to attract IRS attention, however, and considering how complicated getting 501(c)(3) status is, it is worth knowing how to keep it.

The ongoing standards to meet include:

  • Showing that the operation doesn't benefit any private interest
  • Earnings recorded don't benefit "any private shareholder or individual"
  • Not providing excess benefit to organization insiders (e.g. Reduced rent or low-interest loans)
  • Abiding by certain restrictions on political campaigning and legislative lobbying activities

IRS allegations of violation of any of these standards could result in serious financial penalties. Worse, it could result in the loss of that coveted tax-exempt status. Know your rights and if you have questions, consult an experienced attorney.

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Located in Atlanta, The Peck Group, LC, represents clients nationwide. Regionally, we are committed to serving clients in Fulton County and throughout the state of Georgia.