Tax Duties of Tax-Exempt Organizations

If your nonprofit organization fails to report properly to the IRS, it's tax-exempt status can be revoked.

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Tax-exempt organizations are not required to pay federal taxes, but many tax-exempt organizations are required by law to file annual reports with the IRS. If a tax-exempt organization, except for churches and church-related organizations, fails to report to the IRS for three consecutive years, their tax-exempt status is automatically revoked.

Types of Tax-Exempt Organizations

Many kinds of organizations can achieve the tax-exempt status, including:

  • Charitable organizations
  • Social welfare organizations
  • Agricultural or horticultural organizations
  • Labor organizations
  • Business leagues (trade associations)
  • Social clubs
  • Fraternal societies
  • Employee benefit associations or funds

Under the Pension Protection Act of 2006, most tax-exempt organizations must file informational returns with the IRS every year.

Informational Returns Filing Requirements

The IRS Form tax-exempt organizations must file depends on their financial activity. For example, IRS Forms 990-series are used for the purpose of filing informational returns. IRS Forms 990-EZ, 990-PF and 990 are also used by various kinds of tax-exempt organizations for tax-reporting purposes.

Filing of the 990-series IRS forms must be submitted before May 15th of the fiscal year. If an organization expects a delay in filing, they may file for an extension.

Employment Taxes

If a tax-exempt organization has employees, it must apply for a federal Employer Identification Number (EIN). It will also need to withhold taxes from their employees’ paychecks. Employment taxes include:

  • Federal income tax withholding
  • Social Security and Medicare taxes
  • Federal unemployment taxes

Only certain exempt organizations need to file federal unemployment taxes, but acquiring an EIN, tax and wage compliance, and informational return filing are mandatory for most exempt organizations.

IRS Audits and Compliance Checks

Charities and non-profit organizations are examined by the IRS to ensure compliance with the tax laws. An examination can be a field audit, an office/correspondence audit, or a compliance check (which is not an audit). Before the examination, the exempt organizations will receive either a letter or a phone call from the IRS.

In a field audit, an IRS agent visits the organization’s premises to review information and examine the functioning of the organization. In an office/correspondence audit, the exempt organization is required to send certain documents to the IRS by mail. In a compliance check, a letter is sent by the IRS to gather information. A compliance check is not an audit.

Tax-exempt organizations should be careful to follow all rules that apply to them to avoid having their status revoked by the IRS.

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