Obtaining a determination letter from the IRS is no guarantee that a nonprofit organization’s tax-exempt status is secure for the long run. Your nonprofit must meet additional requirements to maintain its exempt status.
Required filings and recommended recordkeeping
Although your organization is exempt from income taxes, it’s probably required to file an annual IRS Form 990-series return, reporting income and expenses. (Religious congregations and certain of their affiliated organizations are exempt from filing.) You also may need to submit unrelated business income and employment taxes returns.
To fulfill these requirements, the IRS advises nonprofits to maintain records of:
Money coming in. This includes, for example, cash register receipts, bank deposit slips, receipt books, invoices, credit card slips and any Form 1099 documents.
Money going out. Account statements, canceled checks, cash register receipts, credit card slips and invoices are all examples. Keep these documents for three years after the date the return is due or filed, whichever is later.
Employment taxes. Keep documents for at least four years that show salaries, wages, benefits and taxes withheld.
Assets your organization owns and uses. For assets such as investments, buildings, equipment and furniture, maintain purchase and sales invoices, real estate closing statements, canceled checks, financial account statements, and financing documents. Keep these for as long as you own the assets plus three years after disposal.
In addition, your permanent records should contain a copy of your organizing documents (such as the articles of incorporation), as well as copies of your exemption application and determination letter. Also keep copies of any returns and attachments you send the IRS and the records used to prepare the returns, including financial records, information about your programs, and board and committee meeting minutes.
Your nonprofit’s activities and public disclosure of information are also subject to compliance obligations. Your activities generally must be limited to those related to accomplishing your exempt purpose. Certain other activities — including prohibited political activity, lobbying, or private benefit or inurement — also can put your tax-exempt status in jeopardy.
Hopefully, you’re already aware of these limits on activities. You may not, however, be familiar with the IRS’s public disclosure requirements for nonprofits. You must make your exemption application, determination letter and the three most recently filed annual information returns available to the public on request. Provide copies immediately for in-person requests and within 30 days for written requests. You don’t have to respond to individual requests if you make the documents “widely available” — for example, as a PDF on your website.
Nonprofit organizations should keep copies of any returns and attachments sent the IRS and the records used to prepare the returns.
Provide these documents without charge, except for a reasonable copying fee and actual postage costs. If your nonprofit is a 501(c)(3) organization and files IRS Form 990-T, “Exempt Organization Business Income Tax Return,” you’re also required to make available the three most recent returns.
The disclosure requirement applies to the forms, attachments or separate items you sent with the forms, and any correspondence with the IRS about the forms. You don’t have to provide the internal books and records you used to prepare your forms. Form 990, Schedule B, “Schedule of Contributors” also is exempt from public inspection.
Keep the IRS informed
Finally, if you’re required to file an annual return, you must report name, address, and structural and operational changes on your return. If you decide to make material changes in your structure or activities, there may be tax consequences. Consult your tax advisor for advice on how to proceed in such circumstances.