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Organizational Management

Nonprofit Tax Compliance: Three Things You Need to Know

Artie Shlykov Avatar
Artie Shlykov
Published on March 19, 2019

This is a guest post by Elena Dedman, Business Development Manager at Tax Bandits.

You’ve been so busy with your regular programming that when you get the calendar reminder telling you to do your organization’s taxes, all you do is sigh and press “Remind me later”.

I’ll do it next week, you promise yourself.

However, as a tax professional, I know that all too often, next week turns into the week after… only for organizations to scramble when the deadline rolls around.

Added to this, you might also be questioning the necessity of doing it at all. After all, your organization was put in place to help people, not to scam taxpayers out of their money.

Unfortunately, while integrity may be one of your organization’s sacred values, that’s not the case across the board. Even in the case of organizations where the majority of the individuals involved are honest, there could be one bad apple who ruins things.

Nonprofit compliance laws are put in place to protect the public and ensure nonprofit organizations do not abuse their financial advantages. The ability to be exempt from federal and state taxes, along with having access to public funding, causes nonprofits to be held to a high standard by the government.

For these reasons and more, it’s important to follow the tips we list here to make sure your organization can continue to do the good you set out to do.

Not only will following these guidelines help keep you tax compliant, but it will also communicate to anyone who joins or serves your organization that you’re strict about ethics — making it less likely that any bad apples will fall into your yard.

Here are 3 things you need to do to keep your nonprofit tax compliant.

And as an added bonus, they’ll help you maintain a good name with the public and the government — it’s a win-win!

1. Keep records.

This tip comes straight from the source.

In their course designed to help organizations maintain exempt status, the IRS warns, “If you don’t keep accurate and detailed records of your organization’s activities, you won’t have the information you need to complete the filing requirements.”

But what records should you keep?

And for how long?

Glad you asked!

Here’s a list of documents you should keep for at least 3 years:

Financial Records and Account Information

For money coming in, or going out, collect and keep cash register receipts, bank deposit slips, receipt books, invoices, credit card slips, Form 1099-MISC documents, account statements, canceled checks, sales slips, petty cash slips, and any documents pertaining to investments or purchased assets.

Copies of any returns and attachments you send to the IRS

This includes not just your actual tax form, but also the records you used to prepare the returns, such as information about your organization’s programs, meeting minutes for the governing board and minutes for any standing committees

There are also records that you should keep permanently. These include:

  • Organizing document (Articles of Incorporation or your Charter)
  • Copy of Form 1023 (the exemption application you submitted)
  • Determination letter from the IRS

2. Keep it Real

By nature, nonprofit organizations tend to be friendly with one another because there isn’t competition for profit. Nonprofits are more likely to help and encourage each other, work together, and even offer each other advice.

While this can be great support, it can also lead to misinformation. While it’s tempting to rely on mentors within your industry, make sure that, when it comes to tax compliance, you’re consulting tax professionals.

Here are a few of the of the beliefs I’ve had to set straight at nonprofits over my years as a tax professional:

1. Form 990 has to be filed every year.

Somehow, it got around that this only needed to be done every three years. That is false: tax-exempt organizations are required to file Form 990 tax returns annually.

The confusion may have come from the fact that If an organization fails to file IRS Form 990 for three consecutive years, their tax-exempt status will be revoked.

Also, be aware that there are several different forms to choose from within the 990 suite, including 990N, 990EZ, and 990PF.

Know the difference and select the one that is appropriate for your organization.

2. IRS penalties are calculated based on an organization’s gross receipts.

Even if your organization used all its donations for the year and has no money left, you can still be penalized for failing to file. The IRS does NOT calculate penalties according to income.

Organizations must annually file Form 990, regardless of the amount of money that remains after the organization’s tax year has ended.

3. Nonprofits must report all contributions on IRS Form 990.

A tax-exempt organization filing IRS Form 990 must report all donations — meaning that  whether it’s change that someone dug out of their couch or a check the size of your car, you’ve got to reveal everything you received from donors.

You will also need to include contribution details for donations of $5,000 or more, and this fact may have been responsible for the idea that only substantial donations need to be reported.

4. Nonprofits must file Form 941 if they are an employer.

If you thought the 990 was the only form you were responsible for, think again.

If you employ someone to help your organization meet its goals, regardless if it’s just one person working 10 months or 10 people working 1 month, you must file Form 941 with the IRS.

Also known as the Employer’s Quarterly Tax Return, Form 941 is used to report employment taxes quarterly and assists with calculating the employer’s portion of Social Security and Medicare tax.

Note: If your organization has an annual liability for social security, Medicare, and withheld federal income taxes at $1,000 or less for the year, an organization can file IRS Form 944 instead of Form 941.

3. Keep shining

Turns out that the IRS did a study to find out what organizations that stayed in compliance with the IRS had in common. It yielded what may seem like pretty common sense information — you might already be doing these things by default.

Still, it bears repeating just in case. If you haven’t checked these things off your list, or maybe if you haven’t given them any recent attention or review, take a second look.

Tax compliant nonprofits have the following in common:

  • They have written mission statements.
  • They use comparability data when making decisions about compensation.
  • They have procedures in place for the proper use of charitable assets.
  • They have Form 990 reviewed by the entire board of directors.

The Bottom Line

If you’re taking away just one thing from this list of tips today, let it be that you MUST file your 990 Form with the IRS. That’s the most concrete thing you can do to help keep your organization tax compliant. If you’d like to learn more, please join my webinar on March 26th: 3 Ways For Your Organization to Maintain Tax-Exempt Status.

Read More: 5 Nonprofit Fundraising Laws You Should Know About


nonprofit tax complianceElena Dedman is a tax e-filing expert and nonprofit industry leader at TaxBandits. Throughout her career, Elena has helped thousands of nonprofits maintain compliance by assisting with development of many new programs – including a simplified 990-N e-filing process, state of the art public support calculation wizard, and more. She often challenges the status quo “we have always done it this way” to help nonprofits stay focused on what matters most – making a difference in the community.



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