The IRS requires much more information from 501(c)(3) nonprofits these days and there are quite a few hurdles one has to conquer in order to obtain a 501(c)(3) status. Some key points to remember when running a 501(c)(3) nonprofit is that a nonprofit organization must serve the greater good and not any one individual or organization. This includes income or assets being provided or paid to officers, directors, or employees of said organizations. Don’t jeopardize your efforts of obtaining tax exemption by drawing attention from the IRS for making a few bad judgment calls.
One of the most common issues that occurs is when board members try to use their position on the board for personal gain. A good example of this is offering to sell a service for profit such as accounting services or contracting. Though often not done out of deliberate deceit, the IRS still views these actions as an inappropriate benefit.
A 501(c)(3) organization is also not allowed to engage in political activity and only in limited lobbying. Endorsing or opposing any candidate for public office or engaging in too much lobbying (seeking to influence a politician or public official) on an issue can raise red flags.
Another error commonly made by nonprofits is receiving too much unrelated business income. An activity is an unrelated business and subject to unrelated business income tax if it is a trade or business, regularly carried on or not substantially related to further the exempt purpose of the organization.
When applying for tax exemption, not only do you sign a very detailed contract with the IRS, you are also required to state the purpose of your business and provide a mission statement proposing how you will accomplish your purpose. Failure to understand the fine print of the contract you signed or not upholding the promised exempt activities, puts you at risk of losing your 501(c)(3) status permanently and incurring a hefty fine.