Maintaining your Tax-Exempt Status So You Can Focus on Charitable Work

While charitable organizations focus on their charitable work, they can easily (and sometimes inadvertently) lose their tax-exempt status under IRC Sec. 501(c)(3). In order to maintain tax-exempt status, charitable 501(c)(3) organizations should focus on maintaining compliance in the following six areas:

1. Private Benefit: Charitable 501(c)(3) organizations must maintain activities that are directed toward an exempt purpose. These activities should not serve the private interests of any individual or limited group.¹  
2. Lobbying: Charitable 501(c)(3) organizations may not devote more than an insubstantial part of its activities to influencing legislation.²
3. Political Activity: Such organizations are prohibited from participating in political campaigns on behalf of or in opposition to candidates running for office.³
4. Unrelated Business Income: Charitable 501(c)(3) organizations are limited in the amount of income they derive from a regularly carried on trade or business that is not substantially related to the charitable purpose of the organization.⁴  
   In recent private letter rulings, the IRS revoked the exempt status of an organization that regularly carried on business with the general public in a manner similar to organizations operated for profit.⁵ Similarly, the IRS revoked the exempt status of an organization that owned a non-exempt coffee shop where the coffee shop’s income from sale proceeds was not exclusively and primarily dedicated to the organization’s exempt purpose.⁶ 
5. Operation in Accord with Stated Exempt Purpose: Charitable 501(c)(3) organizations must pursue activities which accomplish the exempt purpose(s) set forth in the organization’s initial application.⁷
   In recent private letter rulings, the Service recently revoked the exempt status of organizations that were inactive for several years and did not engage in substantial activities accomplishing one or more of the stated exempt purposes .⁸
6. Annual Reporting Obligations: Charitable 501(c)(3) organizations must file annual information returns (Form 990 series) to report their activities. Organizations that fail to electronically file complete returns (including all required schedules) for three consecutive taxable years automatically lose their exempt status. The Service publishes a list of organizations whose exempt status was automatically revoked.⁹

An organization may seek to have its exempt status retroactively reinstated to the date of revocation where the organization can show it exercised ordinary business care and prudence in determining and attempting to comply with its annual reporting requirements. Retroactive reinstatement is available through the following programs:

1. Streamlined retroactive reinstatement: Available to organizations that were eligible to file Form 990-EZ or Form 990-N returns for the three years that caused their revocation;
2. Retroactive reinstatement process (within 15 months): Available to organizations not eligible for streamlined retroactive reinstatement that make the submission within 15 months of the later of (a) the date on the organization’s revocation letter, or (b) the date the organization appeared on the Revocation List on the IRS website; or
3. Retroactive reinstatement process (after 15 months): Available to all other organizations with reasonable cause.
   Organizations that are unable to demonstrate they exercised ordinary business care and prudence with respect to their reporting obligations, may still have their exempt status reinstated from the postmark date of their application.¹⁰

Charitable organizations are often focused on their meaningful work within our communities. However, a misstep may result in the revocation of tax-exempt status. By focusing on compliance within the above six areas, charitable organizations will help to ensure their exemption status is maintained.

¹Treas. Reg. 1.501(c)(3)-1(d)(1)(ii)
²Treas. Reg. 1.501(c)(3)-1(b)(3)
³Treas. Reg. 1.501(c)(3)-1(b)(3)
⁴Treas. Reg. 1.501(c)(3)-1(e)(1)
⁵PLR202321009 (May 26, 2023)
⁶PLR202321005 (May 26, 2023)
⁷Treas. Reg. 1.501(c)(3)-1(c)
⁸PLR202321011 (May 26, 2023) and PLR202321013 (May 26, 2023)
⁹“Revocation of 501(c)(3) Determinations,” Internal Revenue Service. (March 24, 2023), https://www.irs.gov/charities-non-profits/charitable-organizations/revocations-of-501-c3-determinations.
¹⁰“Automatic Revocation – How to Have Your Tax-Exempt Status Reinstated,” Internal Revenue Service. (Aug. 30, 2022), https://www.irs.gov/charities-non-profits/charitable-organizations/automatic-revocation-how-to-have-your-tax-exempt-status-reinstated

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