Nonprofit Tax Compliance: IRS Form 990
Why Your Organization Must File IRS Form 990 Annually to Maintain Tax-Exempt Status
Yes, nonprofit organizations must file an annual tax return—specifically the IRS Form 990—to maintain their tax-exempt status, and failure to file for three consecutive years results in automatic revocation. This annual filing is mandatory for nearly all tax-exempt organizations and is crucial for public transparency. While some smaller nonprofits with simple financials may attempt the filing themselves, most nonprofits prefer to work with a CPA or a specialized nonprofit accounting service to ensure accuracy, proper disclosure, and timely submission. A specialized service not only handles the Form 990 but can also advise the organization on other potential tax liabilities, such as state taxes, sales taxes, and Unrelated Business Income Tax (UBIT).
Key Takeaway
What tax form must a nonprofit file every year?
A nonprofit must file the IRS Form 990 every year to maintain its federal tax-exempt status.
What happens if a nonprofit doesn’t file its tax form?
A nonprofit’s tax-exempt status will be automatically revoked if it fails to file the required return for three consecutive years.
Besides the 990, what other tax might a nonprofit have to pay?
A nonprofit may have to pay taxes on Unrelated Business Income Tax, or UBIT, if it engages in activities outside its exempt purpose.
Q: Why do nonprofits, which are tax-exempt, still have to file tax returns?
A: Nonprofits file an annual return—known as the IRS Form 990—not to calculate income tax owed, but to provide information and maintain their tax-exempt status. Think of it as an annual compliance and transparency report. The IRS uses the Form 990 to ensure the organization is operating within its stated mission and complying with federal regulations. Furthermore, the 990 is a public document that provides donors, grantmakers, and the general public with a detailed overview of the organization’s finances, governance, and activities.
Q: What is the single most critical consequence of failing to file the Form 990?
A: The most critical consequence is the automatic revocation of your tax-exempt status. If a nonprofit fails to file the required Form 990 (or the shorter versions, 990-EZ or 990-N) for three consecutive years, the IRS will automatically revoke its 501(c)(3) status. Reinstating this status is a long, costly, and complicated process that can severely disrupt your operations and fundraising. This is one filing requirement that is truly essential.
Q: Can a nonprofit organization file the IRS Form 990 on its own?
A: Yes, some smaller nonprofits with relatively straightforward financial records and a simple organizational structure may choose to file the Form 990, especially the simpler Form 990-N (e-Postcard) or Form 990-EZ. If you have consistently updated and accurate financials, the process is streamlined. However, the Form 990 itself is a complex document that requires specialized knowledge of functional expense allocation and nonprofit accounting principles, making errors common for those without specific expertise.
“The IRS requires nonprofit organizations to file a 990 every year to maintain their tax-exempt status.”
Q: Why do most nonprofits choose to hire a CPA or accounting service for the Form 990?
A: Many nonprofits prefer to entrust the filing to a CPA or a specialized nonprofit accounting service because it guarantees accuracy and proper disclosure. These professionals are intimately familiar with the unique schedules and disclosure requirements of the Form 990. A major benefit of working with a nonprofit accounting service is that they often include the filing as part of their package of services. This frees the organization’s leaders to focus on their mission, confident that the required compliance is being handled by experts.
Q: What other taxes might a nonprofit have to file or pay?
A: Even with 501(c)(3) status, a nonprofit may be subject to several other taxes depending on its location and operations. A qualified accounting advisor can help you navigate these. Examples include:
- Payroll Taxes: As an employer, a nonprofit must withhold and remit federal and state income and payroll taxes (Social Security and Medicare) for its employees.
- State Taxes: Many states require an annual registration or filing similar to the Form 990 to maintain state tax-exempt status, and some impose income taxes on unrelated business income.
- Sales Taxes: Nonprofits are generally required to collect and remit sales tax on taxable goods or services they sell, unless a specific state exemption applies.
- Unrelated Business Income Tax (UBIT): If a nonprofit engages in a regular trade or business activity that is not substantially related to its exempt purpose, the income generated from that activity is subject to federal income tax.
By partnering with an experienced service professional, you gain access to the expertise needed to identify and manage all of these potential tax liabilities, ensuring comprehensive financial compliance.
Ensuring Continuous Tax-Exempt Status
While securing tax-exempt status is a major achievement for any nonprofit, maintaining that status hinges entirely on meeting your annual tax compliance obligations. The IRS Form 990 isn’t merely a document; it’s your organization’s essential public report card for governance, activities, and financial health. Since failing to file for three years leads to automatic status revocation, this is one area where the “do-it-yourself” approach carries significant risk. By relying on an experienced CPA or specialized accounting service, your nonprofit can confidently manage the complex demands of the Form 990 and all other potential tax liabilities, freeing your leadership to focus on the mission with complete peace of mind.
Brady Ware Nonprofit Advisors want to help you fulfill your mission with financial health and compliance services and a network of nonprofit consultants who specialize in strategic decision-making.
Disclaimer: This article provides general information and should not be considered professional financial or tax advice. Please consult with a qualified CPA or financial advisor for guidance specific to your organization’s needs.
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Nonprofit Tax Services
Matt specializes in providing strategic tax compliance and consulting for nonprofit organizations. He leverages his deep expertise in IRS reporting requirements to help nonprofits maintain their tax-exempt status while identifying opportunities for tax optimization.