In: Accounting
What reasons may cause a 501(c)(3) public charity to lose its tax-exempt status?
What is the process of for an organization to regain its tax-exempt status once it is lost?
Q. What reasons may cause a 501(c)(3) public charity to lose its tax-exempt status?
Answer:
As per section 501(c)(3) a Tax Exempt status is granted to organizations. But any organization can lose it if he did any activities one of the following activities:
1) Private Benefit: 501(c)(3) is given by govt to do activities serves in public interest and it should be for the general public without doing any discretion among them. any activities which are done for the benefit of any individual or organization or not in the public interest will directly affect its status as tax-exempt.
2) Political Activity: There is a prohibition not to involve directly or indirectly any political activities or contribution to benefits of the political activity.
3) Lobbying: 501(c)(3) organization are allowed to do some lobbying activities but it should not be substantial in nature else it will affect the tax-exempt status of the organization.
4) Unrelated Business Income: Having too much-unrelated business income may also affect the tax-exempt status of the organization. if an organization is earning from an unrelated business or trade it has to pay tax on that unrelated income and file Form 990-T.
5) Annual Reporting: Every tax-exempt organization needs to file there annual return with respective form and details about its tax-exempted activity as well as its unrelated business income except churches and church-related organizations. Defaulting to this for 3 consecutive years will automatically remove their tax-exempt status.
6) Activity stated for exempt purposes: Each organization needs to do the activities stated in the application of tax-exempt status. Stoping of these activities will lead the organization to lose the tax exemption.
Q What is the process of for an organization to regain its tax-exempt status once it is lost?
Answer:
In case of tax-exempt status Automatically revoked: Organization needs to file an application with suitable application fee for reinstatement of tax-exempt status. On application, IRS will check that if the organization meets the requirements. On compliance with all requirement, IRS will issue a new determination letter and update the database for the same.