Congratulations on securing the coveted 501(c)(3) tax-exempt status for your organization! This significant milestone not only acknowledges your commitment to serving the community but also comes with a set of responsibilities to maintain that privileged status. However, are you taking the right steps to maintain your Nonprofit’s Tax-Exempt status? As you embark on this journey of nonprofit leadership, it’s crucial to understand that obtaining tax-exempt status is just the beginning. The real challenge lies in safeguarding it through ongoing compliance with IRS regulations.

In this article, we delve into the critical aspects of maintaining your 501(c)(3) tax-exempt status. We’ll focus on the critical aspect of “Required Filings” within the realm of maintaining 501(c)(3) tax-exempt status. Understanding and fulfilling your responsibilities in this area is paramount to safeguarding your organization’s tax-exempt standing. We’ll delve into the specific filings mandated by the IRS, guiding you through the process and highlighting key considerations along the way.

Running an organization properly entails more than just pursuing your mission—it requires adherence to regulatory requirements and best practices. By mastering the intricacies of required filings, you’ll not only mitigate the risk of jeopardizing your tax-exempt status but also strengthen the overall governance and credibility of your organization.

Required Filings – Recordkeeping

Embarking on the journey of maintaining 501(c)(3) tax-exempt status requires meticulous attention to detail, starting with understanding the significance of “Required Filings.” Before delving into the intricacies of IRS forms and deadlines, it’s imperative to establish a robust recordkeeping system. Without meticulous documentation of an organization’s activities, fulfilling filing requirements becomes an uphill battle. Accurate records not only facilitate compliance but also contribute to organizational
transparency and accountability.

A. Permanent Records

Among the foundational elements of recordkeeping are Permanent Records, essential documents that underpin an organization’s legal and tax-exempt status. These include the organizing document (such as Articles of Incorporation or Charter), a copy of Form 1023 (the exemption application), and the IRS determination letter. Maintaining these documents ensures clarity and
legitimacy in the eyes of regulatory authorities.

B. Retention of Returns and Attachments

In addition to Permanent Records, organizations must retain copies of all returns and attachments submitted to the IRS. This includes not only financial records but also information pertaining to organizational programs and governance. Meeting minutes for the governing board and standing committees, such as the executive or compensation committee, are invaluable components of recordkeeping. The IRS recommends retaining copies of returns and supporting information for at least three years following their submission.

Required Filings – Financial Records

Central to effective recordkeeping is the maintenance of accurate financial records.

What kind of financial records do I need to keep?

1. Financial Records – Money Coming In

To accurately track revenue sources, it’s crucial to keep detailed records of all funds received by the organization. This includes cash register receipts, bank deposit slips, invoices, credit card slips, and Form 1099-MISC documents sent to the IRS. These records should be retained for at least three years after the return is due or filed, allowing for potential amendments or IRS inquiries. Additionally, certain stakeholders, such as grantors or state agencies, may require longer retention periods for specific records.

2. Financial Records – Money Going Out

Equally important is documenting expenses incurred while operating the organization and its programs. Save documents such as account statements, canceled checks, credit card sales slips, and invoices to provide a clear picture of financial transactions. For organizations involved in producing and selling items, maintaining records of materials purchased is essential for inventory valuation. Like income records, expense documents should be retained for at least three years after filing the return.

3. Financial Records – Employment Tax Records

Employment tax records, including salary, wage, benefit, and tax withholding documents, constitute a separate category of financial records. While these may seem like “money going out,” they are critical for tax compliance and should be retained for a minimum of four years. Refer to Publication 15 (Circular E), Employer’s Tax Guide, for comprehensive guidance on employment-related recordkeeping.

4. Financial Records – Asset Records

Asset records provide insight into the organization’s holdings, including investments, buildings, and furniture. Document acquisition details, purchase price, improvements, depreciation, and disposal information to ensure accurate asset management. Examples of asset record documents include purchase and sales invoices, real estate closing statements, and financing documents. Retain these records for as long as you own the asset, plus three years after disposal.

Asset records should show (https://www.stayexempt.irs.gov/se/files/downloads/MaintainingExemptStatus_Print2021.pdf)

• When and how the asset was acquired

• Whether any debt was used to acquire it

• Purchase price

• Selling price and expense of sale

• Cost of any improvements

• Deductions taken for depreciation or for casualty losses, such as fires or storms

• How the asset is or was used

• When and how the asset was disposed of

Required Filings – Record Keeping System

Selecting an appropriate record-keeping system is crucial for nonprofit compliance and efficiency. While the IRS doesn’t prescribe a specific system, consider these key factors:

1. Flexibility – Choose a system adaptable to your organization’s needs, allowing for easy tracking of income, expenses, and multiple programs.

2. Program-Specific Tracking – Ensure the system can segregate financial data for each program, aiding accurate reporting and accountability.

3. Transaction Summaries – Maintain clear transaction summaries, whether through journals, ledgers, or modern software.

4. Compliance – Prioritize adherence to IRS regulations and accounting standards to facilitate accurate reporting.

5. Accessibility and Security – Ensure records are easily accessible yet secure to authorized personnel, whether stored digitally or physically.

By selecting a system aligned with these principles, nonprofits can effectively manage finances while maintaining transparency and compliance.

Bottom Line

Maintaining 501(c)(3) tax-exempt status is a vital aspect of nonprofit governance, requiring diligent attention to required filings and recordkeeping. By implementing robust record-keeping systems and adhering to IRS regulations, organizations can ensure transparency, accountability, and continued compliance.

We can Help Secure Your Nonprofit’s Future

Don’t let the complexities of maintaining 501(c)(3) tax-exempt status overwhelm you. Entrust your organization’s compliance to HWA Alliance of CPA Firms, Inc. (HWAA). Specializing in nonprofit taxation, our experienced professionals offer tailored solutions to safeguard your tax-exempt status with precision and expertise. Contact us today for a consultation, and let’s ensure your mission thrives securely.