4 Common Nonprofit Compliance Problems

One of the major benefits available to charities operating in the United States is the option to apply for nonprofit status with the federal government through the IRS. This provides the organization with several great perks including tax exemption status, the ability to apply for public and private grants for funding, and some liability protection. However, it also requires a lot of diligent paperwork and documentation in order to remain in compliance with the terms of nonprofit status. It can be tricky to stay on top of it all if the charity has a small staff. Here are four common compliance problems that charities sometimes run into.

Compliance With State Laws

It's not enough to gain tax-exempt nonprofit status from the federal government. The organization also has to comply with local state laws as well. This can become a tricky bureaucratic process full of roadblocks but it's absolutely necessary before the organization can solicit or accept any donations. Additionally, it can be trickier to achieve nonprofit status on a state level than at a federal level.  

Filing the Proper Paperwork

One of the biggest issues that nonprofits run into, especially understaffed nonprofits, is filing all of the required paperwork correctly and on time. Maintaining nonprofit status requires filing a Form 990 annual tax return every year without fail. Failure to file may cause the organization to incur financial penalties and failure to file after three consecutive years will lead to the automatic revocation of nonprofit status.  

Staying Out of Politics

One of the terms of achieving and retaining nonprofit status is that the organization must stay out of politics. That means it must not become involved in any campaigning or lobbying for any political candidate. It also means the organization cannot openly endorse any political candidate even in statements, media, or social media posts. Failure to comply with this term can result in the withdrawal of tax-exempt status.  

Financial Transparency

A nonprofit organization is required to keep all net profits within the organization in order to maintain the charity's tax-exempt status. That doesn't mean the organization cannot profit financially. It just means that any individual cannot profit financially and any net profits earned must be cycled back into the organization for the purposes of maintaining operations and achieving the charity's mission statement. Unfortunately, there can be confusion about how profits are distributed and to whom and that requires complete financial transparency within the organization.

To learn more, contact a company that provides nonprofit compliance services.