FAQs - Nonprofit Industry

Non-profit status is a state law concept that may make an organization eligible for certain benefits, such as state sales, property and income tax exemptions. However, organizing a non-profit organization at the state level does not automatically grant the organization exemption from federal income tax.

To qualify as an organization exempt from federal income taxes, the entity must meet certain Internal Revenue Service (IRS) requirements as defined in the Internal Revenue Code (IRC). For example, to be considered tax-exempt under IRC section 501(c)(3), an organization must be organized and operated exclusively for exempt purposes set forth in IRC section 501(c)(3), and none of its earnings may inure to any private shareholder or individual.

In addition, the organization may not be an “action” organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.

The Internal Revenue Code (IRC) identifies certain categories of tax-exempt organizations including, but not limited to, the following:

• Charitable organizations – IRC section 501(c)(3)
  • Public charities
  • Private Foundations
• Civic leagues, local associations of employees and social welfare organizations – IRC section 501(c)(4)
• Labor, agricultural/horticultural organizations – IRC section 501(c)(5)
• Trade associations, business leagues and chambers of commerce – IRC Section 501(c)(6)

Form 990 was revised to reflect changes in the law and the increasing size, diversity and complexity of the tax-exempt sector. The redesigned form serves the tax compliance interests and the transparency and accountability needs of the states, the general public, and the local communities served by the organization.

The new form allows an organization to describe its tax-exempt accomplishments and mission upfront and provides more opportunities throughout the form for the organization to explain its activities.

Other major changes were made to the form’s summary page, governance section, and various schedules, including those relating to executive compensation, related organizations, foreign activities, hospitals, non-cash contributions and tax exempt bonds. A checklist of schedules was also added.

Certified public accountants adhere to the American Institute of Certified Public Accountants’ Code of Professional Conduct (the Code). The Code requires that all certified public accountants act with integrity, competence and independence. The value of an audited financial statement is derived from the CPA’s professional obligation to remain objective.

The independent auditor’s report is addressed to “those charged with governance.” Generally these individuals are identified as members of the following: the board of directors, the audit committee, the finance committee or a combination of all three. Those charged with governance can also include members of the organization’s management.

An independent audit may be required by an organization’s bylaws, certain donors, the state of Wisconsin for those organizations that receive in excess of $100,000 in contributions annually, and state and federal awarding agencies.

An audit of an organization’s financial statements may assure stakeholders, including donors, board members and the community, that their contributions and interests are properly managed and safeguarded.

The most prevalent type of audit is the financial statement audit. In a financial statement audit, the auditor has been engaged by the organization to provide assurance to the users of the financial statements, through the independent auditor’s unqualified report, that the organization’s financial statements present fairly, in all material respects, the financial position of the organization.

An engagement can include an audit of an organization’s system of internal control. In this case, the auditor can be engaged to assess the design and implementation of an organization’s internal controls over financial reporting, cash receipts and disbursements, and other transactions.

For tax years beginning after December 31, 2006, if an organization is required to file an information return or annual electronic notice and fails to do so for three consecutive years, the organization will lose its tax-exempt status as of the filing due date of the third year. To reinstate tax-exempt status, the organization must apply (or reapply) for tax-exempt status and pay the appropriate user fee.

Source: www.IRS.gov

No. As long as you filed Form 8868 by your organization's filing due date, then file the Form 990 as required by the extended due date, the organization’s tax-exempt status will not be automatically revoked during the extension period.

Source: www.IRS.gov

Failure to timely file the information return, absent reasonable cause, can give rise to a penalty under section 6652 of the Internal Revenue Code. Whether an organization qualifies for the reasonable cause exception to the penalty will be determined by the Internal Revenue Service on a case-by-case basis taking into account all relevant facts and circumstances.

The regulations provide that a request for abatement of penalties based on reasonable cause must be made in the form of a written statement, containing a declaration by the appropriate person that the statement is made under penalties of perjury, setting forth all the facts alleged as reasonable cause. This statement should be provided as an attachment to the Form 990. When requesting abatement of penalties for reasonable cause, your statement should include supporting documentation and address the following items:

• The reason the penalty was charged. The daily delinquency penalty may be charged for either a late filed return, an incomplete return, or both.
• Explain what prevented the organization from complying with the law, including:
• what prevented the organization from requesting an extension of time to file its return, if the organization did not request such an extension;
• how the organization was not neglectful or careless, but exercised ordinary business care and prudence; and
• what steps have been taken to prevent the same situation from occurring in the future?

Source: www.IRS.gov

If an organization whose gross receipts are less than $1,000,000 in a tax year files the Form 990 after the due date (including extensions) without evidence of reasonable cause, the Internal Revenue Service will impose a penalty of $20 per day for each day the Form 990 is late. The maximum penalty is $10,000, or 5 percent of the organization's gross receipts, whichever is less. The penalty increases to $100 per day, up to a maximum of $50,000, for an organization whose gross receipts exceed $1,000,000.

Source: www.IRS.gov

Apply on-line, over the phone or by fax or mail by fling Form SS-4 Application for Employer Identification Number.

Yes, there are user fees associated with the application.