Charities and 501(c)(3) Requirements and Duties

By Chad A. West, June 13, 2012 It’s easy for a charitable organization to maintain its tax exempt status, but if the organization isn’t careful, it can be just as easy to lose it. An organization can lose its 501(c)(3) status for a number of reasons, including failing to submit an annual report. IRS Yearly Reporting Requirements While most organizations are required to submit annual reports to the IRS, small “tax-exempt organizations whose annual gross receipts are normally $50,000 or less” are only required to submit the “e-Postcard,” a short, easy form that takes about five minutes to complete.

I handle the tax reporting for two organizations that I sit on the board for, Dash for the Beads 5K Run and Rock the Campus for a Cure, and the submission process couldn’t be easier. Small organizations can also complete Form 990 or Form 990-EZ (the forms filled out by larger charities), but most tend to take the easier reporting route and submit the e-Postcard. The e-Postcard is due “every year by the 15th day of the 5th month after the close of your tax year), so if your tax year ends on December 31, the e-Postcard is due on May 15 of the following year. If a tax-exempt organization messes up and forgets to file the e-Postcard, the IRS is forgiving and will send a reminder to the Director of the organization. There is no penalty assessment for late filing the e-Postcard, but an organization that fails to file a return for three years in a row will automatically lose its tax-exempt status.

Duties of the Organization Director The IRS encourages charities to adopt and enforce policies to ensure that fundraising efforts meet federal and state law requirements and solicitation materials are accurate, truthful, and candid. Directors have a duty of care to their organizations which requires them to discharge their responsibilities in good faith – with the care that an ordinary, prudent person in a similar position would exercise. If a Director faithfully fulfills his duty of care, he will not be liable for any harm to the charity resulting from his decisions. It could easily be determined that a Director fails to discharge his duty of care by failing to actively participates in the charity‘s governance, failing to review a charity’s financial statements and annual returns, failing to ensure that solicitation materials are accurate, and failing to ensure that an organization’s tax exemption is maintained. Thus, a director who sits back and does nothing cannot claim lack of responsibility for a poor decision made by others in the organization. In some instances, a director who fails to maintain an organization’s tax exempt status may be liable to the organization for breach of fiduciary duty, a civil action. And unfortunately, an organization that lost its tax exempt status, but still solicits donations while touting that it’s tax exempt, could find itself in hot water – the organization itself could be liable for fraud, and may be required to return the donations to the misinformed donors.


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