Tax-exempt organizations are not subject to income tax, but they are required to file Form 990 (or Form 990-EZ/990-N) annually to maintain their status. Form 990 is a public document that donors, rating agencies, and state regulators use to evaluate an organization's governance and financial health.
1. Failing to File for Three Consecutive Years
The IRS automatically revokes tax-exempt status for any nonprofit that fails to file Form 990 for three consecutive years. Reinstating tax-exempt status is an expensive, time-consuming process that requires filing Form 1023 again.
2. Misreporting Executive Compensation
Nonprofits must disclose salaries paid to officers, directors, and key employees. Misreporting compensation or paying excessive salaries (above fair market value) can result in excise taxes and audits.
3. Unrelated Business Income Tax (UBIT)
If your nonprofit generates income from activities unrelated to its exempt purpose (such as selling merchandise or renting space), that income may be subject to UBIT. NGO managers must track these revenue streams separately and file Form 990-T if required.