Don’t Let the IRS Take Away Your Nonprofit Status!

Running a nonprofit is fulfilling—but staying compliant with IRS rules is critical. One wrong move, and your tax-exempt status could vanish. Here are the biggest pitfalls nonprofits face and how to avoid them:

?? Failing to File IRS Form 990 – The IRS requires nonprofits to file Form 990 annually. If you miss three consecutive years, your tax-exempt status is automatically revoked—no warnings, no second chances. Solution? Mark your calendar and file on time, every time. Even small organizations with revenue under $50K can file the 990-N postcard version in minutes. If you’re behind, file ASAP to avoid penalties.

?? Using Funds for Personal Expenses – Nonprofit money belongs to the mission, not personal luxuries. The IRS looks for red flags like using nonprofit funds for rent, personal bills, or excessive salaries. Keep finances separate and track every dollar. Establish strict policies to ensure transparency and accountability. A well-organized financial system protects not just your tax-exempt status but also your nonprofit’s reputation.

?? Engaging in Political Activity – While nonprofits can educate the public on policy issues, directly endorsing candidates or donating to political campaigns is a major violation. The IRS draws a hard line between advocacy and political engagement. Nonprofits can host forums or encourage civic participation, but they must remain neutral. If your organization wants to engage in lobbying, consider registering as a 501(c)(4) social welfare organization.

?? Generating Too Much Unrelated Business Income – If revenue doesn’t align with your mission, the IRS might view your nonprofit as a taxable business. For example, a food bank selling discounted meals to support its programs is fine, but running an unrelated for-profit enterprise is not. If your organization earns unrelated business income, you may need to pay taxes on it or risk jeopardizing your nonprofit status. Ensure that your revenue streams align with your mission to avoid unnecessary scrutiny.

?? Private Benefit & Inurement – Nonprofits must serve the public, not private individuals or insiders. Giving favorable deals to board members, excessive compensation, or allowing a founder to profit from the organization’s activities raises serious concerns. Ensure fair salaries and transparent financial transactions by following strict conflict-of-interest policies. Proper governance prevents legal troubles and maintains trust with donors and stakeholders.

?? What Happens If You Lose Your Tax-Exempt Status? Losing tax-exempt status comes with serious consequences:

• Your nonprofit must pay taxes like a for-profit business.
• Donors can no longer deduct their contributions.
• Grants and funding opportunities may disappear overnight.

Reinstating your tax-exempt status can be a long and complicated process. If it was revoked due to a simple paperwork mistake, you may be able to get reinstated quickly. However, the best strategy is prevention—stay compliant from the start.

Final Thoughts: Stay Compliant, Stay Mission-Focused Running a nonprofit isn’t just about helping people—it’s about playing by the IRS’s rules.

?? Biggest Takeaways: ? File Form 990 on time—every year. ? Keep nonprofit money separate from personal funds. ? Stay out of politics (unless legally structured for it). ? Ensure all business activities align with your mission. ? Follow conflict-of-interest policies and pay fair salaries.

Because one mistake can turn "tax-exempt" into "tax disaster." Stay compliant, and your nonprofit can keep making an impact—without the IRS knocking on your door.

Don’t leave your nonprofit’s future to chance! Download our FREE Compliance Checklist today to protect your tax-exempt status and stay in good standing with the IRS. Click the picture to download the checklist.

About the Author

Danielle Parks is a passionate financial advocate and the founder of Parks Projects NJ, where she helps businesses, nonprofits, and individuals achieve financial clarity and long-term success. Specializing in everything from bookkeeping and tax planning to strategic business consulting, Danielle crafts personalized financial strategies designed to drive growth and sustainability. Her client-centric approach ensures that each solution is tailored to meet the unique needs of the people and organizations she works with.

With a deep commitment to empowering her community, Danielle partners with organizations like the Trenton Track Club, Holistic House & Community Healing Foundation, and Resilient Student Athlete to create opportunities for financial education and growth. Danielle is driven by her mission to break the stigma around finances and help others take control of their financial futures, whether that’s through thoughtful tax planning, clear financial coaching, or structured business consulting.

When she’s not advising clients or developing financial plans, Danielle is focused on the growth of Parks Projects NJ, a business where innovation meets financial expertise. Above all, Danielle believes in creating lasting relationships with clients, guiding them toward the confidence and clarity they need to make informed financial decisions.