Consequences of Failure to Comply
The compliance manual that accompanies the “favorable determination letter” that the IRS will ultimately issue provides that the organization’s continued tax-exempt status will depend on its compliance with the applicable requirements “in operation”. The IRS is performing an increased number of audits of 501(c)(3) charities to monitor their operational compliance and continued worthiness for tax exemption. Loss of tax-exempt status would result in the nonprofit’s net income being taxed at the federal (and potentially also the state) level and donations no longer being tax deductible.
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