Nonprofit record retention and potential consequences
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The IRS( ) requires that 501(c)(3) nonprofits engage in good record keeping and record retention because it wants to make sure they are not abusing its tax-exempt status. Therefore, they should be careful to keep their records safe and destroy them properly when it is legally allowed. Nonprofits aren’t required to disclose their documents to the general public.
Some types of records must be kept permanently to show the IRS( ) a full account of the business the nonprofit is engaging in. These include the organization’s bylaws, business licenses, documents relating to intellectual property or real estate, correspondences from the IRS( ), grant applications and notices, must be kept permanently. These are documents that the nonprofit will need to use to show its work and to continue doing business.
While some documents only need to be kept for a period of years (i.e. employment records, payroll records, bank records, contractual records, previous years tax returns) it may be in the best interest of the organization to keep those records for a little longer than necessary or even keep them permanently. For example, 990 forms, the forms that tax-exempt nonprofits file with the IRS( ) that contains their financial information, needs to be kept for at least 7 years after it has been filed. The IRS( ) can conduct an audit for a year up to 3 years after it is filed.
However, since this is the form that reflects the organization’s financial holdings during a certain period of time, it can be useful for tracking the long term growth or spending of an organization.
When a tax-exempt nonprofit organization fails to comply with record-keeping laws, it is in danger of losing its 501(c)(3) tax-exempt status. This occurred just last year when the Urban Revitalization Coalition, Inc., an organization dedicated to supporting Donald Trump’s administration policies, failed to file a Form 990, and was placed on the IRS’s “Automatic Revocation List” in August. 501(c)(3)s are usually not permitted to participate in political campaigns, but the Urban Revitalization Coalition has ties to President Trump (its founders are associated with Trump’s attempt to reach minority voters). Their tax-exempt status was not revoked for participation in political events, but for failing to file a required series of forms with the IRS( ).
While it is unknown if the Urban Revitalization Coalition had a comprehensive record retention policy and if they adhered to it, this case helps illustrate why nonprofits need to have good record-keeping policies and comply with the IRS( ) when Uncle Sam comes asking questions.