Tax season often brings anxiety to nonprofit leaders because even small mistakes can have significant consequences. Many organizations face hurdles such as missing deadlines or choosing the wrong tax form. The same goes for submitting inaccurate information, overlooking state filing obligations.
Not seeking expert help makes things worse, as well. This is why we wrote this extensive guide on how taxes can differ between states.
Accurate tax filing is not just an administrative duty; it is an essential part of sustaining your nonprofit’s mission. When nonprofits file timely and correct returns, they maintain compliance, preserve public trust, and continue to secure funding for their causes.
Mistake 1: Missing Filing Deadlines
One of the most common errors nonprofits encounter is missing the filing deadlines for IRS tax returns. Investopedia has a lot to say about this, which you can read about here. Nonprofits are required to file an annual information return, which is typically due on the 15th day of the fifth month after the end of their fiscal year. Late or missed filings can lead to severe consequences.
Consequences of Late or Missed Filings
- Revocation of Tax-Exempt Status: Failure to file for three consecutive years can result in automatic revocation of tax-exempt status. This can effectively shut down your operations and harm your reputation.
- Fines and Penalties: The IRS may impose fines for late filings, which can become a significant financial burden, especially for smaller organizations with limited budgets.
- Donor Concerns: If donors learn about missed deadlines or penalties, it can undermine their confidence in your nonprofit’s management.
Action Tip:
Create a filing calendar, set up reminders, and designate a team member (or use project management software) to track all deadlines. This proactive approach helps ensure that your organization never misses a crucial filing date.
Mistake 2: Filing the Wrong Form
Nonprofits must determine which version of Form 990 to file. The IRS offers three forms, each designed for organizations of different sizes:
- Form 990-N (e-Postcard): For small nonprofits with gross receipts of $50,000 or less.
- Form 990-EZ: For nonprofits with gross receipts under $200,000 and total assets under $500,000.
- Form 990: For larger organizations that do not qualify for the simplified forms.
Choosing the wrong form can lead to either over-reporting or under-reporting financial details, which may result in errors, scrutiny during audits, or even challenges to your nonprofit’s credibility.
Tips for Determining the Right Form:
- Review Your Finances: Evaluate your total gross receipts and asset levels each fiscal year to confirm which form you are eligible to file.
- Consult Guidelines: The IRS website provides detailed instructions and eligibility criteria for each Form 990 variant. It’s essential to review these guidelines annually.
- Consider Future Growth: If you anticipate that your organization’s income may increase, plan ahead and prepare for the possibility of transitioning to a more comprehensive form.
Action Tip:
Regularly review your financial thresholds and maintain a close dialogue with your accountant. By staying informed on your financial status, you can ensure you file the appropriate form every year.
Mistake 3: Incomplete or Inaccurate Information
A common pitfall in nonprofit tax filings is submitting incomplete or inaccurate information. Even a minor error on your Form 990 can trigger an IRS audit or delay the processing of your return.
Examples of Common Errors:
- Data Entry Mistakes: Mistakes in numerical entries, such as misstating total revenues or misclassifying expenses.
- Omitting Required Attachments: Failing to include schedules or supporting documents that provide context for your financial statements.
- Inconsistent Records: Discrepancies between the financial information reported on your tax return and your internal records.
How to Avoid These Errors:
- Double-Check Your Data: Before submitting your return, have multiple people review the completed forms. Peer reviews or external audits can catch errors that one person might miss.
- Use Reliable Software: Invest in nonprofit accounting software designed to streamline tax preparation and reduce human error.
- Maintain Organized Documentation: Keeping thorough, accurate, and up-to-date financial records can simplify the process of filling out your return.
Action Tip:
Implement a checklist system to verify all data entries and required attachments before submission. This extra step can save time and prevent costly mistakes.
Mistake 4: Forgetting State Tax Obligations
While federal filing requirements are the most well-known, many nonprofits overlook state-specific tax obligations. States have their own filing deadlines, reporting formats, and registration requirements that can differ significantly from federal rules.
State-Specific Requirements to Keep in Mind:
- Charitable Solicitation Registrations: Many states require nonprofits to register to fundraise, with annual renewals and detailed financial disclosures.
- State Income Tax Filings: Although most nonprofits are exempt from federal income tax, certain states may have tax reporting requirements for unrelated business income or other financial activities.
- Local Reporting Rules: Some cities or counties require additional filings for local compliance, especially if your organization operates in multiple jurisdictions.
Action Tip:
Compile a list of all states where you operate or solicit donations. Ensure that you are aware of each state’s specific deadlines and filing requirements. Updating your compliance calendar with state obligations can help prevent oversights.
Mistake 5: Not Seeking Professional Help
Many nonprofits try to navigate the complexities of tax filings entirely on their own. However, attempting to manage these tasks in-house without proper operational support can lead to critical oversights that jeopardize compliance and strain your team’s resources.
Why Not Seeking Help is a Mistake:
Relying solely on internal efforts for tax filing and financial management can be risky. Administrative oversights—such as misplaced documents, incorrect data, or missed deadlines—can result in costly penalties and even the revocation of your tax-exempt status. When your team is juggling multiple responsibilities, critical details can easily be overlooked.
The Rekonect Advantage:
Rekonect offers tailored operational support specifically designed for nonprofits. By leveraging Rekonect’s services, your organization can benefit from:
- Efficient Record Organization: Rekonect helps set up and maintain structured systems for storing and organizing all essential financial documentation. When tax season arrives, having your records neatly arranged makes the filing process much smoother.
- Structured Deadline Management: With Rekonect’s guidance, you can implement a well-organized compliance calendar. This ensures that all required deadlines—from federal IRS filings to state registrations—are clearly tracked and met.
- Streamlined Processes: Rekonect works with your team to standardize administrative tasks, reducing the risk of errors and ensuring consistency in financial reporting and record keeping.
- Enhanced Accountability: By providing a structured operational framework, Rekonect empowers your staff to maintain high standards of accuracy, helping to prevent errors that might otherwise lead to audits or compliance issues.
Choosing to forego the expertise and organizational support that Rekonect offers means missing out on a proven system designed to keep your tax filings on track. Their dedicated approach transforms a complex, error-prone process into a well-organized operation that not only secures your tax-exempt status but also bolsters donor confidence.
Conclusion
Accurate tax filing is a cornerstone of nonprofit success. The five mistakes covered in this post—missing filing deadlines, filing the wrong form, submitting inaccurate or incomplete information, forgetting state tax obligations, and not seeking professional help—are common pitfalls that can have significant consequences on your organization’s operations and public trust.
By taking proactive steps such as setting up filing calendars, confirming the appropriate Form 990, double-checking your data, being aware of state-specific requirements, and considering professional advice, you can avoid these mistakes and position your nonprofit for sustainable success.
For more detailed guidance on managing your financial processes and ensuring robust tax compliance, explore the resources offered by Rekonect. Their support services are designed to help nonprofits streamline operations, maintain precise financial records, and focus on their mission without being bogged down by administrative challenges.
Need more information on nonprofit tax filing? You can contact Rekonect to get answers.