A lot of hard work was put in to secure your organization’s nonprofit status. It not only means major financial benefits, but also protection for your donors. Securing this status comes with the responsibility of maintaining compliance with federal and state requirements. The penalties for not complying can be steep to your reputation and your bottom line. Do you know if all of your chapters are in good standing?
In our Chapter Rescue series, we’ve covered preventing and responding to chapter financial mismanagement and chapter financial fraud. Along with solidifying your chapter’s financial footing, providing them with the resources they need to be compliant can prevent future compliance crises.
Please consult with legal and financial counsel on federal and state compliance regulations. This article is intended to bring light to potential gaps in your compliance policies, we are not lawyers or accountants. Your organization’s approach to compliance depends on your legal relationship between National and your chapters, as well as which entity you’ve decided will take on the administrative responsibility.
Chapters that are their own legal entity are responsible for filing reports with state and federal agencies. Regardless of who has ownership, you will want to make sure that chapters are staying on top of it. Any potential compliance issues could reflect on your National brand, leaving you to handle the mess.
Chapter Federal Compliance
While federal compliance may be top-of-mind at National, chapters also need to understand that the penalties for non-compliance can be detrimental. As we mentioned, there are financial benefits to a nonprofit’s 501(c) status, like the exemption from federal corporate taxes. If your organization is found to be non-compliant, the IRS has the authority to revoke the tax exemption, Employer Identification Number (EIN), and impose daily fines.
If a chapter has failed to file its tax forms (Form 990) for three consecutive years, they will lose their federal tax-exempt status and will not be able to participate in the Group Tax Exemption. The chapter can remedy this by applying to have their status reinstated. Learn more on IRS.gov.
Chapter State Compliance
Ensuring your chapters are aware of state compliance requirements is equally important to compliance at the Federal level.
State standards are not one-size-fits-all. Enlist the counsel of a legal professional versed in the requirements of your chapter’s specific state. They may include:
- Filing an annual report
- Filing a corporate registration
- Maintaining a state tax exemption
- Maintaining a registered agent
The repercussions of falling out of compliance may include financial penalties and the loss of the chapter’s nonprofit corporate status. Chapters may need to file back reports and pay fees to keep or reinstate their status. Learn more by contacting the Secretary of State office that granted the articles of incorporation for the chapter.
Prepare Chapters for Federal & State Compliance
Being reminded of the penalties for non-compliance likely has you ready to amp up preventive measures to make sure it doesn’t happen to your chapters. Here are some ways you can better prepare your chapters for compliance:
Send annual reminders
Leverage email blasts to send out annual reminders to chapters that it’s time to file tax returns.
Get technology involved
Take advantage of technical resources like the IRS approved e-filer for forms 990N and 990EZ. They can display chapter status and send out reminders for you.
Have documents in order
Gather copies of each chapter’s IRS and state tax exemption determination letters, articles of incorporation, and bylaws. Encourage chapter leaders to upload to a file hub or portal for easy access and safe storage. This file library could also include critical documents like 990s, annual plans and chapter policies.
Have each chapter complete a compliance checklist or self-assessment to measure their performance against best practices. You can increase participation by offering financial incentives or awards for chapters.
Elevate your training
Review your chapter compliance training and provide educational resources to chapters explaining the requirements and why they need to take them seriously.
Avoid the pitfalls of chapter’s falling out of compliance by keeping communication and preparedness at the forefront. Whether the responsibility falls on you or your chapters, you will all need to be working together to meet federal and state compliance requirements.