Compliance Guide For 501(c)(3) Tax-Exempt Organizations

Internal Revenue ServiceTax Exempt andGovernment EntitiesExempt OrganizationsCompliance Guide for501(c)(3) Tax-ExemptOrganizationsWhy keep records?What records should be kept?How long should you keep records?What federal tax reports and returnsmust be filed?What disclosures must a 501(c)(3)organization make?

50Why keep records?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2Monitor Programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2. . . . . . . . . . . . . . . . .2Prepare Financial StatementsPrepare Annual Returns and Tax Returns. . . .3. . . . . . . . . . . . . . . . . . .3Identify Sources of ReceiptsComply with Racial NondiscriminationRequirements (Private Schools) . . . . . . . . . . . . . . .3Record Deductible Expensesfor UBIT Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4What records should be kept?Supporting Documents.4. . . . . . . . . . . . . . . . . . . . . . . . .5How long should you keep records?Records and Timeframe Periods.7. . . . . . . . . . . . . .7Accounting Timeframe Periodsand Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8What federal tax reportsand returns must be filed?Form 990 Series.Form 990 Filing ExceptionsSchedules A and BForm 990-T9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9. . . . . . . . . . . . . . . . . . . .9. . . . . . . . . . . . . . . . . . . . . . . . . . . . .10. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10Employment Tax Returns. . . . . . . . . . . . . . . . . . . . . .11What disclosures must a501(c)(3) organization make?.12Public Inspection of Annual Returnsand Exemption Applications . . . . . . . . . . . . . . . . .12Sale of Free Government InformationCharitable Contributions—Substantiation and Disclosure. . . . . .13. . . . . . . . . . . . . . .14IRS assistance and information . . . . . . . . . . . . . . . . .15Specialized Assistancefor Tax-Exempt OrganizationsGeneral IRS AssistancePublicationsForms. . . . . . . . . . . . . . . .15. . . . . . . . . . . . . . . . . . . . . . . .16. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

1(c)(3)Federal tax law provides tax benefits tononprofit organizations recognized as exemptfrom federal income tax under section 501(c)(3)of the Internal Revenue Code (IRC). It requiresthat most tax-exempt organizations must complywith federal tax law to maintain that status andavoid penalties.This IRS Publication 4221 presents generalcompliance guidelines for recordkeeping, reporting, and disclosure requirements that apply toorganizations that have tax-exempt status fromfederal income tax under section 501(c)(3) of theIRC. Content includes references to the statute,Treasury regulations, and other IRS publicationsand IRS forms with instructions. Publication 4221is neither comprehensive nor intended to addressevery situation.To learn more about compliance rules andprocedures that apply to organizations exemptfrom federal income tax under section 501(c)(3)of the IRC, see Publication 557, Tax-Exempt Statusfor Your Organization. For assistance on 501(c)(3)compliance, you may also want to consult atax adviser.1

Why keep records?In general, an organization must keep books andrecords to show that it complies with tax rules. Theorganization must be able to document the sourcesof receipts and expenditures reported on Form 990,Return of Organization Exempt From Income Tax.See Prepare Annual Returns and Tax Returns. If anorganization does not keep required records, it maybe unable to show that it qualifies for exemption.Thus, the organization may lose its tax-exempt status. In addition, an organization may be unable tocomplete its returns accurately and may be subjectto penalties. See FILING PENALTIES FOR 990 SERIES onpage 10. A good recordkeeping system will alsoenable an organization to monitor the progress ofprograms and aid in the preparation of financialstatements and returns.Monitor ProgramsRecords can show whether programs are improving,which programs are successful, and what changesan organization may need to make. Good recordsmanagement may be a contributing factor to thesuccess of a program.Prepare Financial StatementsIt is important to maintain revenue and expensestatements and balance sheets to prepare accuratefinancial statements. These statements can help anorganization when working with banks, creditors,and contributors and funding organizations.2

Prepare Annual Returns and Tax ReturnsRecords must support income, expenses, andcredits reported on Form 990 series and other taxreturns. Generally, these are the same recordsused to monitor programs and prepare financialstatements. Also, books and records of exemptorganizations must be available for inspection bythe IRS. If the IRS examines an organization’sreturns, the organization may be asked to explainitems reported. A complete set of records willspeed up the examination.Identify Sources of ReceiptsOrganizations may receive money or property frommany sources. Records can identify the sources ofreceipts. Organizations need this information toseparate program from non-program receipts,taxable from non-taxable income, and to completeSchedule A of Form 990 noted in section Whatfederal tax reports and returns must be filed?Organizations that check box 10, 11, or 12, Part IV,of Schedule A, must keep records that show howmuch support they receive from specific contributors.Comply with Racial NondiscriminationRequirements (Private Schools)Private schools must keep records that show thatthey have complied with requirements relating toracial nondiscrimination. For more information, seePart V, Schedule A, of Form 990, SupplementaryInformation – Organization Exempt Under Section501(c)(3).3(c)(3)

Record Deductible Expensesfor UBIT PurposesAn organization may overlook deductible expenseswhen it prepares its unrelated business income tax(UBIT) return (Form 990-T, Exempt OrganizationIncome Tax Return) unless it records the expenseswhen they occur.What recordsshould be kept?Except in a few cases, the law does not require aspecial kind of record. An organization can chooseany recordkeeping system, suited to its activities,that clearly shows the organization’s income andexpenses. The type of activities an organizationconducts affects the type of records necessary tokeep for federal tax purposes. An organizationshould set up a recordkeeping system using anaccounting method that clearly shows its incomefor the tax year. See Accounting Timeframe Periodsand Methods on page 8. If an organization hasmore than one program, the organization shouldkeep a complete and separate set of records foreach program.A recordkeeping system should generally include asummary of transactions. This summary is ordinarily written in an organization’s books (for example,accounting journals and ledgers). The books mustshow gross receipts and functional expenses, aswell as deductions and credits. For most smallorganizations, the checkbook is the main source4

for entries in the books. In addition, an organizationmust keep documentation that supports entries inthe books.Supporting DocumentsOrganization transactions such as contributions,purchases, sales, and payroll will generate supporting documents. These documents — grant applications and awards, sales slips, paid bills, invoices,receipts, deposit slips, and canceled checks —contain information to be recorded in accountingrecords. It is important to keep these documentsbecause they support the entries in books andthe entries on tax and information returns.Organizations should keep them in an orderlyfashion and in a safe place. For instance, organizethem by year and type of receipt or expense.GROSS RECEIPTSGross receipts are the amounts received from allsources. An organization must keep supporting documents that show the amounts and sources of its grossreceipts. Documents that show gross receipts include:cash register tapes, bank deposit slips, receipt books,invoices, credit card charge slips, and Form 1099-MISC,Miscellaneous Income.PURCHASES, INCLUDINGACCOUNTING FOR INVENTORYPurchases are items bought, including any itemsresold to customers. If an organization produces items,it must account for any items resold to customers. Thus,for example, it must account for the cost of all rawmaterials or parts purchased for manufacturing into finished products. Supporting documents should show theamount paid, and that the amount was for purchases.Documents for purchases include: canceled checks, cashregister tape receipts, credit card sales slips, and invoices.These records will help an organization determine thevalue of its inventory at the end of the year. SeePublication 538, Accounting Periods and Methods, forgeneral information on methods for valuing inventory.5(c)(3)

EXPENSESExpenses are the costs an organization incurs (otherthan purchases) to carry on its program. Supportingdocuments should show the amount paid and thepurpose of the expense. Documents for expensesinclude: canceled checks, cash register tapes, accountstatements, credit card sales slips, invoices, andpetty-cash slips for small cash payments.EMPLOYMENT TAXESOrganizations that have employees must keep specificemployment tax records. See Publication 15, Circular E,Employer’s Tax Guide, for details.ASSETSAssets are the property, such as investments, buildingsand furniture that an organization owns and uses in itsactivities. An organization must keep records to verifycertain information about its assets. Records should show:- when and how the asset was acquired- whether any debt was used to acquire the asset- purchase price- cost of any improvements- deductions taken for depreciation, if any- deductions taken for casualty losses, if any, such aslosses resulting from fires or storms- how the asset was used- when and how the asset was disposed of- selling price- expenses of saleDocuments that may show the above information include:purchase and sales invoices, real estate closing statements,canceled checks, and financing documents. If an organization does not have canceled checks, it may be able toshow payment with certain financial account statementsprepared by financial institutions. These include accountstatements prepared for the financial institution by athird party. Account statements must be highly legible.The following defines acceptable account statements.6IF payment is by:THEN statement must show:checkcheck number, amount, payee’sname, and date the check amountwas posted to the account by thefinancial institutionelectronicfunds transferamount transferred, payee’s name,and date the transfer was posted tothe account by the financial institutioncredit cardamount charged, payee’s name, andtransaction date