FindLaw Network

White Plains: 914-686-7171
Chappaqua: 914-238-7171
East Hampton: 631-329-7171

Large Firm Skills
With Small Firm Service

Not-for-profits can run in to tax trouble

| Oct 26, 2019 | Tax Controversies |

Many people in White Plains and other parts of New York may wish to set up a not-for-profit corporation and then apply for an exemption from income taxes and, by extension, other state taxes as well. This is most often referred to as 501(c)(3) status.

The idea behind this wonderful tax benefit is that it allows people to perform work which promotes the common good and which, in many cases, relieves the government from some of its responsibilities.

Unfortunately, though, there are a handful of people in New York and other places who may try to game the system by applying for the exemption when, in reality, their business is either for profit or is otherwise ineligible. Likewise, an exempt corporation cannot engage in certain political activities, but many attempt to get around this provision of the law.

What this means is that the IRS, and other taxing authorities, watch the operations of a 501(c)(3) carefully. Even if it turns out to be innocent enough, the IRS will not hesitate to crack down and revoke the exempt status of a corporation which, in the IRS’s mind, is no longer eligible for the benefit.

A tax controversy of this nature can ruin an otherwise viable not-for-profit that is doing a lot of good for the community. After all, without the exemption, the organization must pay taxes just like any other business. Moreover, donors to the organization can no longer take their gifts as tax deductions.

Of course, the best thing a not-for-profit can do to protect their exempt status is keep their affairs in proper order and follow the law. However, this sometimes is more complicated than it may seem, and honest mistakes can happen. In other cases, a not-for-profit may be falsely accused of abusing its exemption. These sorts of situations may call for the assistance of a legal professional.