Running a nonprofit means juggling many priorities, fulfilling your mission, engaging donors, and managing resources responsibly. But no matter how inspiring your work is, one administrative misstep can jeopardize your organization’s tax-exempt status. Maintaining compliance with the IRS and state requirements is essential to keeping your 501(c)(3) designation and protecting the trust your supporters place in you.
At HBL CPAs, we help nonprofits of all sizes navigate the complex rules around tax exemption, financial reporting, and governance. Here’s what every 501(c)(3) should know to stay compliant and avoid costly mistakes.
Understand IRS Requirements for 501(c)(3) Organizations
The Internal Revenue Service defines 501(c)(3) organizations as those “organized and operated exclusively” for charitable, religious, educational, scientific, or similar purposes. To keep this status, your nonprofit must meet ongoing federal requirements.
1. File Form 990 Annually
Every 501(c)(3) must file a version of Form 990 each year, even if the organization has little or no income. Missing three consecutive filings leads to automatic revocation of tax-exempt status. If you are unsure which version of the 990 series your organization should file, there is information on the IRS website, or HBL can help you determine which version is appropriate for you.
2. Avoid Private Benefit or Inurement
Nonprofits cannot use funds or assets to personally benefit board members, officers, or insiders. Paying reasonable salaries is fine, but excess benefits, loans to board members, or using donations for personal expenses are all prohibited. This may also include payments for travel for board members or employees that are not economy fares, etc. It’s a good idea to implement a process for similar types of payments to or on behalf of board members or key employees to document your assessment of the payment and why you don’t consider it to be private inurement. Documentation is always a good idea, and it can also memorialize the actions you took to be good stewards of the funds entrusted to your organization.
3. Limit Political and Lobbying Activities
While advocacy and education are allowed, direct political campaign involvement is not. Excessive lobbying or endorsing candidates can result in penalties or revocation of status. The IRS Political Activities Guide outlines these limits clearly.
4. Report Unrelated Business Income
If your nonprofit regularly earns income from activities not directly related to its mission, you must report and pay tax on that income using Form 990-T. Failing to track and separate unrelated business activities is unlawful and can draw unwanted IRS attention.
Common Mistakes That Lead to Revocation
Even well-run nonprofits can slip up on administrative details. Here are some of the most common compliance pitfalls:
- Missing Form 990 deadlines – The most frequent reason for losing exemption.
- Inadequate recordkeeping – Missing donor receipts, board minutes, or audit documentation.
- Improper use of funds – Using restricted donations for unrelated expenses.
- Failure to update the IRS – Not reporting changes in leadership, address, or structure.
- Private benefit or self-dealing – Allowing insiders to profit from nonprofit activities.
The IRS publishes a list of organizations whose status has been revoked, so it’s worth periodically checking your status using the Tax Exempt Organization Search.
Strengthen Governance and Recordkeeping
Good governance protects your mission and your status. A well-informed, engaged board of directors is one of your best compliance safeguards.
- Review bylaws annually. Make sure they reflect current operations and state requirements.
- Keep detailed meeting minutes. Document board votes, compensation approvals, and major decisions.
- Implement conflict-of-interest policies. Disclose and manage potential conflicts promptly.
- Maintain accurate records. Store financial statements, donation receipts, grant agreements, and corporate filings securely for at least seven years.
Transparency matters too. Your most recent Form 990 must be available for public inspection upon request, and many organizations post theirs voluntarily on Guidestar (Candid).
Stay Compliant at the State Level
Federal tax exemption doesn’t automatically cover state compliance. Each state has its own requirements for registration, reporting, and charitable solicitation.
Generally, nonprofits must:
- File annual or biennial reports with their Secretary of State.
- Maintain a registered agent and up-to-date contact information.
- Register before soliciting charitable donations (if required in that state).
Arizona’s Requirements
In Arizona, nonprofits must file an annual report with the Arizona Corporation Commission to maintain active corporate status. Organizations must also keep a statutory agent on record and update that information promptly when leadership changes.
Unlike many states, Arizona does not currently require a separate statewide charitable solicitation registration, but nonprofits that solicit donations should still comply with local ordinances and transparency standards set by the Arizona Attorney General’s Office.
HBL CPAs, headquartered in Tucson, regularly assists Arizona nonprofits with state filings, Form 990 preparation, and audit readiness, ensuring that organizations stay compliant both federally and locally.
Best Practices to Stay in Good Standing
- Develop a compliance calendar. Track due dates for IRS forms, state filings, and grant reporting.
- Review financial controls annually. Segregate duties, reconcile accounts, and verify donor restrictions.
- Schedule a governance check-up. Have your CPA or legal advisor review your bylaws and policies.
- Train your board. Provide education on fiduciary duties and IRS compliance basics.
- Conduct an annual audit or review. Even if not required, it helps demonstrate accountability to donors and regulators.
How HBL CPAs Can Help
At HBL CPAs, we’ve supported Arizona’s nonprofit community for decades with services tailored to the unique financial and regulatory needs of 501(c)(3) organizations. HBL CPAs can help you stay compliant, transparent, and mission-focused, so you can continue making a difference in your community.
Learn more about our Nonprofit Accounting Services or schedule a consultation with our team today.
