Nonprofit organizations work hard to stay mission-focused while managing fundraising, programs, and day-to-day operations. In the middle of that work, tax compliance can easily become an afterthought — and even well-run organizations overlook important requirements.
Here are five of the most common nonprofit tax mistakes, why they matter, and how organizations can avoid them.
1. Missing or Late State Charity Filings
While nonprofits typically pay close attention to federal filings, state charity registrations and renewals are often overlooked. Requirements vary by state and affect organizations that solicit contributions, even if most donations come from other regions.
Why this matters:
Late or missing state filings can lead to penalties, loss of the ability to legally fundraise, and reputational risks.
How to avoid it:
Create an annual state compliance calendar and review filing requirements for every state where the organization solicits, receives, or intends to receive contributions.
2. Not Reporting In-Kind Donations Accurately
Non-cash contributions — donated goods, supplies, auction items, and certain professional services — require careful documentation and accounting treatment. Many nonprofits misclassify items, underreport them, or forget to record them entirely.
Key reminder:
Donated services are not tax-deductible for donors, but the value of donated goods must be recorded correctly in financial statements and disclosed on the Form 990.
How to avoid it:
Implement an in-kind donation log and train staff on recognizing, valuing, and coding non-cash contributions.
3. Treating Contractors as Employees (or Vice Versa)
Worker classification is one of the most frequent IRS compliance issues. Nonprofits often issue 1099s to individuals who should be classified as employees — especially for recurring, supervised, or ongoing work.
Why this matters:
Misclassification may trigger IRS scrutiny, employment tax penalties, and payroll corrections.
How to avoid it:
Use clear internal guidelines based on IRS criteria, and review worker status annually or when roles change.
4. Incomplete or Inaccurate Form 990 Disclosures
The Form 990 is more than a tax return — it is a public transparency document. Organizations frequently overlook disclosures related to:
- governance policies
- board independence
- related-party transactions
- grants and program service accomplishments
- schedules that require additional documentation
Why this matters:
Errors on the 990 can affect public trust, charity ratings, and state oversight reviews.
How to avoid it:
Complete a pre-filing checklist and involve finance, development, and governance teams to ensure cross-department accuracy.
5. Forgetting Unrelated Business Income (UBI)
Activities not directly connected to the organization’s exempt purpose may generate unrelated business income, even if the revenue supports the mission. Common examples include facility rentals, advertising revenue, and certain sales.
Why this matters:
Failing to report UBI can result in additional taxes, penalties, and IRS questions about organizational activities.
How to avoid it:
Review all revenue streams annually to determine whether any activities trigger UBI and require Form 990-T filing.
Final Thoughts
These mistakes are common, but they are also preventable with strong internal controls and regular year-end reviews. Proactive compliance helps preserve tax-exempt status, strengthens organizational accountability, and supports long-term sustainability.
If your nonprofit needs help navigating tax compliance, reviewing IRS notices, or preparing for Form 990 season, TrimnerBeckham is here to guide you with clarity and confidence.
