CNE Nonprofit Tax & Legal Requirements 1 — Questions and Answers
Question 1: What IRS form must most tax-exempt organizations file annually?
- Form 1040
- Form 990 or a variant (Correct answer)
- Form W-2 only
- Form 1099-MISC
Correct answer: Form 990 or a variant
Most tax-exempt organizations must file Form 990, 990-EZ, or 990-N annually to maintain status and provide accountability.
Question 2: What happens if Form 990 isn't filed for three consecutive years?
- A small fine
- Automatic revocation of tax-exempt status (Correct answer)
- A warning letter
- Nothing, filing is optional
Correct answer: Automatic revocation of tax-exempt status
Under the Pension Protection Act of 2006, three consecutive years of non-filing triggers automatic revocation.
Question 3: What is the private benefit doctrine?
- A donor tax deduction
- No part of net earnings may unreasonably benefit private individuals (Correct answer)
- A grant-making restriction
- Unlimited executive compensation rule
Correct answer: No part of net earnings may unreasonably benefit private individuals
This doctrine prohibits operating for private benefit, ensuring resources serve the public interest.
Question 4: What is intermediate sanctions (Section 4958)?
- Criminal penalties for fraud
- Excise taxes on excess benefit transactions between the nonprofit and insiders (Correct answer)
- Late filing penalties
- Sanctions on international operations
Correct answer: Excise taxes on excess benefit transactions between the nonprofit and insiders
Section 4958 imposes excise taxes on insiders receiving compensation exceeding fair market value from the organization.
Question 5: What is unrelated business income tax (UBIT)?
- Tax on all nonprofit revenue
- Tax on income from business not substantially related to exempt purpose (Correct answer)
- Investment tax exemption
- State sales tax
Correct answer: Tax on income from business not substantially related to exempt purpose
UBIT applies to regularly conducted business activities not substantially related to exempt purpose, taxed at corporate rates.
Question 6: Which governance documents are legally required for nonprofits?
- A strategic plan
- Articles of incorporation and bylaws (Correct answer)
- A fundraising plan
- A marketing strategy
Correct answer: Articles of incorporation and bylaws
Articles of incorporation (filed with state) and bylaws (internal governance) are the foundational legal documents.
CNE Nonprofit Tax & Legal Requirements 1
What IRS form must most tax-exempt organizations file annually?