Nonprofit Nonprofit Legal and Compliance 1 — Questions and Answers
Question 1: What IRS designation classifies most charitable nonprofits in the United States?
- 501(c)(3) (Correct answer)
- 501(c)(4)
- 501(c)(6)
- 501(c)(7)
Correct answer: 501(c)(3)
Section 501(c)(3) of the Internal Revenue Code grants tax-exempt status to organizations organized and operated for charitable, religious, educational, or scientific purposes.
Question 2: What is Form 1023 used for in the US nonprofit sector?
- Applying to the IRS for 501(c)(3) tax-exempt status (Correct answer)
- Filing annual financial reports with the IRS
- Registering to solicit donations in a state
- Reporting unrelated business income tax
Correct answer: Applying to the IRS for 501(c)(3) tax-exempt status
Form 1023 is the IRS application that organizations submit to obtain recognition as a tax-exempt public charity under Section 501(c)(3).
Question 3: What happens if a US nonprofit fails to file Form 990 for three consecutive years?
- It automatically loses its tax-exempt status (Correct answer)
- It receives a financial penalty only
- It must reapply for state nonprofit registration
- It is required to undergo an IRS audit
Correct answer: It automatically loses its tax-exempt status
Under the Pension Protection Act of 2006, nonprofits that fail to file Form 990 (or 990-N) for three consecutive years automatically have their tax-exempt status revoked.
Question 4: What is unrelated business income tax (UBIT) for nonprofits?
- A tax on income from activities that are not substantially related to the organization's exempt purpose (Correct answer)
- A tax on investment earnings from the endowment
- A penalty for late filing of Form 990
- A tax on compensation paid to the Executive Director
Correct answer: A tax on income from activities that are not substantially related to the organization's exempt purpose
UBIT applies to nonprofit income from activities regularly carried on as a trade or business that is not substantially related to the organization's tax-exempt mission.
Question 5: What is charitable solicitation registration?
- A state-required registration that nonprofits must complete before soliciting donations from residents of that state (Correct answer)
- A federal IRS process for approving fundraising campaigns
- A board resolution authorizing fundraising activities
- A contract with a professional fundraising firm
Correct answer: A state-required registration that nonprofits must complete before soliciting donations from residents of that state
Most US states require nonprofits to register with a state agency (often the Attorney General's office) before soliciting charitable contributions from state residents.
Question 6: What is the public support test for US public charities?
- A requirement that the organization receive at least one-third of its support from public sources to maintain public charity status (Correct answer)
- A test of whether the nonprofit's programs serve a broad public interest
- An IRS review of whether the organization has a diverse board
- A government assessment of program effectiveness
Correct answer: A requirement that the organization receive at least one-third of its support from public sources to maintain public charity status
Public charities must pass the public support test (generally one-third of support from public sources) to avoid being reclassified as a private foundation.
Nonprofit Nonprofit Legal and Compliance 1
What IRS designation classifies most charitable nonprofits in the United States?