Last month I gave a seminar on revenue diversification to a group of people who serve on the boards of a wide variety of nonprofit organizations. In my work, I have the pleasure of meeting dynamic leaders who are dedicated to serving others and to providing their organizations with the oversight that will help them achieve the missions for which they were created.

What I found surprising and potentially problematic was that the vast majority of my audience, though passionate about their missions, could not tell me anything about the real mission statements on which their charities were founded. The one that appears on their Form 1023 and that is submitted to the IRS to gain the service approval for a tax-exempt status. Most of my audience had never heard of, nor seen, nor read their Form 1023.

In order to gain tax exempt status under the IRS Section 501(c), nonprofits are required to complete a Form 1023, stating the intended mission of the organization such as charitable, religious, educational, or scientific purposes. They are also required to provide a detailed narrative of all past, present and planned activities that support this purpose. Gaining tax exempt status saves the organization from paying a host of taxes such as federal income tax, federal unemployment tax, state tax, and more. The danger arises when a nonprofit begins to engage in activities that fall outside the parameters of what they originally listed on their Form 1023. Then, they could be at risk of losing their tax exempt status and all of the financial benefits that come with it.

For example, if a nonprofit earns income through activities that are not related to those on the Form 1023, they could be required to pay taxes on that income. More importantly, if a nonprofit participated in political campaigns, lobbying, or engaged in activities that benefited an individual’s private interest, they could be stripped of their tax exempt status altogether. No matter how well intentioned these actives might seem, the IRS may take a completely different view.

Whenever I to talk with people who are thinking of assuming a position of leadership within a nonprofit, I strongly recommend that they first gain a clear understanding of the organization’s mission, and that includes the important information of the mission detailed in their Form 1023. One of the most important things that you can do to protect the interests of your nonprofit is to know and embrace the real mission statement and all of the rules that apply to it. And this mission, should you choose to accept it, will ensure that you, your donors, and your volunteers can continue to serve the causes that are nearest and dearest to your hearts.

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