IRS or SOS. Which one is scarier?

Posted 3/29/2019

Dear NPLI Management Solutions – During our last board meeting, we engaged in a healthy debate.  About half of us are certain the Internal Revenue Service (IRS) is much scarier for our nonprofit than the Secretary of State.  The other half of us believe it’s the Secretary of State which we should be much more concerned about.  So…which is scarier?

As it relates to nonprofit compliance matters…

Correct Answer:  Secretary of State

Here’s a brief explanation.

For the majority of nonprofits, the biggest risk of falling out of compliance with the Internal Revenue Service is the nonprofit losing its federal tax exemption status (i.e. 501c3).

Although having the federal tax exemption revoked by the IRS due to failure to file the required annual report (Form 990) can be devastating to the nonprofit, it doesn’t render the nonprofit from being able to operate.  It will; however, make it much more difficult in securing funding from grants and donations; but the nonprofit can still open its doors and conduct business.  Federal Tax exemption is optional.  Sure, it’s nice to have but a nonprofit can exist without being recognized as a federal tax exempt organization.


Falling out of compliance with the Secretary of State’s office is a different story entirely.  This can absolutely prohibit the nonprofit from legally conducting business or even using the name of the nonprofit.  Having an active status with the Secretary of State is not optional.  It’s a requirement.


And, if the nonprofit’s powers, rights and privileges have been suspended or forfeited by the Secretary of State, then its federal tax exemption status (ie. 501c3) with the IRS is automatically jeopardized.








Tip:  Don’t be afraid.  Fear only complicates matters.


The key is to remain in good standing with both the IRS and Secretary of state…as well as with other agencies that regulate nonprofits and charitable organizations.   This basically requires (1) knowing the rules and (2) following the rules for each agency.


For more information or assistance…

  • Contact IRS
  • Contact state officials providing information for nonprofits
  • Contact NPLI