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When charitable organizations get an unexpected tax bill

It can be difficult for entrepreneurs and humanitarians to put together businesses to benefit society. There are a few perks that are present to help encourage these endeavors. One of the main perks: exemption from taxation.

How can an organization qualify for exemption from taxation? Charitable organizations operate under the rules provided by the Internal Revenue Code under section 501(c)3. These rules provide guidance to help businesses meet the requirements necessary to avoid taxation.

In order to qualify, the Internal Revenue Service (IRS) notes that businesses must operate as follows: “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.” A failure to meet this definition can result in a denial of exempt status. This can lead to an unexpected tax bill.

At first glance, it may sound pretty clear cut. Meet the definition, get the exemption. Unfortunately, like all things in the legal world, a number of complications can arise that can lead to confusion.

What kind of issues can arise? Even those that appear to clearly fit this definition can find themselves fighting for exemption. Even churches can get an unexpected tax bill. In one of the more recent cases, the church is getting a hefty bill for property tax obligations. The church is fighting back, noting that it is used for “religious purposes” thus meeting the definition outlined above. If the church wins, it can continue operating in its exempt status. If it loses, it will likely face tens of thousands of dollars in tax obligations annually.

What should an organization do if an exempt status is questioned? A notification from the IRS can lead to serious issues. Organizations that find themselves in this type of situation are wise to seek legal counsel. An experienced tax dispute attorney can review the allegations and help determine the best course of action.  

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