Quick overview

Starting a nonprofit is mission-driven work, but the IRS and state regulators expect clear, documented compliance from day one. This checklist lays out the essential tax and governance steps new nonprofit organizations must complete and maintain to protect their tax-exempt status, avoid penalties, and remain eligible for grants and deductible donations.

(Author note: In my 15 years advising nonprofits, early investment in governance, bookkeeping, and correct IRS filings prevents 80% of common compliance problems I see later.)

Step-by-step tax compliance checklist

Below are actionable items organized by phase: formation, initial applications, first-year operations, and ongoing annual obligations.

1) Choose the right legal structure and purpose

  • Organize under state nonprofit corporation law (or trust/association where applicable). Your organizing documents (articles of incorporation) must include specific language required for federal tax exemption: an explicit exempt purpose (charitable, educational, religious, etc.) and a dissolution clause that dedicates assets to another 501(c)(3) on winding up. These clauses matter for IRS review when you file Form 1023 (see the IRS guidance on applying for tax-exempt status).

2) Obtain an Employer Identification Number (EIN)

  • Apply for an EIN using the IRS online EIN application. Even nonprofits without employees need an EIN for banking, payroll withholding if you hire, and for tax filings.

3) Apply for federal tax-exempt status (if you want deductible donations)

  • For most public charities and private foundations, file Form 1023 (long) or Form 1023-EZ (short) to seek recognition under section 501(c)(3). Prepare a well-documented narrative of activities, a detailed budget, and governance documents (articles, bylaws, conflict-of-interest policy).
  • The IRS application instructions and fee structure are available at the IRS Charities & Nonprofits pages (see Applying for Tax-Exempt Status).
  • FinHelp guidance: review our explainer on Form 1023 — Application for Recognition of Exemption for common pitfalls and required exhibits.

4) State-level registrations and charitable solicitation compliance

  • Most states require initial registration to solicit donations and may require annual renewals (often with the state Attorney General or a charity bureau). Check your state’s charity registration office early; many states assess registration fees and require copies of your IRS application or determination letter.
  • Also confirm state sales-tax and property-tax exemptions; filings vary widely.

5) Set up governance and internal policies

  • Adopt bylaws, a conflict-of-interest policy, whistleblower policy, and record-retention policy. The IRS evaluates whether the organization is ‘‘organized AND operated’’ for exempt purposes; strong governance documents and board meeting minutes help prove that.
  • Maintain accurate minutes for all board meetings and document major decisions such as executive compensation, grant approvals, and related-party transactions.

6) Establish bookkeeping, finance controls, and a budget

  • Use accounting software that separates program, fundraising, and administrative expenses. Track restricted vs. unrestricted funds, in-kind donations, and donor intent. Consider a chart of accounts tailored for nonprofits.
  • Segregate duties (receipting, deposits, bookkeeping, reconciliation) to reduce fraud risk.

7) Understand payroll and employment tax obligations

  • If you hire staff, register for state unemployment insurance and withhold federal and state income and payroll taxes. File employment tax returns (e.g., Form 941) and issue W-2s. Some nonprofit payroll rules (like volunteer reimbursements) have specific IRS guidance.

8) Prepare for unrelated business income tax (UBIT)

  • If your nonprofit operates trade or business activities that are unrelated to your exempt purpose, you may owe tax and must file Form 990-T. Keep these activities clearly documented and consider whether they should be run by a taxable subsidiary.
  • FinHelp resource: see our guide on How to file a UBIT return for practical examples.

9) File the correct annual information return

  • Most tax-exempt organizations must file an annual information return with the IRS: Form 990, Form 990-EZ, or Form 990-N (e-Postcard), depending on gross receipts and total assets. Failure to file for three consecutive years triggers automatic revocation of tax-exempt status (IRS rule).
  • See FinHelp’s pages on Form 990-N (e-Postcard) and the main Form 990 page for filing thresholds and examples.

10) Meet donor acknowledgments and substantiation rules

  • For cash donations of $250 or more, the donor must receive a contemporaneous written acknowledgment that includes the amount and whether any goods or services were provided. Keep copies. For noncash gifts, follow IRS rules for valuation and Form 8283 when needed.

11) Know deadlines and extensions

  • Generally, Form 990 is due by the 15th day of the 5th month after the end of your fiscal year (for calendar-year organizations this is May 15). To request more time, file Form 8868 (Extension of Time to File an Exempt Organization Return). Check current IRS instructions each year for slight procedural updates.

12) Keep thorough records

  • Retain governing documents, determination letter, financial records, payroll tax filings, grant agreements, and donor acknowledgments. A recommended retention schedule: permanent retention for articles, bylaws, 501(c)(3) determination letter, and grant agreements; seven years for tax returns and supporting financial records.

Common mistakes to avoid

  • Relying on a verbal mission: your articles must have required exempt-language clauses.
  • Skipping the EIN or using a founder’s SSN for nonprofit banking.
  • Missing Form 990 deadlines or misfiling the wrong 990 version (e-Postcard vs. full 990).
  • Inadequate documentation for fundraising events or unrelated business activities.
  • Not having a conflict-of-interest policy — the IRS expects it and it supports your application for exemption.

Penalties and consequences

  • Automatic revocation of tax-exempt status for failing to file Form 990/990-EZ/990-N for three consecutive years. Reinstatement requires either filing a Reinstatement Request or submitting Form 1023 again in some cases.
  • Penalties for late employment tax deposits and failures in reporting can be substantial; consult a payroll specialist early.
  • Donor confidence and grant eligibility may suffer if public filings are incomplete or inaccurate (many foundations require up-to-date Form 990s when reviewing grant applications).

Practical tips from practice

  • Prepare Form 1023 materials with a clear activities narrative and a three-year budget; it saves time during IRS review. (In one case, revising the narrative and adding a program-level budget cut the IRS back-and-forth by half.)
  • Use a simple internal calendar that tracks state registration renewals, Form 990 due dates, payroll tax deposit schedules, and board meeting dates.
  • Invest in cloud-based bookkeeping with role-based access to simplify audits and year-end reporting.

Resources and authoritative references

(Internal links) See FinHelp guidance on: Form 1023 — Application for Recognition of Exemption, Form 990-N (e-Postcard), and How to file a UBIT return.

Checklist summary (printer-friendly)

  • Articles of incorporation with tax-exempt language: Done/Needs review
  • EIN obtained: Done/Needs
  • Conflict-of-interest and whistleblower policies: Done/Needs
  • Bylaws adopted and board minutes filed: Done/Needs
  • Form 1023/1023-EZ filed (if applicable): Done/Needs
  • State charitable registration completed: Done/Needs
  • Accounting system set up and segregated funds: Done/Needs
  • Payroll accounts established and tax deposits scheduled: Done/Needs
  • Form 990/990-EZ/990-N filed annually: Done/Needs
  • Donor acknowledgments and noncash documentation: Done/Needs

Final notes and professional disclaimer

This article is an educational resource, not legal or tax advice. Rules and filing procedures can change; always verify current forms and instructions at the IRS website and consult a qualified nonprofit tax advisor or attorney for organization-specific guidance. For IRS guidance referenced above, see the Charities & Nonprofits pages and the Form 1023 instructions (IRS.gov, accessed 2025).

— FinHelp.io, Senior Financial Content Editor & Nonprofit Tax Advisor