Steering clear of the IRS

July 25, 2005 5:12 PM

IANAL, so I need your help. At what point does a small activity group with some money in the bank need to worry about attracting IRS attention?

Our group meets regularly and charges admission to cover the cost of the hall and other expenses. We've amassed USD1,100 and will spend half of it on new equipment. One member wants to be very conservative, and not spend any other money until we have a slush fund of USD2,000 to cover contingencies. Others want to spend some money on events related to our cultural group.

The $ is in a bank, in my name with a notation about the group, mostly in case I get hit by the proverbial bus. We perceive filing for non-profit status to be a huge investment of money and time. It's my understanding that the IRS can look at this as taxable income if it comes to their attention. A. Is there an amount that would trigger that? B.Should the money go in the freezer or under the mattress instead of the bank? thanks, AskMe.

posted by Mom to law & government (3 comments total)

It depends on where you are. In many U.S. states, you can simply register with your Secretary of State as a regular not-for-profit corporation. This costs $150 in my state. You can then open a bank account in your group's name up to the allowable limit ($25,000 in my state) without any tax liability.

You won't be a "tax-exempt" organization, but this just means that your donors can't take anything off on their personal taxes and your group is not exempt from paying sales tax on its purchases. If you want true tax-exempt status and greater fundraising abilities, you must file with the IRS as a 501(c)(3) organization. That is more complicated but nothing a decent accountant can't handle.
posted by naomi at 7:00 PM on July 25, 2005

Thanks, Naomi. I'll check it out, and report back. My preference is to not accummulate $, but the rest of the group may want to go not-for-profit.
posted by Mom at 8:53 PM on July 25, 2005

Some random thoughts:

(1) The IRS is extremely unlikely to (a) find out about your situation, and (b) be willing to spend any significant resources on the matter, because anything under $10K is trivial. (In other words, there is zero chance of being prosecuted.)

(2) The IRS tends to focus on INCOME, not assets. So you need to document the organizations's expenses (a list, and receipts), so should questions ever arise, the IRS doesn't expect you to pay taxes on total revenue (as opposed to net revenue - income less expenses).

(3) You might be surprised at how little documentation your bank requires for you to open an account in the name of your organization - it's worth asking them. You're safer if your name isn't on the account.

(4) The account - in your name, or with an organization's name on it - needs to have authorized signatures of at least two people (so if one is hit by the proverbial bus, the other can still sign checks and access the funds).
posted by WestCoaster at 10:09 PM on July 25, 2005