Is Your Charitable Organization Inactive?

Is Your Charitable Organization Inactive?

March 20, 2025

If so, its exempt status is at risk.

One of the requirements for a charitable organization to maintain its exempt status is to meet the operational test. An organization will meet the operational test if it is operated exclusively for one or more exempt purposes and engages primarily in activities that accomplish the exempt purposes specified in section 501(c)(3).  An organization will not meet this test if more than an insubstantial part of its activities does not further an exempt purpose.

What if the charitable organization is inactive? According to some recent IRS Letter Rulings, an inactive charitable organization will not meet the operational test and will lose its exempt status. Here are two examples of organizations that have recently lost their exempt status due to inactivity.

IRS Letter Ruling 202425014

The organization was inactive during the fiscal year under tax examination. It was primarily run by volunteers and had little board participation. The organization did not hold any meetings with the governing body during the fiscal year but was in the process of recruiting individuals to sit on the board. The organization did not have any policy manuals, officer manuals, or employee handbooks. It did not disburse any funds during the tax year under examination due to a lack of knowledge and participation of the governing board. Finally, there was no correspondence or records between the organization and officers, members, or volunteers during the tax year under examination.  Due to these and other factors, the IRS revoked the organization’s exempt status.

IRS Letter Ruling 202511016

In another ruling, the IRS revoked an organization’s exempt status for failing the operational test for not conducting any charitable activities for multiple years. The only activity it did engage in was maintaining parcels of donated land that it had previously received. This activity was not charitable in nature and was insufficient to meet the operational test.

Conclusion

Maintaining the exempt status of a charitable organization requires active engagement in activities that further its exempt purposes. Inactivity or failure to meet the operational test, as demonstrated by the examples of IRS Letter Rulings 202425014 and 202511016, can result in the loss of exempt status. If the organization is inactive and does not plan to renew its activities, it should take steps to legally dissolve the organization and file a final return with the IRS.