The importance of immediately fixing a lost tax exemption.

Under the basic federal income tax rules, all income derived by an individual (or business entity) is taxable.  This general rule applies to all entities unless those entities can demonstrate that they qualify for a specific exemption.  Therefore, once a charity loses its exemption (e.g. § 501(c)(3) status) it will owe tax on all of its income.  Additionally, a deduction of a charitable donation made by a donor may be jeopardized and depending on the situation, a corporate officer or director could be held liable for the charity’s failure to file appropriate returns or to pay tax.