What are the most typical reasons why a 501(c)(3) charity can lose its tax-exemption?
The good news (or bad news, depending on your point of view) is that very few charities lose their federal 501(c)(3) tax exemption.
The biggest reason by far is the failure to file some sort of Form 990 tax return. The Pension Protection Act of 2006 created a new requirement for essentially all organizations exempt under Section 501(c) of the Tax Code (not including churches which are not required to file any return but including (c)(4) social welfare organizations, (c)(6) trade associations and (c)(7) social clubs). Their exempt status is automatically revoked if an organization fails to file a form for three consecutive years. More than 300,000 organizations have lost their exemption since the provision became effective, and the IRS reports new revocations for failure to file on a regular basis. Groups with annual gross receipts normally under $50,000 can fulfill the requirement by filing the Form 990-N electronic postcard. Larger organizations must file the 990-EZ or the full Form 990.
Other than that kind of mechanical failure, which also weeds out organizations that go defunct but don’t bother to tell the IRS, the IRS usually announces in the early fall of even numbered years when federal elections are being held a couple of revocations for participation in election campaigns. We also read occasionally of an organization that has lost its exempt status for excess benefit transactions or other private inurement, or for failing to carry out a charitable program. But the annual total is a tiny fraction of the 1 million (c)(3)s that are recognized by the IRS. You have to be pretty bad, and pretty unlucky, to be brought to the attention of the IRS and lose your status.