To become a public charity that has tax-exempt status from the IRS, an organization files IRS Form 1023 with the IRS. The IRS lists a series of questions to help you determine whether your organization is eligible for federal tax exemption.
1023 Basics – What is the 1023?
The IRS Form 1023 is the application used to apply for 501c3 status. There are other similar forms for other Internal Revenue Code sections.
The 1023 must be signed by a principal officer, by an authorized employee, or by an attorney for the corporation and the form should be sent certified mail, return receipt requested to: Internal Revenue Service, P.O. Box 12192, Covington, KY, 41012-0192.
The following must be included as part of the application:
- Certified copy of the certificate of formation from your state
- Copy of bylaws
- Detailed pro forma financial statements, including revenue and expense statement for current and three preceding fiscal years
- For new organizations, proposed budgets for the next two fiscal years including a list of anticipated financial support
- Narrative description of past, present, and future planned activities with an emphasis on broad public benefit of the organization’s activities
- Names and addresses of directors and officers and their annual compensation
- Annual accounting period (fiscal year)
- Statement as to whether the organization is claiming status as a private foundation or public charity
- Employer Identification Number (EIN)
What happens after we file the application with the IRS?
You may wait for a while!
The IRS has 270 days to rule on the application. Usually within 2-3 months, the IRS requests additional information or approves the organization’s tax-exempt status by issuing a “determination letter” to the corporation formally approving the exemption.
However, we have recently seen great delays at the IRS on these 1023 applications. Some organizations have found up to two year delays, unfortunately.
One of the benefits of working with an attorney who specializes in nonprofits is the ability to get through the IRS maze more quickly.
What if the IRS wants more information on our application for 501(c)(3) status?
An organization must fully and quickly answer any additional questions asked by the IRS. Failure to do so can cause the IRS to close the file.
An organization is given 21 days to respond to a request for additional information, with an extension of 14 days available upon request (if needed for good cause).
If the time period expires without additional time being requested and granted, the IRS will close the file in a suspense mode for 90 days. During this time period, the applicant may submit the requested information and request the file be re-opened. If the 90 day period passes and no response is received, the file will be closed and a new application and new user-fee will be required.
What are the follow up questions? Applying for Exemption/Misc. Determination: Sample Questions
The IRS has recently provided some sample questions.
Here’s how it works:
- Applications for exemption and miscellaneous determination requests are assigned to Exempt Organizations specialists for review.
- If additional information is necessary to make a determination, a specialist will contact the organization for the information.
- Questions can concern any portion of your application.
The IRS has provided sample questions on the following topics:
- Activities Appear to be Described in Subsection other than Requested Subsection
- Attempting to Influence Legislation or Political Campaign Intervention Activities
- Bingo and Other Gaming
- Church Affiliate (Integrated Auxiliary)
- Compensation and Related Party Transactions
- Credit Counseling
- Down Payment Assistance
- Financial Information and User Fees
- Foundation Classification
- Foundation Set-Aside 4942(g)
- Government Affiliate
- Group Ruling (Central Organization)
- Housing Joint Ventures with Finalized Agreements/Operating History
- Housing Joint Ventures without Finalized Agreements/Operating History
- International Activities
- Investments with Limited Partnerships
- Limited Liability Company
- Mission Society
- Mortgage Foreclosure Assistance
- Organizational and Administrative Requirements
- Other Miscellaneous Activities
- Voluntary Employees’ Beneficiary Association
Remember that you usually have 21 days to respond to a series of questions!
IRS Instructional Guide Publication 4220: Guide to Setting up 501(c)(3)
The Cullinane Law Group loves to set-up new nonprofits. We work with the founders to make their visions come alive. We create strong and legally compliant nonprofits that have solid bases for long-term success. We help nonprofits, foundations, religious organizations, and social entrepreneurs throughout the United States who seek to create positive change. Please contact us when you are ready to start a new nonprofit or get help with your 1023 application.