IRS form 1023 frequently asked questions (FAQ)
IRS form 1023 frequently asked questions.
The following are the most asked questions I have received. Please read through them as chances are that you are wondering about the same topic as well.
The last two question and answers are the phone numbers and addresses for the IRS, and instruction regarding how to contact the Exempt Organization Department of the Internal revenue Service. Click on the questions to open and read the answers.
What is the difference between nonprofit and tax-exempt status?
Nonprofit status is a state law concept. Nonprofit status may make an organization eligible for certain benefits, such as state sales, property and income tax exemptions. Although most federal tax-exempt organizations are nonprofit organizations, organizing as a nonprofit organization at the state level does not automatically grant the organization exemption from federal income tax. To qualify as exempt from federal income tax, an organization must meet requirements set forth in the Internal Revenue Code.
What are the differences between private foundations and public charities?
A private foundation is any domestic or foreign organization described in section 501(c)(3) of the Internal Revenue Code except for an organization referred to in section 509(a)(1), (2), (3), or (4). In effect, the definition divides section 501(c)(3) organizations into two classes: private foundations and public charities.
Generally, organizations that are classified as public charities are those that
• Are churches, hospitals, qualified medical research organizations affiliated with hospitals, schools, colleges and universities,
• Have an active program of fundraising and receive contributions from many sources, including the general public, governmental agencies, corporations, private foundations or other public charities,
• Receive income from the conduct of activities in furtherance of the organization’s exempt purposes, or
• Actively function in a supporting relationship to one or more existing public charities.
Private foundations, in contrast, typically have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources) and most have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs.
Do I need a tax-exempt number for my organization?
No. Unlike some states that issue numbers to organizations to indicate that these organizations are exempt from state sales taxes, the IRS does not issue numbers specifically for exempt organizations. While the Internal Revenue Service does issue Employer Identification Numbers (EINs), these are merely a unique identifier, similar to a Social Security number for an individual. Applying for and receiving an EIN says nothing about the organization’s tax status; however, your organization needs an EIN to apply for tax exemption.
How much is the user fee for an exemption application?
The amount of the user fee depends on the applying organization’s average annual gross receipts. If the organization’s average annual gross receipts have exceeded or will exceed $10,000 annually over a four-year period, the fee is $850. If gross receipts have not exceeded or will not exceed $10,000 annually over a four-year period, the user fee is $400. An applicant must certify its gross receipts in Part XI.
What provisions must be included in organizing documents to qualify for exemption?
A charity’s organizing document must limit the organization’s purposes to exempt purposes set forth in section 501(c)(3) and must not expressly empower it to engage, other than as an insubstantial part of its activities, in activities that do not further those purposes. This requirement may be met if the purposes stated in the organizing document are limited by reference to section 501(c)(3). In addition, an organization’s assets must be permanently dedicated to an exempt purpose. This means that if an organization dissolves, its assets must be distributed for an exempt purpose described in section 501(c)(3), or to the federal government or to a state or local government for a public purpose. To establish that an organization’s assets will be permanently dedicated to an exempt purpose, the organizing document should contain a provision insuring their distribution for an exempt purpose if the organization dissolves. Although reliance may be placed upon state law to establish permanent dedication of assets for exempt purposes, an organization’s application can be processed by the IRS more rapidly if its organizing document includes a provision ensuring permanent dedication of assets for exempt purposes. For examples of provisions that meet these requirements, see Sample Articles.
If the organizing document does not contain these provisions, an organization should amend it before submitting its exemption application. State officials can provide more information about how to amend organizing documents.
May an authorized representative sign Form 1023?
No. Form 1023 instructions state that an individual authorized by Form 2848 may not sign the application unless that person is also an officer, director, trustee, or other individual who is authorized to sign the application. Form 1023 is an application for the issuance of a determination letter or ruling letter by the IRS that recognizes an organization’s exemption from federal income tax. Revenue Procedure 2011-4 (or latest update), requires that a letter ruling or determination letter request be accompanied by a penalties of perjury statement signed by the taxpayer, not the taxpayer’s representative. This requirement is based on the concept that by signing the application, an official of the organization is assuming responsibility for the accuracy of the information. Generally, an authorized representative would not be in a position to verify the accuracy of the information provided by the organization.
Is there such a thing as an advance ruling?
Federal tax law used to provide an advance ruling process whereby new section 501(c)(3) organizations could qualify as publicly supported organizations even though they had not existed long enough to establish a record of public support. This process was eliminated in 2008. A new organization now can be treated as a publicly supported organization for its first five years, and must establish that it meets the test beginning with its sixth taxable year.
Why does Form 1023 ask for information about successor organizations?
Line 1, Part VII, asks whether an organization is a successor (as defined in the instructions) to another organization, for-profit or non-profit. If an organization answers “yes”, it must complete Schedule G, which requests detailed information about the predecessor organization, transfers of assets, and any continuing relationship. Generally speaking, the purpose of Schedule G is to obtain information about whether a transaction creating a successor organization resulted in benefit to private shareholders or individuals associated with the predecessor organization.
Why am I asked for information about payments to third parties?
Obtaining information about potential tax avoidance transactions is one of the goals of Form 1023. These transactions may include improper business dealings between the applicant and its top officials, excessive compensation arrangements, fundraising involving such areas as vehicle donations and conservation easements, and foreign grants and operations.
Tax advisors who promote abusive tax avoidance transactions are subject to penalties.
Why can’t we apply if it has been 27 months since our organization was formed?
In general, an organization must file its exemption application within 27 months from the end of the month in which it was formed. If it does so, it may be recognized as exempt back to the date of formation. If an organization files its exemption application after the 27-month deadline, exempt status may only be recognized from the filing date forward.
Exceptions to this general rule apply. If an organization answers yes to Line 2, Part VII, indicating that it filed late, it is directed to Schedule E, which asks questions to establish if it is excepted from the general rule.
Does it matter if an organization is formed in a country other than the United States?
An organization may qualify for exemption under section 501(c)(3) even if it is formed and/or conducts its activities in a country other than the United States. Note, however, that contributions to an organization formed in a foreign country are generally not deductible as charitable contributions for federal income tax purposes except pursuant to a treaty between the other country and the United States. (For example, contributions to Canadian charities may be deductible, while contributions to charities based in most other countries are not.)
Form 1023 asks whether an organization was formed in a country other than the United States to help identify charities based or operating in countries that may present tax risk issues.
What happens if we don’t have the required organizational structure?
If an organization does not have the required organizational structure, the IRS will return its application (the user fee is generally not refundable, however). If the organization can create the required structure within the time specified by the IRS, it can resubmit the application without penalty or paying an additional user fee.
How much detail should be provided in the narrative description of activities?
The narrative description, including information referenced in other parts of the application, should include information that answers the following questions:
• What is the activity?
• Who conducts the activity?
• When is the activity conducted?
• Where is the activity conducted?
• How does the activity further the organization’s exempt purposes?
• What percentage of the organization’s total time is allocated to the activity?
• How is the activity funded?
If an organization has a website, it may attach paper copies of relevant materials to support the narrative description of activities.
What if purposes or programs change after an application is submitted?
If the organization’s organizing documents, purposes, or programs change while the IRS is considering an application, you should report the change in writing to the office processing your application. If you do not know the office that is processing your exemption application, contact Exempt Organizations Customer Account Services.
Because material changes in a charity’s structure or activities may affect its tax-exempt or public charity status, organizations should report such changes to the IRS Exempt Organizations Division.
Where do I send my exemption application?
Send your completed exemption application to the address stated in the instructions to the application form:
Internal Revenue Service
P.O. Box 12192
Covington, KY 41012-0192
To send your application using express mail or a delivery service, use the following address:
Internal Revenue Service
201 West Rivercenter Blvd.
Attn: Extracting Stop 312
Covington, KY 41011
Please check with the IRS website for up-to-date addresses. These addresses might change without notice.
How can I Contact the IRS regarding my application?
For answers to technical and procedural questions about charities and other non-profit organizations, call IRS Tax Exempt and Government Entities Customer Account Services at (877) 829-5500 (toll-free number). If you prefer to write, use the address below. For answers to employment tax questions, call the Business and Specialty Tax Line at (800) 829-4933 (toll-free). To obtain a determination letter that applies the principles and precedents previously announced to a specific set of facts, or to transmit copies of amended documents, write to:
Internal Revenue Service
Exempt Organizations Determinations
P.O. Box 2508
Cincinnati, OH 45201