By Abigail Neal, Arizona Charity Lawyer
If you want your nonprofit corporation to be exempt from federal taxation and allow donors to deduct their donations on their tax returns, you will need to complete and submit an Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code (IRS Form 1023). Before getting started, you should check to be sure that your organization qualifies for tax exempt status.
If you believe that your organization does qualify to be tax exempt, you will need to submit a Form 1023 to the IRS within 27 months of forming your nonprofit corporation. If you submit the 1023 within this 27 month period, your tax exemption will be effective as of the date your corporation was formed. If you do not submit your Form with in 27 months, you still may have some options but it can be a little more difficult. While some organizations are ready to file their Form 1023 Application as soon as the incorporation is final, others need some time to really flesh out their organization’s programs.
Form 1023EZ or Standard Form 1023?
IRS Form 1023EZ
In summer of 2014, the IRS rolled out the much anticipated 1023EZ. The purpose of the new 1023EZ was to create a streamlined version of the 1023 for certain organizations. Unlike the standard 1023, the 1023EZ does not require a comprehensive description of the organization’s activities, operations, governance and finances. However, those that wish to file the 1023EZ must meet certain criteria in order to qualify for the streamlined process. A few notable requirements include:
Projected annual gross receipts will not exceed $50,000 in any of the next 3 years
Gross receipts have not exceeded $50,000 in any of the past 3 years
The organization cannot have assets totaling more than $250,000
Other issues can arise if the organization was formed or has a mailing address in a foreign country, if the organization applying for tax exempt status is an LLC, or if the organization is a successor to another entity. The 1023EZ cannot be used by churches, schools, hospitals and medical research or hospital organizations, cooperative hospital service organizations, cooperative service organizations of operating educational organizations, charitable risk pool, many credit counselors and HMOs. The 1023EZ also cannot be used by organizations that: are supporting organizations under Section 509(a)(3); invest more than 5% of the organization’s total assets in non publicly traded securities or funds; participate in partnerships to share profits and losses with for profit entities; sell or intend to sell carbon credits or offsets; operates as an Accountable Care Organization; maintains or intends to maintain one or more donor advised funds; are organized exclusively for testing for public safety and requesting a foundation classification; are requesting private foundation classification; or organizations that are applying for retroactive reinstatement.
Standard IRS Form 1023
If your organization falls outside of the requirements to file a 1023EZ, your organization will need to file the standard IRS Form 1023. The standard form is substantially more complex and time consuming. Most notably, the standard Form 1023 calls for a detailed narrative describing the organization and its activities, more detailed information about the organization’s board of directors, and past, current and projected financial statements. The standard form also requires you to submit copies of company documents, including the Articles of Incorporation, Bylaws and Conflicts of Interest Policy.
Why Do I Need An Attorney?
Hiring an attorney prepare your organization’s Form 1023 can save you time and substantial IRS induced headaches. The difference between hiring an attorney experienced in preparing 1023s and doing it yourself could be waiting approximately 90 days (or less) for your tax exempt determination letter versus waiting a year or more. As many do-it-yourself applicants have found, an Application that is not properly developed will be assigned to an IRS agent for further development. The last time I checked, the IRS was assigning undeveloped Applications submitted 15 months ago. We don’t yet know the time frames for rejected 1023EZ applications, and whether they will be returned and told to file the standard 1023 or if they will get stuck in the “needs further development” time consuming cycle.
The standard IRS Form 1023 Application can be tricky because a number of areas require special attention. There are very specific requirements for the narrative, budgets and financial statements and supplemental material that must be submitted with the 1023. You will be required to provide detailed information about your organization, the programs it intends to conduct, the organization’s finances and its officers and directors. The IRS will scrutinize these areas, so it’s important to get them right the first time! As every organization is different, each organization must submit different information with the 1023. No two Form 1023 Applications are exactly alike.
Note: We can prepare IRS Form 1023 Applications for organizations formed in any state.
When you hire charity and nonprofit lawyer Abigail Neal to prepare your Form 1023, Abigail will meet with you to discuss your organization and its goals and address any areas that will require special attention. At that point we can determine whether your organization must file the 1023EZ or standard 1023.
For organizations preparing the 1023EZ Application, Abigail will work through the IRS Eligibility Worksheet with you, review your Articles of Incorporation for the IRS required language, and complete and submit the 1023EZ Application on your behalf and pay the IRS user fee.
(includes $400 IRS user fee)
(If you have not formed your nonprofit corporation, read here about our corporate formation + 1023EZ package discount)
Standard Form 1023
For organizations preparing the standard 1023 Application, Abigail will work with you to ensure you have the right people on your board of directors, and review your Articles of Incorporation for the IRS required language. After getting some basic information about your organization, we will complete the Form 1023 and send you an initial draft of the narrative and supplemental information that must accompany the Form, along with a punch list of additional information needed to complete the narrative and supplement. This will include directions about the financial information that will need to be submitted with the 1023. Once we have all the necessary information, we will finalize the Form 1023 Application, narrative, supplement and financial statements so that they comply with IRS requirements and submit the package to the IRS.
Fee: $3,000 and up
(does NOT include IRS user fee of either $400 or $850)
To get started, call Arizona nonprofit lawyer Abigail Neal at (480) 699-7992 to schedule your initial consultation. Learn more about the Neal Law Firm’s charity legal services.