When a group decides it wishes
to create a charitable organization, it must first review the expected purposes
and activities of the proposed organization.
If it appears that the substantive requirements for exemption as a
charitable organization will be satisfied by these purposes and activities, the
group would proceed with the incorporation of the organization under the local
state nonprofit corporation code. At
that point, the procedural aspects of obtaining tax exempt status for your
organization come into play..
To qualify for exemption, a
charitable organization must notify the IRS that it is applying for recognition
of its exempt status. The notice is given by filing Form 1023, "Application
for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue
Code." The notice must be filed within 15 months from the end of the month
in which the organization was organized. A user fee of $500 must accompany the
application unless you anticipate that the organization's average annual gross
receipts over the first four years of operation will be $10,000 or less. In that
case, the user fee is $150.
A considerable amount of
information must be furnished to the IRS on the application for recognition of
exemption. For example, the following data must be supplied:
• Information identifying the
• A specification of the
organizational form and conformed copies of the organizing document and bylaws;
• A description of the
organization's sources of support and of its fundraising activities;
• A detailed description of
the organization's past, present and proposed activities and purposes;
• Information concerning the
officers, directors and trustees; and
• Financial statements.
The data supplied on the
application must be complete and accurate.
Careful attention to the preparation of this important document.
Assuming that the application
demonstrates the organization's eligibility for exemption, the IRS will issue a
ruling recognizing the exemption. A favorable ruling is effective as of the
organization's formation. The ruling can be relied on so long as there are no
substantial changes in the organization's character, purposes or methods of
operation, subject to the power of the IRS to revoke the ruling due to changes
in the law or other good cause.